effects of import tariffs and import quotas on businesses

6.3 Business and the International Economy – Globalisation

6.3.1 What is Globalisation?

Globalisation is the process by which businesses and markets operate on an international scale, allowing the movement of goods, services, capital, technology and ideas across national borders.

6.3.2 Reasons for Globalisation (syllabus wording)

• Advances in transport – cheaper, faster shipping and air freight.
• Diffusion of technology – internet, communication tools and production techniques spread worldwide.
• Liberalisation of trade – removal of tariffs, quotas and other barriers through agreements (e.g., WTO, EU).
• Growth of multinational enterprises (MNCs) – firms seek new markets and cheaper inputs.
• Increasing consumer demand for a wider range of products.

6.3.3 Why Globalisation is Important for Businesses

• Access to larger markets – more customers → higher sales potential.
• Access to cheaper or higher‑quality inputs – lower production costs and higher profit margins.
• Opportunities for diversification – spread risk across regions and product lines.
• Exposure to new technologies and management practices – improves efficiency and innovation.
• Increased competition – forces firms to become more efficient and innovative.

6.3.4 Opportunities and Threats of Globalisation

Opportunities	Threats
New markets for export	Greater competition from overseas firms
Economies of scale (lower unit costs)	Exposure to foreign‑exchange fluctuations
Access to advanced technology and skills	Risk of cultural misunderstandings and brand dilution
Potential for strategic alliances and joint ventures	Political and legal differences (e.g., regulations, tariffs)

6.4 Trade Barriers

6.4.1 Why Governments Use Trade Barriers (syllabus wording)

To protect domestic industries, preserve jobs, safeguard health and safety, or raise revenue.

6.4.2 Types of Trade Barriers

• Import Tariffs – a tax on each unit of a good as it crosses a border.
• Import Quotas – a physical limit on the quantity of a good that can be imported in a set period.
• Non‑tariff barriers
  • Technical standards & specifications (e.g., safety, labeling)
  • Licensing or import permits
  • Subsidies to domestic producers
  • Embargoes and outright bans

6.4.3 Effects of Import Tariffs on Businesses (6.4.3)

1. Higher input costs – tariffs increase the purchase price of imported raw materials or components.
2. Potential rise in selling prices – firms may pass the extra cost onto customers, reducing price competitiveness.
3. Compressed profit margins – if price increases are limited by market demand.
4. Stimulus for domestic production – local firms may expand to replace the now‑more‑expensive imports.
5. Risk of retaliation – trading partners may impose their own tariffs, affecting export markets.
6. Government revenue – the tax collected can be used for public services, indirectly affecting the business environment.

Business‑Response Checklist (AO2/Application)

• Pass‑through price increase to customers (if demand is price‑elastic, consider limited pass‑through).
• Source the input from a lower‑tariff country or from a domestic supplier.
• Redesign the product to use a cheaper local alternative.
• Negotiate long‑term contracts to lock in current prices.
• Lobby government for tariff reductions or exemptions.

6.4.4 Effects of Import Quotas on Businesses (6.4.4)

1. Limited supply of imported goods – firms cannot import beyond the quota, which may cause shortages.
2. Higher market prices – scarcity drives up prices, benefiting domestic producers but raising costs for users.
3. Reduced flexibility – companies cannot quickly respond to changes in demand or price fluctuations.
4. Encouragement of domestic alternatives – creates opportunities for local firms to develop substitute products.
5. Possibility of black‑market activity – illegal imports may appear, often at higher prices and with quality risks.
6. No direct revenue for government – unlike tariffs, quotas usually do not generate tax income.

Decision‑Making Tips (AO2/Application)

• Monitor quota allocations and expiry dates closely.
• Develop local substitutes or diversify the product range.
• Form strategic alliances with quota‑holding firms.
• Consider importing through a third country not subject to the quota.
• Advocate for licence‑based quotas that can generate revenue and provide predictability.

6.4.5 Comparing Import Tariffs and Import Quotas

Aspect	Import Tariff	Import Quota
Nature of restriction	Financial – tax on each unit imported	Physical – limit on total quantity
Effect on price	Price rises proportionally to the tariff rate	Price rises because supply is restricted (scarcity)
Government revenue	Generates revenue from the tax	Usually no direct revenue (unless licences are sold)
Predictability for businesses	High – cost per unit is known in advance	Lower – firms may hit the quota limit unexpectedly
Impact on domestic producers	Improves competitiveness by raising import costs	Creates a protected market by limiting foreign competition
Potential for retaliation	High – other countries may match tariffs	Moderate – quotas can be counter‑ed with their own limits

6.5 Multinational Companies (MNCs)

6.5.1 Why MNCs Grow (syllabus 6.5.2)

• Search for new markets and customers.
• Access to cheaper or higher‑quality inputs.
• Exploiting economies of scale and scope.
• Strategic positioning to avoid trade barriers.
• Desire to spread risk across different economies.

6.5.2 Benefits to a Business of Becoming a Multinational and Impact on Stakeholders

• Access to new markets – larger sales base, higher revenue.
• Risk diversification – downturns in one country can be offset by performance elsewhere.
• Economies of scale – lower average costs through larger production volumes.
• Brand building and reputation – global presence can enhance credibility.
• Learning and innovation – exposure to different business practices and technologies.

6.5.3 Benefits for the Host Country

• Job creation and skill development.
• Influx of foreign capital and technology transfer.
• Improved balance of payments (initial capital inflow; profit repatriation may offset later).
• Development of related local industries (suppliers, logistics, services).

6.5.4 Drawbacks for the Host Country

• Profit repatriation reduces long‑term earnings.
• Possible crowding‑out of domestic firms.
• Dependence on foreign decision‑making.
• Risk of cultural clashes and workplace disputes.

6.5.5 Benefits for the Home Country

• Higher employment in overseas subsidiaries.
• Increased national income from overseas profits (subject to tax).
• Enhanced reputation and global influence.

6.5.6 Drawbacks for the Home Country

• Loss of domestic jobs if production is relocated abroad.
• Exposure to political or economic instability in host nations.
• Potential criticism for “off‑shoring” and negative public perception.

6.6 Impact of Exchange‑Rate Changes (6.6)

6.6.1 What is an Exchange Rate?

An exchange rate is the price of one currency expressed in terms of another.
Appreciation – domestic currency becomes stronger (more foreign currency can be bought).
Depreciation – domestic currency becomes weaker (less foreign currency can be bought).

6.6.2 How Exchange‑Rate Changes Affect Business

• Imports – depreciation raises the cost of imported raw materials, components or finished goods; appreciation lowers those costs.
• Exports – depreciation makes a firm’s exports cheaper for foreign buyers, potentially increasing sales; appreciation makes exports more expensive and may reduce demand.
• Profit margins – changes in import costs or export revenues directly affect the bottom line, especially for firms with thin margins.
• Pricing strategy – firms may need to adjust selling prices in foreign markets or renegotiate contracts.
• Financial planning – exchange‑rate risk can be managed through hedging, invoicing in the home currency, or using forward contracts.

6.6.3 Example

Scenario: A UK toy manufacturer sells 10 000 units to the Euro‑zone at €20 each. The exchange rate is £1 = €1.15.

• Revenue in pounds = (10 000 × €20) ÷ 1.15 = £173 913.
• If the pound depreciates to £1 = €1.05, the same €20 price now yields £190 476 – a £16 563 increase.
• Conversely, if the pound appreciates to £1 = €1.30, revenue falls to £153 846 – a £20 067 decrease.
• Business response may include: renegotiating contracts in pounds, using forward contracts, or adjusting the Euro‑price.

6.7 Case Study Illustrations

Tariff Example

Scenario: Country A imposes a 20 % tariff on imported steel. A domestic car manufacturer uses 1 tonne of steel per car. World price of steel = £500 per tonne.

• Tariff cost per tonne = 0.20 × £500 = £100.
• New steel cost = £600 per tonne → production cost rises by 10 %.
• Possible business responses:
  • Raise car prices (risk of losing market share).
  • Source steel from a non‑tariff‑affected country.
  • Invest in domestic steel production or redesign the car to use less steel.

Quota Example

Scenario: Country B sets an import quota of 100 000 tonnes of wheat per year. Domestic bakeries normally import 150 000 tonnes.

• Only 100 000 tonnes are available at the world price; the remaining 50 000 tonnes must be bought from local growers at a higher price.
• Resulting effects:
  • Bakeries’ production costs increase → bread prices rise.
  • Domestic wheat farmers gain a protected market and higher incomes.
  • Consumers may switch to cheaper alternatives or reduce consumption.

Diagram Suggestion (Flowchart)

Insert a flowchart showing: Government policy → Import tariff or quota → Change in business costs → Adjusted selling price or production strategy → Impact on market share & profit.

Key Take‑aways

• Globalisation offers opportunities (new markets, economies of scale) and threats (competition, exchange‑rate risk).
• Trade barriers protect domestic industries but affect businesses differently:
  • Tariffs raise the cost of each imported unit and generate government revenue.
  • Quotas restrict the total quantity that can be imported, often creating scarcity‑driven price rises without direct revenue.
• Businesses must adapt by:
  • Adjusting prices or product mix.
  • Finding alternative suppliers or developing local substitutes.
  • Increasing domestic production, innovating, or using financial tools to manage exchange‑rate risk.
• Understanding the effects of tariffs, quotas, exchange‑rate changes and other barriers is essential for strategic decision‑making in a globalised market.
• Multinational companies expand to exploit global opportunities, bringing both benefits and challenges for host and home countries, and affecting a wide range of stakeholders.