import tariffs and import quotas

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6.2.1 The Importance of Globalisation – Import Tariffs & Quotas

Learning objective

Explain how import tariffs and import quotas influence businesses, consumers and the wider economy in a globalised world, and evaluate the strategic decisions they create for firms.

1. Globalisation – definition, drivers and why firms expand internationally

  • Definition: The increasing integration of national economies through the flow of goods, services, capital, technology and people.
  • Key drivers
    • Trade liberalisation (removal of barriers, free‑trade agreements)
    • Advances in transport and communication technology
    • Growth of multinational enterprises (MNEs)
    • Lower transport and transaction costs
    • Policy reforms that encourage foreign direct investment (FDI)
  • Why businesses go abroad
    • Market‑seeking – access to larger or faster‑growing markets.
    • Resource‑seeking – obtain raw materials, labour or specialised inputs at lower cost.
    • Efficiency‑seeking – achieve economies of scale or exploit comparative advantage.

2. Opportunities & threats of globalisation (with real‑world examples)

Opportunities Example Threats Example
Access to larger, international markets – higher sales potential. Apple launching iPhone models in India. Increased competition from overseas firms. Local smartphone makers losing market share to Chinese brands.
Sourcing cheaper or specialised inputs from abroad. UK fashion retailer buying fabrics from Bangladesh. Exposure to exchange‑rate fluctuations. Brexit‑related GBP depreciation raising import costs for a car dealer.
Technology transfer and learning from global best practice. Japanese car manufacturers adopting German robotics. Risk of dependency on foreign suppliers and supply‑chain disruption. COVID‑19 shutdown of Chinese component factories affecting electronics firms.
Diversification of risk across different markets. Coca‑Cola operating in over 200 countries. Domestic firms may lose market share if they cannot compete on cost or quality. Local dairy producers unable to match the price of imported milk powder.

3. The importance of multinational companies (MNCs)

  • Provide capital, technology and managerial expertise to host economies.
  • Generate employment and tax revenue in both home and host countries.
  • Facilitate the spread of new products, standards and practices.
  • Potential drawbacks: profit repatriation, cultural homogenisation and pressure on local firms.

Case study (fast‑food example): McDonald’s entered India in 1996, adapting its menu (no beef) to local tastes, creating thousands of jobs and a supply chain for local farmers while repatriating a portion of profits to the United States.

4. Exchange‑rate impact on imports and exports

  • Depreciation of the domestic currency – imports become more expensive, exports become cheaper for foreign buyers.
  • Appreciation of the domestic currency – imports become cheaper, exports become more expensive.
  • Effect on business decisions: pricing, sourcing, profit margins and competitive positioning.

Numeric illustration (10 % depreciation of the GBP against the USD):
If a UK firm imports a component costing $100, the cost rises from £70 to £77 (10 % increase). The same firm’s export of a product priced at £80 gains a 10 % price advantage in the US market, potentially increasing sales volume.

5. Why governments use tariffs and quotas

  1. Protect domestic industries (infant‑industry or strategic protection).
  2. Raise revenue for the state (mainly tariffs).
  3. Improve the balance of payments and safeguard foreign‑exchange reserves.
  4. Achieve political or strategic aims (sanctions, retaliation).

6. Legal controls on international trade

  • World Trade Organisation (WTO) – sets rules on the use of tariffs, quotas, anti‑dumping and safeguard measures; provides a dispute‑settlement mechanism.
  • Anti‑dumping duties – imposed when foreign firms sell below normal value and cause injury to domestic producers.
  • Safeguard measures – temporary restrictions (tariffs or quotas) to protect a sector from a sudden surge in imports.
  • Regional agreements (EU, NAFTA, ASEAN) may contain “free‑trade” clauses that limit the use of tariffs and quotas among members.

7. Types of trade protection – tariffs and quotas

Measure Definition How it works Typical economic impact
Import tariff A tax levied on goods as they cross the border.
  • Ad‑valorem tariff: % of the customs value (e.g., 10 % of $50 = $5).
  • Specific tariff: Fixed amount per unit (e.g., $2 per kilogram).
Customs assess the duty; the importer pays before the goods are released.
  • Domestic price rises → lower consumer demand.
  • Domestic producers gain a price advantage.
  • Government collects revenue.
  • Possible retaliation or WTO dispute.
Import quota A quantitative limit on the amount of a specific product that may be imported in a given period. Import licences are issued; once the quota is filled, further imports are prohibited until the next period.
  • Supply is restricted → domestic price rises.
  • Domestic producers benefit from reduced competition.
  • No direct revenue unless licences are auctioned.
  • Creates “quota rent” – surplus earned by licence holders.

8. Quantitative illustrations

8.1 Effect of a 10 % ad‑valorem tariff

Foreign‑made widget price = $50 FOB.

Tariff amount = 0.10 × $50 = $5  
Import price after tariff = $50 + $5 = $55

If the price elasticity of demand (PED) = –1.5:

%ΔQ = PED × %ΔP = (–1.5) × 10 % = –15 %

The $5 price increase cuts quantity demanded by 15 %.

8.2 Specific‑rate tariff example

Specific tariff = $2 per kilogram. Imported steel costs $20/kg.

Tariff cost = $2 × 1 kg = $2  
Price after tariff = $20 + $2 = $22/kg

8.3 Quota‑rent calculation

World price = $50. Quota raises domestic price to $60. Quota limit = 1 000 units.

Quota rent per unit = $60 – $50 = $10  
Total quota rent = 1 000 × $10 = $10 000

If licences are auctioned, the government can capture the $10 000.

8.4 Exchange‑rate impact illustration

Domestic currency depreciates by 10 % (USD/GBP moves from 1.30 to 1.43). A UK importer buys a $100 component.

Cost before depreciation = $100 / 1.30 = £76.92  
Cost after depreciation = $100 / 1.43 = £69.93 (actually cheaper for the UK importer because GBP weakened? Wait: if GBP depreciates, more GBP needed per USD, so cost rises.)
Corrected:  
Cost after depreciation = $100 × 1.43 = £143  
Increase = £66.08 (≈ 86 % rise) – illustrates how a large depreciation can dramatically raise import costs.

9. Comparative impact table (Tariff vs. Quota)

Impact area Import tariff Import quota
Market price Increases by the amount of the duty (ad‑valorem or specific). Increases because the supply curve is shifted left by the quota limit.
Quantity demanded Falls according to price elasticity. Falls to the quota‑limited quantity.
Consumer surplus Reduces – consumers pay a higher price. Reduces – same effect as a tariff.
Producer surplus (domestic) Increases – domestic firms face less foreign competition. Increases – same reason.
Government revenue Collected as tariff duty. Only if licences are sold/auctioned; otherwise zero.
Quota rent None (unless combined with a tariff). Earned by licence holders or the government.
Risk of retaliation High – other countries may impose counter‑tariffs. High – can trigger WTO disputes.

10. Wider economic & strategic implications

  • Trade wars: Retaliatory tariffs, quotas or anti‑dumping duties can spiral into broader protectionism.
  • WTO dispute‑settlement: Countries may bring cases; rulings can require removal of the offending measure.
  • Legal/ethical considerations:
    • Compliance with WTO rules and regional trade agreements.
    • Anti‑dumping duties are permissible to counter unfair pricing.
    • Ethical debate – protecting domestic jobs vs. harming consumer welfare.
  • Link to other business functions (mirroring the AO language):
    • Marketing mix: Tariffs affect pricing strategy and product positioning.
    • Finance: Higher import costs alter cash‑flow forecasts, working‑capital needs and profitability ratios.
    • Operations: Quotas may force firms to source locally, redesign supply chains or invest in domestic capacity.

11. Required diagrams (exam practice)

Supply‑and‑demand diagram showing the effect of an import tariff: world supply curve shifts up by the tariff amount, domestic price rises from P0 to P1, quantity falls from Q0 to Q1.
Diagram 1 – Import tariff: upward shift of the world supply curve (Sworld + tariff) and resulting changes in price (P₁) and quantity (Q₁).
Supply‑and‑demand diagram showing the effect of an import quota: a vertical quota line limits imports, domestic price rises to P1, quantity falls to Q1, and quota rent is the area between domestic price and world price up to Q1.
Diagram 2 – Import quota: quota limit (Qquota) creates a price increase to P₁ and generates quota rent (shaded area).

12. Impact on business decision‑making (evaluation)

  1. Identify the current tariff rate or quota limit for the relevant product (WTO, regional agreement, or national schedule).
  2. Calculate the cost impact on imported inputs or finished goods, including any elasticity effects.
  3. Compare alternatives:
    • Continue importing and absorb the tariff/quota cost.
    • Source the input from a different country with a lower duty.
    • Shift to domestic production or a joint‑venture.
  4. Assess strategic risks – possible tariff escalation, quota revisions, exchange‑rate movements or WTO disputes.
  5. Incorporate the chosen option into pricing, marketing, cash‑flow forecasts and production planning.
  6. Evaluation prompt: “Which option (import, relocate sourcing, or produce locally) yields the highest profit after accounting for tariff cost, quota rent, exchange‑rate changes and elasticity of demand? Justify your recommendation with calculations.”

13. Key take‑aways

  • Globalisation creates market opportunities but also exposes firms to foreign competition and policy risks.
  • Import tariffs and quotas are the two main protection tools; both raise domestic prices, but tariffs generate government revenue while quotas generate quota rent.
  • Understanding the economic effects, legal framework (WTO, anti‑dumping, safeguards) and strategic implications enables businesses to make informed sourcing, pricing and investment decisions.
  • For the exam, be able to:
    • Define and differentiate tariffs (ad‑valorem vs. specific) and quotas.
    • Draw and interpret the supply‑and‑demand diagrams for each measure.
    • Calculate the monetary impact of a tariff, quota rent, or exchange‑rate change.
    • Evaluate the wider consequences for consumers, producers, the government and the overall economy.

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