Similarities and Differences between Tariffs and Quotas - Essay Example

Teacher 20 November 2007 Similarities and Differences between Tariffs and Quotas Introduction The tariff and the quota are two major aspects of the modern economy and can be found in virtually every country in the world. A wide variety of tariffs have been imposed on many different goods and on many different trading routes for hundreds of years as a way for nations to make an income. The quota has been utilized possibly for an even longer time that the tariff so that nations, cities and any type of organized society might be able to easily create an economic budget. These two economic factors are closely related in how they benefit a nation, however their success in this field comes from two different foundations: the tariff has to do with income secured from international trade, and the quota has to do with primary production within the nation itself. There are many basic similarities between the tariff and the quota, particularly in the way they both relate directly to economic relations within and without a nation; there are several basic differences as well, however, which determine which of these strategies should be employed in any particular situation. Figure 1 lists the ways in which tariffs and quotas and the same and different. Tariffs and Quotas in History Originally speaking, tariffs were imposed in early empires and principalities; ancient Germanic, Slavic and Arabic societies imposed tariffs on imported goods to protect their own established, small economies while simultaneously strengthening trading ties and making beneficial political and economic connections with other parts of the world (Heichelheim, 1957, p. 111). It was the foresight of ancient society leaders that has led to the current state of international trade and helped formulate the basis for contemporary economics. Revenue tariffs essentially help to maintain the structure of a local economy despite the influx of foreign goods and produce; some countries have little income and must rely on tariffs to keep their economies stable (Howard, 2001, p.226). Quotas were introduced in cultures such as the Aztec Empire by rulers who demanded a constant supply of goods from their subjects; quotas were also implemented upon the establishment of the Soviet Union as a way to unite the workers and ensure that everyone was doing their part to keep the economy running (Vaillant, 1962, p.190; Ellman and Kontorovich, 1998, p.221). The idea of the tariff is also quite ancient because since the very beginning of human society there has always existed competition between different groups of people. Despite friendly relations, certain products and produce that is available to one group may not be available to the other, and so trade is a natural occurrence between communities, cities, regions and countries. Figure 1 Tariffs and Quotas ' ' ' ' ' ' ' ' ' ' ' * Can pertain to international trade ' ' ' * Responsible for national revenue ' ' ' * Regulate local economy ' SIMILARITIES ' * Regulate international economy ' ' ' * Both can strengthen international trade ties ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' * Tariffs are always used in terms of ' ' ' international trade, whereas; ' DIFFERENCES ' * Quotas may relate directly to internal ' ' production ' ' ' * Tariffs can greatly impact foreign economy ' ' * Quotas create revenue for local sellers ' ' * Tariffs create revenue for the government ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' The Tariff Strictly speaking, a tariff is the tax that is placed on a foreign import upon its entry into another country. There are three basic types of tariff: revenue, protective and prohibitive tariffs. Each of these serves a specific purpose within the economy and is responsible for bringing in money from different market sectors with overseas origins. The imposition of tariffs on various imported goods ensures that the nation that imports the goods is not losing out on the money that is being spent on said goods. There are two basic reasons for importing various goods from international destinations: the first is to provide the public with products and raw materials that aren't available locally; the second is to take advantage of lower prices on products that would be more expensive to produce locally. The only problem inherent in this international trading relationship is that the local economy stands to lose money on cheap imports when citizens spend their income on imported goods instead of locally-produced goods. To alleviate this cash flow problem and to ensure that the money earned by citizens of one country is reinvested into the local economy, tariffs have been implemented. In receiving tariffs on these imported goods, the local economy does not completely lose out on the earning potential of such goods however its citizens are still able to spend significantly less on certain products and gain access to merchandise that they would otherwise never see in their country. Revenue tariffs are the most rudimentary kind of tariffs. These are imposed on foreign products being imported simply to provide revenue for the country that is importing. These have always been set up strictly to ensure that imported goods do not lead to lost income for the local economy because of cheap foreign materials and goods; the major factor concerning revenue tariffs is that the imports in question are not available locally. Traditionally this would mean that produce like bananas or oranges being imported by the United Kingdom would call for revenue tariffs because Britain could not locally produce such things; contemporary revenue tariffs have shifted to produce like coffee and chocolate and manufactured goods like Asian electronics. Protective tariffs were created to effectively protect local producers and manufacturers from the threat of cheaper imported products. In this case, the imports in question are not unique to their origins, but consist of goods that can already be found locally. Although in terms of local economics it is easy to see why such a tariff would be useful, protective tariffs do shoulder heavy criticisms when a nation becomes too dependent on them. Critics of the American protective tariff agenda say that more focus should be put on the role of foreign diplomacy and friendly trade than on the rigid restriction of trade due to high tariffs (Hoover, 1945, pp.84-98). Although this method can be implemented in an effort to stimulate the local economy into producing top-quality, affordable products and therefore keeping local jobs, the case is often that local economy continues on par with foreign producers and simply beats out the competition due to steep import prices. Prohibitive tariffs are an extreme version of protective tariffs: this label applies when the tariff is so high on one particular product that a country will simply not import any of it. Prohibitive and protective tariffs are an idea that prevailed in 19th and early 20th century America when political leaders and economists believed that free trade was a ruinous idea and essentially building a wall around the American economy was best for the future of the country (Eckes, 1995, pp.28-58). If a product was deemed an integral risk to the economy, tariffs were placed accordingly to not only restrict trade on the item but to stop it altogether; this is an economic idea that was also employed in the Soviet Union and other independent eastern European nations. Tariffs may also be called customs duties and can be implemented not only to traders but to individual citizens. If a person has travelled outside of his or her country of residence and made purchases, these may be susceptible to customs duties according to local law. Although there will be a certain monetary amount that travellers are allowed to spend on foreign products without succumbing to tariffs, they must always be aware that to buy foreign products in bulk can lead to prosecution if the items are not declared to customs agents upon re-entry home (Gardner, 1996, p.55). Customs duties are enforced most heavily in international airports where every disembarking passenger from incoming flights (who intends to stay in the country of arrival) must declare any foreign purchases made if they are in excess of the stipulated legal amounts. Duties are also watched closely at large international borders such as the Canada/United States border. Upon gaining an entry visa to another country or boarding an airplane with a foreign destination, an individual will be provided with a list of goods and amounts that are legally purchasable; the most common items purchased overseas or across the border from home are alcohol and cigarettes and therefore these are blatantly specified with regards to the legal amount that may be purchased. How Tariffs Benefit Large Countries In the case of larger nations like the United States or even large developing countries like India, tariff imposition can benefit the local economy more than it can in smaller states. Of course tariffs are meant to equalise the disparity between economies of an exporting nation and an importing nation; aside from this basic fact, however, tariffs will help a large nation more because of the existence of more natural resources. Large countries are able to produce and often manufacture many goods and products that are in demand not only on the local market but internationally as well. In the case of protective and prohibitive tariffs this means that a large nation will be able to use its own natural resources to build a strong economy upon which internal produce can be fully promoted, exported and expected to bring in large revenues (Hoekman and Kostecki, 1995, pp.87-93). Small countries will not have this natural foundation upon which to operate and can fall victim to high tariffs on their exports. Essentially, it is very possible for large countries to create a monopoly on certain products or produce items simply because they can afford not to import the same; they can also export their own products relatively cheaply while small producers are caught in the trap of the high tariff which they simply cannot afford. The Quota In terms of international trade, and specifically imports, a quota is a set amount that either must be met or cannot be exceeded (Sawyer and Sprinkle, 2004, p. 157). A quota may be implemented on imports to deal with a surplus issue, or it may be done to ensure the availability of a product that is highly in demand. A quota may be set on imports or exports, and will have a direct impact on a national economy because of the implications of product sale and purchase. While a tariff relates directly to the importation of various goods, quotas may perform a wide range of functions within a local and international economy because they are stricter. Specifically, a quota can be used to describe any facet of an economy that incorporates a target number. Although a tariff (be it revenue, protection or preventative) might be in place to directly control import quantities of certain products, simply putting a high tax on traded items does not mean that none of them will be traded. An import quota is different in this aspect because if a government decides that its country has no economic room for a high number of any product, the quota acts as a cap on trade and only an economically viable amount can be traded (Viner, 1943, pp.54-60). Capping the amount of any imported item means that a government can take direct control over surplus problems and ensure that it is not overspending on a product that is virtually redundant. Without capped quotas, it would be possible to essentially overstock the market and as a result the price of the item would drop significantly. Adhering to quota limits on imports keeps local economies from dealing with undue inflation and from creating false rises in international product markets. This was the case with rubber imports in Great Britain: the UK government decided that import quotas must be set due to the overbuying of rubber and the improper trade figures that showed it to be in higher demand than was actually true (Intergovernmental Commodity Control Agreements, 1943, pp. 104-131). By reducing the amount of rubber purchased from worldwide producers, Great Britain succeeded in creating more accurate market statistics for the product and in reducing the price accordingly. Export quotas are relevant to international trade with specific focus on raising revenues instead of merely the protection of existing economic status. When a government decides to impose export quotas, this is because the economy relies on that particular product. If a country fails to trade a certain amount of its main export product, national revenues will shoot down and the nation will struggle to make up the lost funds. Exports quotas are therefore implemented so that a country can rely on sales numbers and plan specific budgeting strategies accordingly. Not only do export quotas ensure the steady income of a nation but they also open avenues for further income. Sometimes a government may decide to implement an export quota as a type of marketing strategy; basically, it will call for higher sales of certain products because of a belief in a growing international market and the theory that trade revenues could be boosted. Such strategies are important because it is only through close observation of international markets that individual countries are able to stay on top of market trends and subsequently keep their own economies strong. The import and export quotas implemented in any country are done so to both maintain economic regularity and to promote unique products that have a chance to perform well on the international market. International trade is the economic basis of every country in the world; without the balance of viable, marketable products and affordable, consumer-driven imports any country would find itself in a very unfavourable position. Quotas are also set up so that a certain sectors within the economy of a country will produce an adequate number of goods for sale or consumption locally. Tactics like these were used heavily during the Soviet period throughout the various Soviet states; the central Communist government would impose quotas on grain production, dairy products, meat and machinery parts so that it would have enough of the necessary goods to feed its population, run the factories and ultimately succeed as a nation. Although they were arguably based on commendable principles, the Soviet quota tactics were often difficult for producers to meet and as a result many people went hungry (Ellman and Kontorovich, 1998, pp.147-155). Similarities and Differences between Tariffs and Quotas Tariffs and quotas both have the ability to directly affect international trade, national revenues, regulate local and international economies and to strengthen international trading ties. The two economic strategies have historically worked together to achieve all of these things in terms of local and international trade; when both are regulated with respect to one another, a country can not only ensure the solidity and success of its own internal good production but its sale of local products in other markets as well as the importation of necessary goods. The importing and exporting businesses work hand in hand and it is through tariffs and quotas that they can do so. Regulating import tariffs and reaching national production quotas can effectively make or break the economy of one country and change the economic status of any product on the international market. The basic differences between tariffs and quotas are the fact that tariffs will always apply to international trade while quotas can be applied either internationally or locally. Tariffs can also greatly affect international economy and will always create revenue for federal government; quotas, on the other hand, create revenue primarily for local sellers and therefore affect economy from a smaller, local scale before changing international trade. The major similarity between the tariff and the quota is the fact that both pertain directly to the economic wellbeing of any country in the world. Both the tariff and the quota were all introduced to economics early in the history of human society because of the basic infrastructure of human social systems. Given the organisational characteristics of the earliest city-states and proto-nations, leadership was established and two things that became clear to these people was that a community cannot exist without the combined efforts of its people and the protection of that internal economy from outside influences (Madge, 1953, p.117). Essentially, a tariff is used to place restrictions on imported goods to regular local revenues; a quota is used to restrict imported goods, maintain a stable economy and to expend local produce to further international markets. Conclusions Tariffs are generally imposed upon imported goods in one of three ways: through revenue, protective or preventative tactics. These are each meant to essentially protect the revenues of the country of import through varying degrees of severity concerning the countries of export. Initially, tariffs were imposed solely to give the importing country a share in profits since their citizens would be effectively spending their money in a foreign market; contemporarily speaking, however, the tariff has evolved as a way to protect local interests in terms of produce and products that can be found both locally and internationally. Large countries stand to benefit the most from the imposition of trade tariffs because they will most often have the natural resources to build a strong economy and create competitive trading markets worldwide in which they may sell their own produce cheaply and import foreign produce cheaply as well. Quotas have been established in many different ways but in terms of international trade these are generally created as a way to regulate the market. By capping export numbers and pushing import numbers, a country can remain confident in the maintenance of proper market value and also effectively market its own products internationally according to trading trends. Both the tariff and the quota are essential to social economy, both traditionally speaking and currently. References Adams, W., Amacher, R., Arndt, S., Bale, M., Cuddington, J., Deardorff, A., Dirlam, J., Hansen, R., Heller, R., Johnson, D., Keohane, R., Keran, M., McCulloch, R., McKinnon, R., Smith, G., Stern, R., Sweeney, R., Tollison, R., & Willett, T. 1979, Tariffs, Quotas, and Trade: The Politics of Protectionism, Institute for Contemporary Studies, San Francisco. Charles S. & Sprinkle, R. 2004, International Economics 2nd edition, Prentice Hall. Eckes Jr., A. 1995, Opening America's Market: U. S. Foreign Trade Policy since 1776, University of North Carolina Press, Chapel Hill, NC. Ellman, M. & Kontorovich, V. 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