An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. For example, a country might limit sugar imports to 50 tons per year. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.
Critics say quotas often lead to corruption (bribes to get a quota allocation), smuggling (circumventing a quota), and higher prices for consumers.
Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition. This is closely aligned with anti-globalization, and contrasts with free trade, where no artificial barriers to entry are instituted.
The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which "protect" businesses and living wages by restricting or regulating trade between foreign nations:
Subsidies - To protect existing businesses from risk associated with change, such as costs of labour, materials, etc.
Protective Tariffs - to increase the price of a foreign competitor's goods ( Including restrictive quotas, and anti-dumping measures.) on par or higher than domestic prices.
Quotas - to prevent dumping of cheaper foreign goods that would overwhelm the market.
Tax cuts - Alleviation of the burdens of social and business costs.
Intervention - The use of state power to bolster an economic entity.
Trade restriction
Exchange Rate
Protectionism has frequently been associated with economic theories such as mercantilism, the belief that it is beneficial to maintain a positive trade balance, and import substitution.
Recent examples of protectionism in first world countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly blue-collar jobs were being lost to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing and the loss of white-collar jobs. Most economists view this form of protectionism as a disguised transfer payment from consumers (who pay higher prices for food or other protected goods) to local high-cost producers.
Some may feel that better job choice is more important than lower goods costs. Whether protectionism provides such a tradeoff between jobs and prices has not yet reached a consensus with economists. Some point out that free-trade has not benefitted those in manufacturing, and that service-sector jobs, such as store clerk, do not pay as well as manufacturing used to. [1]
Famous early protectionists in the United States included Alexander Hamilton (who set the country's financing on the tariff), Abraham Lincoln, and Theodore Roosevelt..[1][2]
The infant industry argument is an economic reason for protectionism. The crux of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale.
The balance of payments (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).
International trade
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International trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is the primary meaning of "globalization".
Trade Series v • d • e
International trade
History of international trade
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Free trade
Trade pact
Trade bloc
Free trade area
Customs union
Trade creation
Trade diversion
Monetary union
Common market
Economic and monetary union
International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.
Contents [hide]
1 International trade theory
1.1 Ricardian model
1.2 Heckscher-Ohlin model
1.3 Specific Factors
1.4 Gravity model
2 Regulation of international trade
3 Risks in international trade
3.1 Economic risks
3.2 Political risks
4 See also
5 External links
5.1 Data
[edit] International trade theory
Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs.
[edit] Ricardian model
The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.
[edit] Heckscher-Ohlin model
The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.
The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance.
[edit] Specific Factors
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. The specific factors name refers to the given that in the short-run specific factors of production, such as physical capital, are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms. Additionally, owners of opposing specific factors of production (i.e. labour and capital) are likely to have opposing agendas when lobbying for controls over immigration of labour. Conversely, both owners of capital and labour profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.
[edit] Gravity model
The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model.
[edit] Regulation of international trade
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount and this view has dominated thinking among western nations for most of the time since then. In the years since the Second World War multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure.
Free trade is usually most strongly supported by the most economically powerful nations in the world, though they often engage in selective protectionism for those industries which are politically important domestically, such as the protective tariffs applied to agriculture and textiles by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.
During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression leading to a collapse in world trade that many believe seriously deepened the depression.
The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, NAFTA between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely due to opposition from the populations of Latin American nations. Similar agreements such as the MAI (Multilateral Agreement on Investment) have also failed in recent years.
[edit] Risks in international trade
The risks that exist in international trade can be divided into two major groups:
[edit] Economic risks
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
[edit] Political risks
Risk of cancellation or non-renewal of export or import licences
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
[edit] See also
Balance of trade
Comparative advantage
Customs union
Economics
Free trade
Free trade area
Gravity model of trade
List of countries by imports
List of countries by exports
List of international trade topics
List of economists
Most favoured nation clause
OPEC
protectionism
Trade bloc
Single Window System
Ecological Economics
Borderless Selling
Export
Import (international trade)
Political risk
[edit] External links
Freetrade.org
International Trade Centre
Interactive Ricardian Model Simulator
Consumers for World Trade Education Fund electronic trade library
[edit] Data
World Bank's Trade and Production Database
Resources for data on trade, including the gravity model
European Union Trade Data
Agricultural Trade Data by FAO
Brazilian Trade Data
India Trade Data
[hide]v • d • eTrade
Definitions Balance of payments · Current account (Balance of trade) · Capital account · Foreign exchange reserves · Comparative advantage · Absolute advantage · Import substitution · International trade
Organizations and policies World Trade Organization · International Monetary Fund · World Bank · International Trade Centre · Trade bloc · Free trade zone · Trade barrier · Import quota · Tariff
Schools of thought Free trade · Balanced trade · Mercantilism · Protectionism
Related issues Globalization · Outsourcing · Trade justice · Fair trade