Quota Effects refer to the economic consequences of a government body imposing an import quota in a national economy. Such import quotas are the legal limitations on the quantities of specific imports that companies are allowed to bring into a given nation. As an example, the United Kingdom might decide to restrict the quantities of Japanese cars that may be imported to 1 million vehicles each year.
The simple answer to the question on effects this causes in a specific country which enforces them is that they will lower foreign imports to the benefit of domestic producers and suppliers. At the same time, this causes more complicated, unintended, and undesirable side effects. Consumers will pay higher prices for their goods, the overall economic well being of the nation may decline, and nations which have been targeted with the import quotas may choose to retaliate with quotas of their own on the imposing nation’s exports.
Rising prices occur as Quota Effects come into play. It is always helpful to consider a concrete and real world example of this concept. If a nation which is a major sugar producer controls around 55 percent of the entire market, they may decide to impose sugar import quotas. This would cause the aggregate available supply of sugar in the domestic market to decrease. Additional demand for sugar would lead to sugar prices rising. The purchasing power of consumers in this nation would suffer. It may be that the domestic sugar producers are able to increase production and meet the demand. If not, the prices will stay high so long as the import quotas are in place. Demand destruction (loss of demand because prices are simply too high) may occur as well.
Increases in domestic production can also be positive Quota Effects. The national producers will have the opportunity to fill the gap of foreign sugar producers and suppliers. If the quotas have reduced the individual sugar imports from four pounds per individual to two pounds, then domestic producers of sugar will need to boost their inputs, production, and labor participation hours in order to fill in the missing two pounds of sugar per consumer. This is particularly beneficial for those domestic industry producers who have the factory capacity and employee numbers to expand their production. They only thing they might be lacking is the incentive to produce additional sugar as the foreign imports of the good are cheaper than what they can additionally produce.
Import quotas such as these also have dramatic and typically negative consequences for the large international multi-nation corporations. These companies have high priority on their international production and trade capabilities. Only the domestic consumption within their nations would not be enough to meet their production and sales targets. Look at General Motors as a classic example of this fact. For the year 2008, they produced around seven million vehicles in total which they sold. Yet a mere three million of such sales occurred within the United States. Had one of their major international country buyers chosen to impose an import quota on American cars, then they would have been forced to rapidly develop an alternative market for the cars, or to reduce production and the resulting income and profits alongside it.
The primary reason that countries resort to such import quotas is that they wish to safeguard one of their important industries from free market failure against the major international MNC players. This is the same thing as putting failing industries on government assistance to keep them going. What many economists believe is that countries should allow their failing industries to disappear and try to focus instead on ones at which they have a competitive and comparative advantage. As an example, the United States is unable to directly compete with China for clothing articles production. The U.S. should instead focus its efforts on maintaining its effective market domination in the computer software development business.