How do quotas restrict trade and protect domestic industry?
Answers
Explanation:
Let's first review what tariffs and quotas are and then discuss the effects they can have on imported goods and the prices we pay. A tariff is a tax imposed on imports, which are goods coming into a country. The tax may range from a few percent of the cost of the good to well over 100% of the cost of the good! This tax is ultimately passed on to consumers, resulting in higher prices.
A quota sets a numerical limit on how much of a product can be imported into a country. This helps to protect producers of domestic products from facing too much competition and ultimately going out of business. Ultimately, quotas benefit and protect the producers of a good in a domestic economy, though the consumers end up paying more if the domestically produced goods are priced higher than imports.
There are many reasons that tariffs and quotas may be used. The most common reasons are often geared towards protecting newer or inefficient domestic industries that are seen as important to the American economy and the production of jobs. The government view is that by protecting these domestic industries, we can maintain jobs through increased sales of domestic goods. This ultimately can lead to higher tax revenue collected.
If we didn't protect some of our firms, other countries could dump thousands of products on our country at extremely low prices and potentially hurt many of our domestic businesses. Now, let's explore in more detail the effects of tariffs and quotas.