Quotas
Instead of issuing tariffs a country may instead chose to limit the number of imports in terms of volume. This limit is known as a quota or as a VER (voluntary export restraint).
The diagram to the left shows the effect of imposing quotas. The demand function represents domestic demand for the good and S
1 shows domestic supply. S
2 shows domestic supply plus the permitted number of imports allowed into the economy from another country.
PW shows the world price of the good which is lower than the domestic price (it is not shown but this would be the point where D1 and S1 intersect). Therefore without a quota (or tariff) in place Q1 would be supplied by domestic producers, Q2 will be demanded by consumers, therefore Q2-Q1 is the amount that is imported from abroad. By imposing a quota a new supply curve (S2) exists which is the total supply from both domestic producers and the quota (as this is a fixed value). The difference between S2 and S1 is the value of the quota.
With the quota in place demand will now be Q3 with Q4 being supplied by domestic producers, therefore Q3-Q4 will be imported (with the quota being fulfilled, i.e. there is no further supply from foreigners permitted).
The quota allows domestic producers to sell at a higher price than the world price (P1) and therefore consumer surplus is transferred to producer surplus as shown by the blue trapezium. The foreign producers also gain as they are selling their good at a higher price, therefore the green rectangle shows their gained producer surplus (again this is converted from consumer surplus). The 2 triangles represent welfare loss, the yellow triangle shows productive inefficiency and the red triangle shows allocative inefficiency.
Like a tariff, quotas can lead to X-inefficiency in domestic firms and keep workers employed in unproductive sectors where the country doesn’t have a comparative advantage. Quotas also acts as an effective subsidy for foreign firms as they receive more money through the quota system than they would have had their not been a quota in place.
Non-Tariff Barriers
Another way to limit trade from foreign producers is to introduce non-tariff barriers which usually consist of rules and regulations on the standards of product in order to put off foreign producers and to prevent them importing into a country.
Non-tariff barriers are hard to identify as some rules and regulations are put in place for sensible and practical reasons, to protect consumers and the environment. However some exist merely as a barrier to foreign producers, for example having strict specification on the size and colouring of goods in order to make it hard for foreign producers to comply with the rules.
Some producers in less developed countries may find it difficult to comply with an rules and regulations as this requires expensive testing and designing, as well as a legal team to ensure that the firm is up-to-date with all the new rules.