Are quotas worse than tariffs?

While public debate has focused heavily on tariffs, quotas have quietly returned as a major protectionist instrument. In 2018, the Trump Administration used Section 232 of the Trade Expansion Act of 1962 to impose tariffs of 25% on steel and 10% on aluminum imports, citing threats to US national security from sustained global excess capacity originating primarily from China. Although these tariffs applied broadly, some trading partners negotiated quota arrangements instead.

South Korea, Brazil, and Argentina agreed to steel export quotas in exchange for relief from Section 232 tariffs, and Argentina also accepted aluminum quotas. US negotiators reportedly sought similar agreements with Canada, Mexico, Japan, and the European Union. In May 2019, however, the United States, Canada, and Mexico reached an agreement to lift steel and aluminum tariffs without imposing quotas, opting instead for a monitoring system with the ability to re-impose tariffs only if import surges occur.

Despite this North American outcome, quotas remain a live policy option in other sectors, including automobiles, uranium ore, and titanium sponge. The report assesses whether quotas are a viable alternative to tariffs or whether they impose higher economic costs and greater disruption.

What are quotas?

Quotas and tariffs both protect domestic industries by raising domestic prices, but they do so in different ways. Tariffs impose a charge on imported goods, while quotas restrict the quantity that can be imported. A key distinction lies in who captures the economic benefit. Tariffs generate government revenue, whereas quota rents — the added value created by restricted supply — generally go to the foreign exporters capable of selling at higher prices. In both cases, domestic consumers bear the cost.

Quotas are also more complex to administer. Governments may directly monitor quantities at the border, allocate import licenses, or rely on voluntary export restraints administered by exporting countries. Compared to tariffs, quotas are less transparent and less predictable. Under a tariff, a 10% duty typically results in a 10% price increase. Under a quota, prices can continue rising as long as demand remains strong and supply is constrained.

This makes quotas potentially more costly. A notable historical example is the Multifiber Arrangement governing textile trade. A 1992 study estimated that US welfare losses in 1984 totaled US$10.4 billion, with US$6 billion transferred to foreign exporters as quota rents. Quotas are also more vulnerable to rent-seeking and corruption, as firms lobby for valuable import rights.

The effects on product quality are mixed. Quotas may encourage exporters to ship higher-value products, but they can also allow producers of lower-quality goods to raise prices, forcing consumers to pay more for lower quality goods. Reflecting these distortions, GATT Article XI prohibits quotas, allowing them only under limited exceptions such as national security.

Case study: South Korea, Brazil, and Argentina

The basics

South Korea, Brazil, and Argentina accepted product-specific absolute quotas on 54 steel products, calculated using average imports from 2015–2017. South Korea’s quota was set at 70% of its three-year average. Brazil’s quotas were 70% for finished steel and 100% for semi-finished products. Argentina’s quota was set at 135% of its average. Argentina also accepted aluminum quotas equal to 100% of its 2015–2017 average.

The United States administered these quotas with maximum possible bite. They were absolute, meaning that once a quota was filled, no additional imports could enter at any price unless an exclusion was granted. Quotas applied to the full calendar year even though they took effect mid-year, causing some to be nearly exhausted immediately. Quarterly limits further restricted imports, forcing firms to warehouse, re-export, or destroy goods if shipments arrived after quotas were filled. Unused quota could not be carried forward or shifted between products.

The perceived good

For US steel and primary aluminum producers, Section 232 measures — including quotas — have helped restore profitability and manufacturing capacity in the short term. Industry representatives argue that negative effects on downstream industries have been far more limited and manageable than predicted.

Proponents also argue that quotas provide greater certainty than tariffs. Under tariffs, imports may continue if exporters reduce prices or importers absorb the cost. Vietnam’s flat steel exports to the United States increased by 79% in 2018 despite Section 232 tariffs, an outcome supporters say would not have occurred under strict quotas. Others argue quotas prevent exempt countries from redirecting exports to the US market to exploit higher prices.

The administration also viewed quota agreements as a way to pressure allies to confront global excess capacity, though critics note that unilateral measures may instead undermine cooperation.

Downsides for downstream industries

Downstream manufacturers strongly criticize quotas. In a letter signed by 33 business organizations, quotas were described as creating “severe supply constraints” and “even more business uncertainty than tariffs”. Importers face the risk that goods may be denied entry if quotas fill while shipments are in transit, along with unexpected storage and shipping costs. They may also be forced to change suppliers, renegotiate contracts, and absorb higher prices.

The exclusion process introduced in August 2018 offered some relief but also added uncertainty. One example involved Shell Chemical Appalachia, which delayed construction of an ethane cracker facility in Pennsylvania when Brazilian steel pipe was blocked by a filled quota. The project resumed only after an exclusion was granted. Oil and gas companies have similarly reported strain on pipeline projects reliant on specialty imported pipe.

More broadly, downstream industries argue that quotas and tariffs raise input costs, reduce competitiveness, and dampen investment. They emphasize that steel- and aluminum-using industries employ far more Americans than primary producers, putting more jobs at risk if supply constraints persist.

Foreign exporters feel the bite

Quota arrangements significantly reduced export volumes. In 2018, steel exports to the United States fell by 26.2% for South Korea, 14.6% for Brazil, and 20.1% for Argentina compared to 2017. In value terms, South Korea’s exports declined by US$430 million and Argentina’s by US$1 million, while Brazil’s exports increased by nearly US$145 million due to higher prices.

Argentina’s aluminum exports subject to quotas dropped by 32.8%, or about 86.8 million kilograms, with a value decline of roughly US$101 million. While exporters benefited from higher US prices, quotas were clearly “reducing US imports” from these countries.

Good news: United States, Canada, and Mexico avoided steel and aluminum quotas

To advance the USMCA, the United States, Canada, and Mexico agreed in May 2019 to lift steel, aluminum, and retaliatory tariffs without imposing quotas and to withdraw WTO litigation. Instead, they committed to preventing dumped and subsidized imports, blocking transshipment, and monitoring trade flows for surges.

This outcome mattered because Canada and Mexico are among the largest suppliers of steel and aluminum to the United States. Quotas would likely have magnified supply constraints and disrupted integrated North American supply chains built under NAFTA. Industry opposition to quotas appears to have prevailed.

More importantly, the agreement shifted attention toward addressing global excess capacity, driven by government subsidies, particularly in China. Chinese overproduction depresses global prices to a level at or below production costs, harming producers worldwide. Therefore, while tariffs and quotas may offer short-term relief, durable solutions require coordinated international action to reduce excess capacity itself.

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