International Business

QUESTION 5: ANALYZE THE LIKELY IMPACT ON DOMESTIC MARKETS OF IMPORT RESTRICTIONS VIA TARRIFS AND QUOTAS RESPECTIVELY. DISCUSS THE DYNAMIC SIDE EFFECTS THAT CAN ARISE FROM IMPORT PROTECTION.

Answer

Introduction

After the World War II the general agreement on tariffs and trade (GATT) signed in 1947, was set up as an interim and intended short term agency of the United Nations to enable members reap the gains from trade according to the principles of comparative advantage. To this end, GATT has administered the guiding principles of reciprocity and treating all member nations the same and has sought to minimise controls on trade transactions. GATT has consistently favoured the imposition of tariffs over non-tariff quantitative barriers such as quota whenever a country claimed that protection was necessary.

Among the most common forms of import restrictions are tariffs, subsidies, quotas and full scale import bans. Each of these tools is used in certain situations where a government feels compelled to regulate the flow of goods into or out of the country.

Import quotas are quantity restrictions imposed by the government of one nation on imports from other nations. The primary goal of import quotas is to reduce imports and increase domestic production. Because the quantity of imports is restricted, the price of imports increases, which thus encourages domestic consumers to buy more domestic production. Import quotas are one of three common foreign trade policies designed to discourage imports and/or encourage exports. The other two are tariffs and export subsidies.

Import quotas are foreign trade policies undertaken by domestic governments that are intended to "protect" domestic production by restricting foreign competition. In general, a quota is simply a quantity restriction placed on a good, service, or activity. Import quotas are then merely legal restrictions on the quantities of imports from the foreign sector that are imposed by the domestic...