Reply to DB Post

Governments will use different techniques to manage and protect different industries within their country. These techniques assist with controlling the importing and exporting of goods. One of these common techniques includes the use of quotas. A business professional working in the arena of international and global trade needs to understand these techniques and the impact it will have on their industry. Understanding how and when quotas are used, as well as the impact it may have on a business and its global business practices is vital to any organization. A misunderstanding of quotas can be very costly to any organization that deals in global trade.

Explanation of Key Term

Quotas are basically limitations that a government may put on goods that are being traded internationally, including:

· Actual goods that can or can’t be imported or exported

· The amount of goods that can or can’t be imported or exported

· Where goods can or can’t be imported or exported

Unlike tariffs, quotas do not address how much is actually paid for goods that are imported or exported; quotas strictly deal with the restriction of quantities that are imported or exported. While quotas don’t dictate the amount that is paid for goods, quotas can have an effect on the price point of goods imported or exported.

Major Article Summary

Winkelmann, L., & Winkelmann, R. (1998). Tariffs, quotas and terms-of-trade: The case of New

Zealand. Journal of International Economics, 46(2), 313-332.

doi:10.1016/s0022-1996(97)00050-0

When discussing different trade policies, quotas and tariffs are usually discussed together, so it is important to understand the definition of tariffs as well. In contrast to quotas, which restrict the amount of goods that can be imported or exported, a tariff is a form of tax enforced by a government on goods that are imported or exported.

Winkelmann and Winkelmann researched the impact that quotas and tariffs have on prices of individual goods in New Zealand. They specifically considered the impact during the years of 1984-1988, a time period that saw the transition of New Zealand from a protectionist society into a competitive global economy. During this time that saw significant trade reform in New Zealand, and created a unique opportunity to assess the effects that both tariffs and quotas had on the prices that were being charged by foreign exporters selling to New Zealand. They determined that this time period would yield significant data due to the extent that New Zealand went to in order to protect import. It was an opportunity to clearly determine the effect on prices of both tariffs and quotas.

The results of the study show that the impact of tariffs and quotas as trade policies are very different. The price effects of both tariffs and quotas are stable and clear, and the study showed that tariffs had no significant effect on prices, while quotas clearly increased the prices of exports.

The Winkelmann’s conclude that the usage of quotas as a trade policy is a very expensive form of protection for any country, but is especially true for New Zealand. The use of quotas is a highly questionable decision and has shown to redistribute income away from the country, which can have a major impact on the welfare of any country that chooses to use quotas.

Discussion

1. The trade policy decisions of any country will have a major impact on the success of that country’s Gross Domestic Product. Understanding the impact of different trade policies can be positive for the country, or can actually be a negative for the country. Research appears to support the fact that quotas aren’t effect and actually have a negative impact. While a country may feel the need to protect the country and its trade policies, using quotas as a solution to those concerns actually hurts that country. The desire to expand and enhance international trade is crucial for any nation’s economy, but the impact and selection of any trade policy, especially the use of quotes, needs to be evaluated and analyzed before any substantive decision is made and decided. The use of quotas as a trade policy is a cause for concern. Quotas can have a detrimental effect on the institution that chooses to implement it as a trade policy.

2. The use of quotas as an integral piece of a notions trade policy has appears to have been the norm in the past. Recent research has shown that the use of quotas does not enhance the global trade value expected. The other articles referenced focus on larger topics regarding the usage of tariffs and quotas. The concept of switching from quotas to tariffs is becoming more of an accepted practice. Tariffs are less distortive and more transparent than quotas (Chen, 2011). The use of a tariff appears to be a more effective trade policy decision than the use of quotes, especially in an emerging economy such as New Zealand. Chen actually prescribes that converting a quota to an equivalent tariff is a positive step toward positive trade. The exception is when the use of tariffs has already occurred and the high tariffs would lead to worse performance in the trade market.

References

Calzolari, G., & Lambertini, L. (2003). Tariffs vs. Quotas in a Trade Model with Capital

Accumulation. Modeling and Control of Economic Systems 2001, 69-74.

doi:10.1016/b978-008043858-0/50012-7

Chen, C., Chang, C., & Mccarl, B. A. (2011). The Equivalence of Tariffs and Quotas under a

Tariff-Rate Quota System: A Case Study of Rice. Canadian Journal of Agricultural

Economics/Revue Canadienne D'agroeconomie, 59(4), 573-587.

doi:10.1111/j.1744-7976.2011.01229.x

Herrmann, R., Kramb, M., & Mönnich, C. (2001). Tariff rate quotas and the economic impact of

agricultural trade liberalization in the world trade organization. International Advances in

Economic Research, 7(1), 1-19. doi:10.1007/bf02296588

Poot, J., & Strutt, A. (2010). International Trade Agreements and International Migration. The

World Economy, 33(12), 1923-1954. doi:10.1111/j.1467-9701.2010.01299.x