Quota is the limit drawn on how much of a particular product can be imported by a country. Whereas, a tariff refers to the tax imposed on the imports coming into a country. Tariffs and quotas can be used for many reasons.
Given below are some reasons highlighting the importance of tariffs and quotas −
Protecting Domestic Employment − The probability of increased competition from imported goods may threaten the local companies. As a result, these local companies may remove workers or shift production of goods offshore. This may eventually lead to unemployment among the masses.
Protecting Consumers − A government may impose a tax on goods that could be harmful for the people. For example, India imposed a tariff on cigarettes as it is injurious to health.
Infant Industries − The Import Substitution Industrialization (ISI) is an approach hired by many developing nations to allow domestic infant industries to prosper.
National Security − The defense industries of a nation are considered pillars of state interests. Many developed countries promote and ensure security of the defense industries which will thereby support national security. For example, Western Europe and the United States of America, both the countries are industrialized and developed, and both are very protective of defense-oriented companies.
Retaliation − When a particular country feels that a trading partner has not abided by the rules or hasn’t followed policies, then tariffs can be imposed on trading partner as retaliation technique. For example, if France imports wine, cheese, and wheat from the USA, and France places optimal tariffs on imports of these products, then the USA could retaliate by imposing optimal tariffs on its imports of, say, lumber, televisions, and machine tools from France.
We have seen the importance and necessity of tariffs in international marketing. It is important to maintain balance between companies within the home country and companies set up in the foreign countries. A government employs several types of tariffs in favor of its economy. These tariffs come along with their own barriers.
The different types of tariffs hired by nations are −
Specific Tariffs − Fixed price levied on per unit of an imported product is considered special tariff. This tariff alters on the basis of the product imported. For example, India may levy a tariff of Rs. 1500 as tax on each pair of shoes imported, and may demand a tariff of Rs. 3000 on each computer imported.
Ad Valorem Tariffs − The word Ad Valorem refers to the proportionate value to the estimated value of the goods or transaction concerned. This type of tax is levied on a product according to the estimated value of the product. For example, Japan levies 15% on automobiles imported from the USA. So, the value of the automobiles increases by 15% on the actual value of the automobile. So, the price of a vehicle which costs $15,000 is now values at $16,500 to the Japanese consumers. This cost increase protects domestic producers from being undercut, but also keeps costs artificially high for Japanese car shoppers.
The different non-tariff barriers are −
Licenses − Government grants license to a business and permits it to import a certain type of product from another nation. For example, there could be a limitation on the cheese to be imported, and licenses would only be granted to certain enterprises that may import cheese from foreign markets.
Import Quotas − An import quota is a trade restriction on the quantity of a particular product that can be imported. For example, a country may impose an import quota on the volume of the material of cloth that is to be imported.
Voluntary Export Restraints (VER) − This type of trade obstruction is deliberately created by the country that is exporting on the country that is importing. A voluntary export constraint is usually imposed on the importing country, and could be followed by a reciprocal VER. For example, France could place a VER on the export of wine to the USA. And, the USA could then place a VER on the export of computer to France. This increases the cost of both computer and wine, but secures the domestic industries.
Local Content Requirement − Local content requirements (LCRs) are policy measures that typically require a certain percentage of intermediate goods used in the production processes to be sourced from domestic manufacturers. The limitation can be a proportion of the product itself, or a proportion of the estimated value of the product. For example, an LCR on the import of car might call for 15% of the pieces used to make the car to be manufactured domestically, or can also call for 5% of the estimated value of the product must come from domestically produced components.
Tariffs come with their own advantages and disadvantages. In simple words, tariff is a form of tax that the government charges to increase revenue on imports made by the domestic market. This eventually also helps the domestic enterprises to flourish.
Adversely, for both individual customers and enterprises the higher the import rates, the higher the price of products. If the cost of iron is exaggerated due to tariffs, individual customers pay more for goods that need iron for manufacturing.
In simple words, tariffs and trade obstructions tend to be pro-producer and anti-consumer.