International Trade - Theory and Policy, 2010a

Administrative costs of tariffs and quotas are also likely to differ. Tariff collection involves product
identification, collection, and processing of fees. Quota administration will also involve product
identification and some method of keeping track of, or counting, the product as it enters the country in
multiple ports of entry. It may also involve some method of auctioning or disbursing quota tickets. It is
not obvious which of these two procedures would be less costly, although a good guess would be tariff
collection.
Perhaps the most important distinction between the two policies, however, is the protective effect the
policy has on the import-competing industries. In one sense, quotas are more protective of the domestic
industry because they limit the extent of import competition to a fixed maximum quantity. The quota
provides an upper bound to the foreign competition the domestic industries will face. In contrast, tariffs
simply raise the price but do not limit the degree of competition or trade volume to any particular level.
In the original General Agreement on Tariffs and Trade (GATT), a preference for the application of tariffs
rather than quotas was introduced as a guiding principle. One reason was the sense that tariffs allowed for
more market flexibility and thus could be expected to be less protective over time. Another reason
concerned transparency. With a quota in place, it is very difficult to discern the degree to which a market
is protected since it can be difficult to measure how far the quota is below the free trade import level. With
a tariff in place, especially an ad valorem tariff, one can use the tariff percentage as a measure of the
degree of protection.
Also, it was considered somewhat easier to negotiate reductions in tariff rates than quota increases during
GATT rounds of trade liberalization. Again, the issue of transparency arises. Trade liberalization
agreements generally target a fixed percentage for tariff reductions. For example, countries might agree to
reduce average tariffs by 30 percent from their current levels. This rule would be perceived as being equal
reciprocation in that each country would be liberalizing to the same degree. Hence the agreement could be
judged to be fair. However, with quotas in place, it would be difficult, if not impossible, to apply such a
straightforward type of fairness principle.
For this reason, current World Trade Organization (WTO) member countries agreed in the Uruguay
Round to phase out the use of quotas, used primarily in agriculture industries. Instead, countries will
apply tariffs that are equivalent in their market effects to the original quotas. This adjustment is referred
Saylor URL: http://www.saylor.org/books
Saylor.org
364