In economics, a tariff-rate quota (TRQ) (also called a tariff quota) is a two-tiered tariff system that combines import quotas and tariffs to regulate import products. A TRQ allows a lower tariff rate on imports of a given product within a specified quantity and requires a higher tariff rate on imports exceeding that quantity. For example, a country might allow the importation of 5,000 tractors at a tariff rate of 10%. However, any tractor imported above this quantity would be subject to a tariff rate of 30%. Unlike a simple quota system, a TRQ regime does not restrict the quantity of imported products. The “in-quota commitment” is complemented by an “out-of-quota commitment”. The out-of-quota commitment does not set any limit on the quantity or value of a imported product, but instead applies a different, normally higher, tariff rate to that product. Imports face this higher duty rate once the in-quota quantity or value has been reached, or if any requirement associated with the “in-quota commitment” is not fulfilled. A TRQ is generally used to protect domestic production by restricting imports. Under that regime, the quota component combines with a specified tariff level to provide the desired level of protection. In many cases, imports above the threshold may face a prohibitive “out-of-quota” tariff rate.
WTO law The terms tariff quota and tariff-rate quota are used interchangeably in existing literature, but the former term is more legally accurate because it may include specific tariffs, and the latter term excludes them. Tariff quota is also the term officially used in Article XIII of the General Agreement on Tariffs and Trade (GATT). Customs duties and other charges are explicitly excluded from the scope of quantitative restrictions within the meaning of Article XI of the GATT. Therefore, a TRQ is not a quantitative restriction since the regime subjects imports to varying duties rather than prohibits or restricts the quantity of imports. There are several dispute settlement rulings regarding the legitimacy of TRQ under WTO law. For instance, the Panel in US - Pipeline stated that a tariff quota involves the “application of a higher tariff rate to imported goods after a specific quantity of the item has entered the country at a lower prevailing rate,” while any quantity above the quota is subject to a higher duty.
Particularly, in EC- Bananas III, the Appellate Body asserted:In contrast to quantitative restrictions, tariff quotas do not fall under the prohibition in Article XI:1 and are in principle lawful under the GATT 1994, provided that quota tariffs are applied consistently with Article I.Although TRQs are also used within the WTO for non-agricultural products, the regime is particularly important in the agriculture sector considering the attempts to eliminate non-tariff measures in this sector. As a result of the Uruguay Round, all non-tariff barriers to agricultural products had to be removed or converted to tariffs (tariffication) to ensure that the sector is protected only by tariffs. In some cases, the calculated equivalent tariffs would be too high to allow for any real opportunity for imports to enter the market. Therefore, a system of TRQ was introduced to maintain existing access levels, and make way for minimum access opportunities.
Economic considerations
In a given period (normally one year), a lower in-quota tariff (t) is applied to the first Q units of imports and a higher out-of-quota tariff (T) is applied to all subsequent imports. If an out-of-quota tariff makes imports prohibitively expensive, it yields the same import volume as a traditional quota does. If the difference between domestic and international prices exceeds T, importers still make profit despite paying high out-of-quota tariff. In contrast, if a standard quota is in place, it is not possible to expand import volume over the restricted quantity (Q). In that case, a TRQ yields a higher volume of trade than does a standard quota; therefore, it is theoretically less restrictive than the latter. A TRQ may influence the incentive to import. The effective supply curve of exports to the import market consists of two horizontal lines. The first line represents the in-quota imports, extending from 0 to Q at the price 1 + t. The other line represents the effective supply of out-of-quota imports, extending from Q to infinity at the price 1 + T. The effect of a TRQ on trade is contingent on domestic demand for imports. The figure shows four possible demand conditions corresponding to demand curves numbered 1 to 4, which denote increasing levels of import demand. In the first case, demand is too low to generate imports at the world price, even without the in-quota tariff, so imports are zero (M1 = 0). In the second case, demand at the price 1 + t is sufficient to result in imports at the volume of M2, but the volume is not enough to cause the quota to bind (M2 < Q). In this case, the TRQ functions as an ordinary tariff being applied at the in-quota rate (t). In the third case, demand at the price 1 + t is sufficient to yield an import volume that exceeds Q, then the TRQ is binding as it restricts the in-quota volume to a predefined level (M3 = Q). Supposing that a TRQ does not exist and merely a tariff at the in-quota rate (t) applies, then an import volume of Q3 will be generated. If the t = 0, import volume will be F3; therefore, M3 = Q < Q3 < F3. Because the import volume yielded when a binding TRQ is in place is smaller than when an unconstrained in-quota tariff (t) applies, there will be a need to ration M3 units among Q3 units of demand. In the fourth case, demand is sufficient to sustain imports at the out-of-quota tariff (1 + T). Since demand curve 4 represents an extremely high level of demand, the import volume is no longer constrained at Q. However, the rationing problem remains necessary for imports within the quota.
Tariff-rate quota administration TRQ administration essentially concerns the distribution of the rights to import at the in-quota tariff rate. There are two GATT criteria for quota administration: quota fill and non-discrimination.
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