Question

Caribbean countries have a comparative advantage in producing sugar, yet the United States blocks their imports (sugar quotas are one of the oldest protectionist measures in the United States). What do you think the impact of the sugar quota is on consumers and producers in the United States? How would doing away with quotas impact the United States as well as these Caribbean countries?

Answer 1

Quotas are similar to tariff in the sense that they both are distortionary, raise the domestic price which reduces the surplus available to consumer, increases the surplus of producers and create a deadweight or societal loss. Import quotas may provide government the auction money which still results in a net welfare loss to the imposing country which is the US in this case. Hence consumer lose and producers gain from the imposition of import quota.

Because imports are reduced, the exporting country, here the Caribbean countries experience a fall in their aggregate demand and so their GDP is likely to fall. Hence import quotas on sugar has welfare reducing effects on both the trading nations.