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An import quota in an open economy might not have the desired affect of increasing the GDP as it increases the demand of domestic currency in the open market raising exchange rate. How does it happen that import quota causes demand to shift positively ?

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The goal of import quotas is to get people to buy domestic goods, which can only be bought for local currency. Therefore import quotas increase demand for local currency. But...

Setting import quotas is a very undesirable economic policy. It is basically a state intrusion into a market economy. Quotas for imports are usually implemented as a desperate measure when there is a continuously negative trade balance, local currency rapidly loses value, and every other measure (increasing taxes, customs, subsidizing exporters, etc.) failed. Distribution of quotas usually involves plenty of corruption. On top of that, World Trade Organization does not normally allow import quotas.

The more common use of import quotas is in agriculture, to support local farmers or production of a certain crop. But such limited use of import quotas should have very limited effect on the currency, unless it is a 'banana republic' where agriculture is the main economic activity.

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  • $\begingroup$ If I am not wrong, import quota to protect certain sector will eventually hit exports of all sectors. $\endgroup$ – Sub-Optimal Dec 4 '15 at 22:48
  • $\begingroup$ Protectionism really doesn't work very well on practice. That is why WTO and all developed economies avoid protectionist policies. In the long term, or even medium term, the protected industry degrades in the absence of competition and eventually domestic consumers prefer to switch to imported goods regardless of how expensive they are (contraband makes it easier). But maybe in a very short term significant import quotas would indeed hit all exports through appreciation of the local currency, all other things held constant. $\endgroup$ – Arthur Tarasov Dec 4 '15 at 23:02
  • $\begingroup$ @arthurTarasov, protectionism works in some cases, take the USA, the list of quotas and tariffs on imports is miles long. It desperately wants to reduce trade deficit. $\endgroup$ – london Dec 5 '15 at 16:30
  • $\begingroup$ @london Tariffs are another thing, they apply universally to all importers so there is no room for corruption. Tariffs exist mostly as a response to other countries setting tariffs on the US exports. The US is trying to establish free trade agreements with as many countries as possible. Take recent Trans-Pacific Partnership for example. These agreements do come with a long list of exceptions so there will always be some tariffs. The US import quotas are mostly limited to agriculture: cbp.gov/trade/quota/guide-import-goods/commodities $\endgroup$ – Arthur Tarasov Dec 5 '15 at 22:34

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