Quantitative restrictions

Indian Economy glossary

Also called: QRs · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"

Meaning

Quantitative restrictions (QRs) are direct limits on the quantity of a good that can be imported or exported. They take the form of outright bans, quotas (a fixed maximum amount) or licences (government permission needed for each import).

QRs matter because they block trade outright instead of just making it costlier. Under WTO rules they are generally banned. India had to remove its QRs after losing a WTO dispute to the US, and the last ones went on 1 April 2001 [2].

Explanation

How a QR works

  • A tariff (a tax on imports) raises the price of imports, but anyone willing to pay can still import any amount.
  • A QR fixes the amount that can come in. Once that limit is reached, no more can come in, whatever the price.
  • QRs are one type of non-tariff barrier (NTB), meaning a trade restriction other than a tariff. They belong to the quantity-based group of NTBs.

Types of QRs

  • Ban: no imports of the good are allowed.
  • Import quota: a limit on the quantity or value of a good that can be imported over a period. Class 11 says quotas "specify the quantity of goods which can be imported".
  • Import licensing: the government must give permission before a good can be imported.
  • Canalisation: imports are allowed only through government agencies.
  • Actual-user requirement: only the firm that will actually use the import can get a licence for it. Traders cannot import it to resell.
  • Voluntary export restraint (VER): the exporting country limits its own exports, usually because the importing country pressures it to.

Worked example: how a quota raises prices

  • At the world price of ₹100, Indians want to buy 10 lakh toys. Domestic makers supply 4 lakh, so 6 lakh would be imported.
  • The government sets a quota of 2 lakh imported toys.
  • What happens next:
  • Supply falls short, so the domestic price rises, say to ₹130.
  • At ₹130, people buy fewer toys and domestic makers produce more.

  • The price settles where the gap between demand and domestic supply is exactly 2 lakh.

  • The ₹30 gap between the domestic price and the world price is the quota rent. It goes to whoever holds the import licence, not to the government.

  • A ₹30 tariff would give the same price, but the government would collect the ₹30 as revenue.
  • This is why economists prefer tariffs to QRs. Tariffication (turning quotas into equal tariffs) became a WTO rule for farm goods.

Why QRs are worse than tariffs

  • Hidden cost: nobody can easily see how much a quota adds to the price.
  • Rent-seeking: the quota rent is extra profit for licence holders, so firms compete for licences instead of for customers. Before 1991 this fed the "licence raj".
  • No revenue: the government gets nothing, unlike with a tariff.
  • Less efficiency: domestic firms know imports are capped, so they face less pressure to improve.

In India

The WTO rule

  • GATT Article XI generally bans QRs.
  • Article XVIII:B is the main exception. It lets a developing country limit imports when it faces balance-of-payments (BoP) difficulties, meaning it is short of foreign exchange.

Before 1991

  • QRs and import licensing were central to import substitution (making goods at home instead of importing them).
  • They protected Indian industry, but they also created the licence raj and led to inefficiency.
  • Class 11 says import licensing was abolished in 1991, except for hazardous and environmentally sensitive items and a few restricted imports.

The India–US dispute (DS90)

  • India kept QRs on farm, textile and industrial goods in 2,714 tariff lines and justified them under Art. XVIII:B [2].
  • The measures included an import licensing system, canalisation and an actual-user requirement [2].
  • In the WTO's BoP Committee, India offered to remove the QRs over seven years. The US and some other members wanted a shorter period, so no consensus was reached [2].
  • Timeline [2]:
  • The US asked for consultations on 15 July 1997.
  • The panel was set up on 18 November 1997.
  • The panel report came out on 6 April 1999.
  • The Appellate Body report came out on 23 August 1999.
  • Both reports went against India and were adopted on 22 September 1999.

Phase-out

  • India removed QRs on most items by 1 April 2000 [2].
  • It removed them on the remaining 715 items from 1 April 2001, the date Class 11 gives [2].
  • Effect on small firms (Class 10, Ravi's capacitor case):
  • "Restrictions on imports of capacitors" were removed "as per its agreement at WTO in 2001".
  • Cheaper Chinese capacitors came in.
  • Small Indian producers lost sales.

Don't confuse with

  • Tariff: a tariff is a tax that raises the price of imports but does not cap the amount, and the government collects the revenue. A QR caps the quantity, and the rent goes to licence holders.
  • Non-tariff barrier (NTB): NTB is the wider category. QRs are only its quantity-based part. SPS measures (food safety and animal or plant health), TBT (technical standards and labels) and procedural delays are NTBs but not QRs.
  • Voluntary export restraint (VER): a VER is a quantity limit that the exporting country places on itself. A normal QR is imposed by the importing country. VERs are now banned by Article 11 of the WTO Safeguards Agreement. The classic case is Japan's car exports to the US from 1981.
  • Tariffication: this is the conversion of QRs into equal tariffs, a WTO rule for farm goods. It is not a type of QR.

Prelims Hooks

  • GATT Art. XI generally bans QRs. Art. XVIII:B allows them only for balance-of-payments reasons in developing countries.
  • DS90 (US vs India): QRs on 2,714 tariff lines. The Appellate Body report came out on 23 August 1999, and the reports were adopted on 22 September 1999 [2].
  • India removed most QRs by 1 April 2000 and the last 715 items from 1 April 2001 [2].
  • Quota rent goes to licence holders. With an equal tariff, the same amount goes to the government as revenue.
  • Trap: QRs include bans, quotas, licensing, canalisation and actual-user conditions. SPS and TBT standards are NTBs, but they are not QRs.
  • MFA/ATC textile quotas ended on 1 January 2005. Class 11 NCERT is outdated when it says US textile quotas on India and China still exist.

Mains Points

  • Why India had to give up BoP-based QRs: Art. XVIII:B protects a country only while it is short of foreign exchange. Once India's reserves were comfortable, the WTO ruled against it in DS90 [2]. India's shift from licences and QRs to tariffs between 1991 and 2001 had two results:
  • Protection became visible, since a tariff shows exactly how much it adds to the price.

  • Firms faced more competition and had to become more efficient.

  • Cost for small producers: the Ravi capacitor case shows that removing QRs let cheaper imports hurt MSMEs. The answer is adjustment support, such as MSME credit and technology upgradation, rather than bringing QRs back.

  • Why tariffs beat quotas, and the "new protectionism": a tariff earns revenue and cannot be used for rent-seeking in the way licences can. As QRs and tariffs have fallen, protection has moved to less visible NTBs such as SPS and TBT rules and QCOs (quality control orders). This is why trade policy debates now focus on NTBs rather than QRs.

Related concepts

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Sources

  1. 1Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal" (primary)
  2. 2DS90 India — Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Productswto.org · tier 2