Increase in tariffs increase the revenue for government as it serves as a tax which is imposed whereas quotas may or may not increase the revenue for the government. However, there are also welfare impacts of the quota and tariffs also on the domestic economy which can indicate that the protectionism may not be good for the economy.
The above diagram shows the impact of having quotas on the supply level and the prices and how the imposition of quotas will create welfare loss for the consumers. The above graph indicates that the world supply is elastic in nature and is indicated by a horizontal line showing SH+Q. The line DH indicates the overall demand in the market and the interaction of supply and demand indicates the market clearing conditions at different price and quantity levels.
Recently, US has imposed higher tariff on the import of tires from China in a bid to protect the ailing tire industry of the country which resulted into the job losses for last five years. (Whoriskey and Kornblut).
Now that tariff is imposed on the import of Chinese so that the production is reduced. As a result of this, the price level will move to Pw’ from Pw in local market for locally manufactured tires. As a result of the tariff imposition, the supply will reduce and the aggregate supply curve will shift leftward to SH. This reduction in the supply and the increase in prices will therefore result into the decrease in the supply and the increase in prices therefore will not only result into the reduction of consumer surplus but will also result into the welfare loss. This is because the imposition of the tariff increases the domestic prices over and above the world prices thus making the domestic consumers more worse off owing to the increase in the prices.
The imposition of tariffs on the import of Chinese tires will first disrupt the equation of trade balance between both the countries as US’s import of tires from China will reduce as the imported