In case you missed it, the Trump administration has been imposing tariffs under the International Economic Emergency Powers Act of 1977 since at least April of this year. The legality of doing so has been questioned, and the Supreme Court is currently hearing oral arguments on the issue.
One of U.S. Attorney General John Sauer’s arguments is that the plaintiffs in this case “authorized IEEPA to authorize quotas and other tariff equivalents.” The implication of this argument is that if these two are the same and one is permissible, then logically the other must also be permissible. I’m not a lawyer, so I won’t comment on the strength of this particular argument. But as an economist, this raises two questions. Are tariffs and quotas actually equivalent, and if so, why would governments use one instead of the other?
Simply put, customs duty is a tax on the import of goods. Because tariffs are taxes, they either increase the price paid by consumers, increase costs borne by sellers, or a combination of both. What matters is that someone pays taxes, and those taxes flow into the federal government in the form of tariff revenue. If you look closely at Figure 2 on page 9 of the Treasury Department’s monthly report, you’ll see that it collects $195 billion in “tariffs,” including customs revenue. This increased cost translates into fewer activities being performed. In other words, tariffs reduce the amount of goods imported into a country. This is true regardless of who pays the tariffs, whether it is domestic consumers who pay higher prices or foreign producers who make fewer profits (although there is considerable evidence that it is domestic consumers, not foreign producers, who pay the tariffs).
Quotas are legal limits on the amount of goods that can be imported. Since tariffs and quotas limit the amount of goods allowed to enter the market, it is easy to imagine that they would have the same effect on the amount of goods imported. However, restricting imports in this way has the effect of increasing the price of imported goods. In fact, if the reduction in imports due to a quota exactly corresponds to the reduction in imports, then the price effect of that quota exactly corresponds to the effect of a tariff.
Because tariffs and quotas ultimately affect consumers and producers in exactly the same way, there is good reason to believe that they are economically equivalent, as Attorney General Sauer argues. If so, why would the government use tariffs when it could use quotas instead?
One reason for this may be that deciding how much to allow into a country is more difficult than simply setting tariffs. How do we decide whether to allow 100,000 cars into the United States instead of, say, 99,000 or 101,000? Enforcing quotas also requires government officials to keep more detailed records of how many cars are coming in, when and where. Just creating the paperwork can be difficult.
A second reason may be that if the message is that imports of goods are hurting America, then restricting imports is simply to prevent “bad things” from happening. However, tariffs not only alleviate bad things, they can also be said to charge a fee for doing “bad things.” Questions of justice typically call for not only the reduction of bad things, but also some punishment for the assholes involved in bad things. Based on this argument, it is possible to rhetorically frame tariffs to fit the bill better than quotas.
But I would suggest that the most likely reason why tariffs are used rather than quotas is that quotas generate so-called quota rents, which then have to be paid in some way. There are formal limits on the amount of imports allowed into a country, so import permits for allowed goods must be allocated in some way. This could be done on a first-come, first-served basis, allowing the first, say 100,000 cars to be taken off the ship and sold in the US, but rejecting subsequent cars and sending them back to their country of origin. In this scenario, all quota rents accrue to the importer.
But with this system in place, other countries will likely try to send goods to us en masse in January, hoping to take the lead. This might work for durable goods like cars, but for non-durable goods like food it would clearly be a disaster, as rotten food would pile up at ports and rot before it could be sold.
Instead of a first-come, first-served basis, the government could issue import permits in advance, allowing the country that secured the permit to export goods to the United States whenever it sees fit. Furthermore, the government could sell these licenses, and under plausible assumptions, the total amount of funds raised by selling licenses could exactly match the revenue generated by the same fee structure.
As an academic exercise, it’s easy to set up an assignment where you earn as much as you pay. In my undergraduate international trade class, we often asked questions like this on exams. But in practice, negotiating both the distribution of a license and its price is very expensive in terms of transaction costs. Once you recognize these real-world costs, which are often not considered in economics classrooms, it is easy to understand why governments prefer tariffs to quotas. Add to this the moral intuition that tariffs not only restrict imports but also rhetorically punish other countries for the harmful practice of selling more of them for less, and from the perspective of those seeking to restrict trade, tariffs may be intuitively more appealing than quotas, even though they are identical on paper.
