International Trade, Globalisation and Exchange Rates: Question 1

Worked solution

Step 1: Recall the methods of trade protection

• Tariff: a tax added to the price of an imported good, raising the price paid by domestic buyers.
• Import quota: a direct legal limit on the physical quantity (or value) of a good that may be imported, regardless of its price.
• Subsidy: a payment made by the government to domestic producers, lowering their costs so they can compete with imports, without placing any restriction on imports themselves.
• Embargo: a total ban that legally prohibits any of a good from being imported at all.

Step 2: Match the scenario to a method

Bellduna’s government:

• does not add a tax to the price of imported solar panels, this rules out a tariff.
• does not pay anything to Bellduna’s own manufacturers, this rules out a subsidy.
• does not ban imported panels completely, this rules out an embargo.
• sets a maximum number of panels allowed in each year, a direct restriction on the quantity permitted, regardless of price.

This direct cap on the physical quantity of imports is the defining feature of $\boxed{\text{an import quota}}$.

Why the other options are wrong

• A (tariff): would require a tax added to the import price, not a cap on the number of units allowed in.
• C (subsidy): would require a payment to Bellduna’s own manufacturers, not a legal limit on imports.
• D (embargo): would require imports to be banned entirely, not merely limited to a maximum number.

Final answer

• The scenario describes an import quota, option B.