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ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business

A government replaces a flat import tariff on steel with a quota limiting the quantity that can be imported. Which is the main effect on a domestic manufacturer that buys steel as its main raw material?

The manufacturer's input costs are likely to rise. A quota restricts the quantity of imported steel, so supply tightens and domestic prices tend to increase. It protects domestic steel producers rather than exposing them to competition, and it gives no subsidy or export benefit to steel users.

  1. AIts input costs are likely to rise because supply of imported steel is restrictedCorrect
  2. BIts input costs will fall because domestic steel producers face more competition
  3. CIts export sales are guaranteed to rise
  4. DIt receives a direct subsidy to offset the quota

Explanation

A quota restricts the quantity of imported steel available, which tends to push up its price in the domestic market. A domestic manufacturer using steel as an input therefore faces higher costs. There is more protection, not more competition, for domestic steel producers, and no subsidy or export guarantee is implied.

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