The Difference Between Import Quotas And Tariffs (And Which Is Worse On Your Wallet)
International trade boosts the quantities of goods available to consumers while reducing the costs of such goods through greater international competition. These impacts sound positive, but they are not necessarily good for everyone involved. American-made products sometimes cost more to produce than goods other countries make, leading to job and industry losses domestically to overseas competition. Two ways the government can address the imbalances that free trade may create at home are through import quotas and tariffs. Both policies may sound ominous, but tariffs are worse on your wallet than import quotas.
Import quotas are specific import limits applied to the quantity of a certain good, usually from particular countries. This trade barrier is commonly enforced by issuing licenses. Nations enforce quotas on the amount of steel that other countries can send into domestic markets, as a real world example.
Meanwhile tariffs are easiest defined as taxes. An import tariff increases the costs to consumers on imported goods, discouraging them from buying foreign products. The United States collects these tariffs through Customs and Border Protection as an agent for the Commerce Department.
Tariffs are a type of trade barrier
The idea behind tariffs is to increase the price of other countries' products brought in as compared to our own domestic goods. In practice, this appears as a duty or tax assessed on importers. However, a tariff cost is passed through to the end buyers, such as companies or individuals. Domesticproducers gain an advantage while the government raises revenue.
Tariffs come in one of two forms, specific or ad valorem. Specific tariffs are a fixed fee that governments levy on a single unit of imported goods. Such a tariff allows for the targeting of specific products. By way of example, this type of tariff might charge $20 on shoe imports while assessing $250 on a tablet or computer import. There are five ways new tariffs can impact your family's budget.
Ad valorem tariffs instead use the Latin/Roman Empire concept of taxing according to value. Governments assess this form of tariff on the value of a good using a specific percentage. Simply put, if an ad valorem tariff was set on electric vehicles from China at 20%, then a vehicle that companies in China sell for $30,000 would increase in price to $36,000 in the U.S. The effect of this tariff would be to encourage domestic car manufacturers, but it also would cause Chinese made electric cars to cost more for American consumers.
Tariffs are generally worse for your wallet than import quotas
It is difficult to tangibly quantify the costs to consumers of import quotas. The theory is that quotas encourage domestic production by absolutely limiting international competition. Quotas as a tool are more effective at restricting imports than tariffs since tariffs still allow users to purchase a product.
The efficacy of quotas is particularly the case when domestic demand is not sensitive to the price of an item. Nebulous costs of import quotas come from their general disruption of international trade. The U.S. currently has import quotas on steel product imports from South Korea, Brazil, and Argentina and on aluminum products sourced from Argentina, per the CBP (U.S. Customs and Border Protection).
On the other hand, the effect of tariffs that are presently outstanding can be quantified. The current Trump-Biden tariffs have reduced the long term U.S. GDP by 0.2% and employment numbers by the equivalent of 142,000 full-time jobs. The inflationary impacts of the present trade-limiting policies amount to $79 billion, and they have cost U.S. households $625 on average, per the Tax Foundation. In the end, many economists hold up such figures to argue that free trade policies which can help keep inflation down are more beneficial overall than the protection afforded to some domestic sectors through tariffs and import quotas.