In Chapters 8 and 9, there is a full discussion of the economic effects of the imposition of tariffs and import quota restrictions (hereafter simply quotas). It was stated there that under very strict conditions the two are equivalent, but if the foreign suppliers are organised while the home importers are not, the area representing tariff revenue will be taken over by the foreign exporters as excess profits (or rent). Hence, the equivalence of tariffs and quotas breaks down when certain imperfections are introduced into the model. Moreover, quotas have been known to be less efficient than tariffs. They prevent the importer from taking advantage of technical progress abroad and this increases instability abroad thus deterring foreigners from being innovative. Also, as the importing country grows, quotas become increasingly restrictive since imports are not allowed to grow with income, whereas under tariffs they are. Because of these factors, international organisations have been very strict about the adoption of quotas. The General Agreement on Tariffs and Trade (GATT) permits their use in emergencies, provided they come under international surveillance and are not discriminatory. However, quotas are bound to attract retaliation and result in the payment of compensation.
KeywordsSupply Curve Domestic Price Production Possibility Frontier General Equilibrium Analysis Excess Profit
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