How does quota work

In business, a quota can refer to a sales target that a company wants a salesperson or sales team to achieve for a specific period.

Sales quotas are often monthly, quarterly, and yearly. Management can also set sales quotas by region or business unit. The most common type of sales quota is based on revenue. Quotas are different from tariffs or customs, which place taxes on imports or exports. Governments impose both quotas and tariffs as protective measures to try to control trade between countries, but there are distinct differences between them.

Quotas focus on limiting the quantities or, in some cases, cumulative value of a particular good that a country imports or exports for a specific period, whereas tariffs impose specific fees on those goods. Governments design tariffs also known as customs duties to raise the overall cost to the producer or supplier seeking to sell products within a country. Tariffs provide a country with extra revenue and they offer protection to domestic producers by causing imported items to become more expensive.

Quotas are a type of nontariff barrier governments enact to restrict trade. Other kinds of trade barriers include embargoes , levies, and sanctions. Quotas are more effective in restricting trade than tariffs, especially if domestic demand for something is not price-sensitive.

Quotas may also be more disruptive to international trade than tariffs. Applied selectively to various countries, they can be utilized as a coercive economic weapon. The U. Customs and Border Protection Agency, a federal law-enforcement agency of the U. Department of Homeland Security, oversees the regulation of international trade, collecting customs, and enforcing U. Various commodities are subject to tariff-rate quotas when entering the United States. Highly restrictive quotas coupled with high tariffs can lead to trade disputes, trade wars , and other problems between nations.

It was also a blow to the U. Customs and Border Protection. Office of the United States Trade Representative. Washing Machine and Solar Cell Manufacturers. Solar Energy Industries Association. Solar Energy Industry Association.

Your Privacy Rights. To change or withdraw your consent choices for Investopedia. Quotas can apply to all countries equally or only to certain countries.

For example, a government might be willing to import 10 tons of grain from each of its neighbors, so it establishes a separate quota for each. The United States does not currently have any absolute quotas, but it has many tariff quotas that increase tariffs on a good once its import quota is met. Some items under a tariff rate quota in the United States include tuna, olives, and ethyl alcohol. There are also tariff quotas applied to imports from specific countries. For example, the U. During the Great Depression, many countries used import quotas to restrict trade and protect domestic businesses.

The League of Nations estimated that some countries, such as France and Switzerland, imposed tariff quotas on more than half of the goods imported during the Great Depression. Import quotas work by limiting the number or value of a product that a country imports brings into a country.

Quotas can apply to all exporters equally, or exporters can each have their allowance that they can fill. Quotas can be hard for the imposing country to manage because they require adequate import controls and proper record-keeping. When a country wants to export goods to the nation imposing a quota, it ships the goods as usual.

When the products arrive, local customs look over the shipment to determine what products are being imported. In the United States, Customs and Border Patrol handles most of the administration of quotas and the checking of imports. When a good arrives at a port or other entry to the country, customs checks the shipment and notes the number of units included and the total value.

If the goods are under a tariff quota, it applies the tariff rate based on whether the imports have met the quota or not. For an absolute quota, customs either allows or blocks the import of the good.

If a country tries to import a good after it meets the absolute quota for that good, it has a few options. One option is to return the shipment to the sender. It can also store the product in a licensed warehouse until the next quota period starts. Once the new period begins, it can import the items. Finally, it can agree to have the shipment destroyed under the supervision of customs.

The idea of a quota is to protect domestic businesses from foreign competition. If firms in another country can produce a product at a lower cost or with higher quality than local firms, it can be difficult for the local companies to handle the foreign competition. This means that the primary beneficiary of import quotas are domestic businesses. They could sell more units of a product at a higher price than they would be able to if no restrictions were in place.

The groups that feel adverse effects from quotas are exporters and consumers. Quotas harm exporters because they limit the amount of goods that the exporter can sell in a country. With an absolute allowance, there is a hard limit on the number of products the exporter can sell, so it must accept lower profits or raise its prices to be able to earn the same amount. If domestic businesses enter the industry, exporters also have to face competition from these new businesses.

Consumers also tend to feel the adverse effects of quotas because quotas tend to increase the cost of goods and services. With no trade, equilibrium market price in the country will exist at the price which equates domestic demand and domestic supply, at P, and with output at Q. However, the world price is likely to be lower, at P1, than the price in a country that does not trade.

If the country is opened up to free trade from the rest of the world, the world supply curve will be perfectly elastic at the world price, P1.

The new equilibrium price is P1 and output is Q1. The domestic share of output is now Q 2, compared with Q, the self-sufficient quantity. The amount imported is the distance Q2 to Q1. In an attempt to protect domestic producers, a quota of Q 2 to Q 3 may be imposed on imports.

This enables the domestic share of output to rise to 0 to Q2, plus Q3 to Q4. The quota creates a relative shortage and drives the price up to P2, with total output falling to Q4. The amount imported falls to the quota level. It is this price rise that provides an incentive for less efficient domestic firms to increase their output.

One of the key differences between a tariff and a quota is that the welfare loss associated with a quota may be greater because there is no tax revenue earned by a government. Because of this, quotas are less frequently used than tariffs. Go to: Extension task. Tariffs, or customs duties, are taxes on imported products, usually in an ad valorem form, levied as a percentage increase on the price of the imported product.

Tariffs are one of the oldest and most pervasive forms of protection and barrier to trade.