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Distinguish between a tariff and a quota as applied in International Trade.

      

Distinguish between a tariff and a quota as applied in International Trade.

  

Answers

Wilfred
The most important type of trade restriction is the tariff. A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary. It is ideally divided into import tariff and an export tariff. An import tariff is a duty on the imported commodity, while an export duty is a duty on the exported commodity. Import duties are more important and the most prevalent. In fact, export tariffs are constitutionally prohibited by most (developed) countries such as the U.S but are often applied by
developing countries on their traditional exports (such as Ghana on its Cocoa an Brazil on its coffee) to get better prices and raise revenue. Developing nations rely heavily on export tariffs to raise revenue because of their ease of collection. On
the other hand, industrial countries invariably impose tariffs or other trade restrictions to protect some (usually L – intensive) industry, while using mostly increased taxes to raise revenue.

Tariffs can be ad valorem, specific or compound;

1. Advalorem tariff– is expressed as a fixed percentage of the value of the traded commodity. For example, a 10 per cent ad valorem tariff on bicycles would result in the payment to customs officials of the sum of Ksh 200 on each Ksh 2000 imported bicycle and the sum of Ksh 400 on each Ksh 4,000 imported bicycle.

2. Specific tariff– is expressed as a fixed sum per physical unit of the traded commodity e.g. a specific tariff of Ksh 100 on each imported bicycle regardless of its price.

3. Compound tariff– is a combination of an ad valorem and a specific tariff e.g. a compound duty of 5 per cent ad valorem and a specific duty of Ksh 100 on imported bicycles would result in the collection of the sum of Ksh 200 on each Ksh 2,000 imported bicycle. (NB: Duty on bicycles (in Kenya) was waived in the 2001/2002 budget).

A quota is a direct quantitative restriction on the amount of a commodity allowed to be imported (or exported). Import quotas are far more common and important than export quotas, and so the term „quota? is often used exclusively to imply import quota e.g those applied by Kenya on imported cereals like maize (year 2001) and the United States on African textile and garment
(NB/: African textiles and garment have now been granted duty-free access to the U.S market under the U.S Congress AGOA initiative).

Differences between an import quota and an equivalent (implicit) import tariff:

1. With a given import quota, an increase in demand will result in a higher domestic price and greater domestic production and lower consumption; however, with a given import tariff, an increase in demand will increase consumption and imports. An import quota completely replaces the market mechanism while an import tariff alters it (market mechanism) by allowing for adjustments in the demand for, and supply of the traded commodity.

2. The second difference between an import quota and an import tariff is that the quota involves the distribution of import licenses. In this case, the government must decide the basis for distributing licenses among potential importers of the commodity. Such choices may be based on arbitrary official judgment rather than on efficiency considerations, and they tend to remain frozen even in the face of changes in the relative efficiency of various actual and potential importers of the commodity.
Furthermore, since import licenses result in monopoly profits, potential importers are likely to devote a great deal of effort in lobbying and even bribing government officials to obtain them (i.e. in so called rent-seeking activities). Thus, import quotas not only replace the market mechanism, but also result in waste from the point of view of the economy as a whole and contain the seeds of corruption.

3. An import quota limits imports to the specified level with certainty, while the trade effect of an import tariff may be uncertain. This is because the elasticities of demand and supply are often not known, making it difficult to estimate the import tariff required to restrict imports to a desired level. Moreover, foreign exporters may absorb all or part of the tariff by increasing their efficiency of operation or by accepting lower profits. As a result, the actual reduction in imports may be less than anticipated. Exporters cannot do this with an import quota since the quantity of imports allowed into the country is
clearly specified by the quota. It?s for this reason, and also because an import quota is less „visible?, that domestic producers strongly prefer quotas to tariffs. However, since import quotas are more restrictive than equivalent import tariffs, society should generally resist these efforts.
Wilfykil answered the question on February 7, 2019 at 05:59

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