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Portion Control

Thinking about manufacturing offshore? Consider the cost of quotas first.

You can't pick up a newspaper today without reading about one company or another making the decision to manufacture its products offshore. Pricing in the marketplace has become a kind of bidding war, and many businesses are finding that to compete, they must shop for foreign manufacturing alternatives. If you decide you want to manufacture your product offshore, however, you may have to factor in the cost of an import quota.

The idea of placing quotas on the amount of goods that can be imported into the United States is not new. In 1792, Alexander Hamilton sponsored legislation to institute import quotas that served to protect infant American industries and allow them to mature rather than face defeat by imports. Since then, some type of quota has always existed in this country. Today, the vast majority of import quotas are found in the textile and apparel industries, although quotas on other import items, such as tuna, cheese and some types of watches, also exist.

There are several types of import quotas, including the following:

  • Global quotas. A global quota designates the total amount of a specified product that can be imported in one year. For instance, there could be a global quota of 100 million baseball caps that will be allowed into the United States during any given year. That global quota is then broken down, and specific quantities are assigned to individual countries in the form of absolute quotas.
  • Absolute quotas. These are assigned to an import product from a specific country for a particular quantity. For example, the U.S. Customs Service could establish an absolute quota in which only 10 million pairs of cotton pants from India are allowed to cross U.S. borders in a given year. Any Indian cotton pants over that number would be refused entry by U.S. Customs.
  • Tariff-rate quotas. Products assigned this type of quota have no quantity cap. However, similar to the U.S. tax system, the more you bring in, the higher a tariff you'll pay on the goods.
  • Seasonal quotas. These are usually assigned to food items and correspond with the growing seasons. For example, when strawberries are in season, a quota on imported strawberries may be assigned to prevent a glut, which would cause price erosion in the U.S. market.

So how are these quotas determined? This is where it gets dicey. In general, quotas seem to be more a reflection of political intervention and lobbying than of market forces. Officially, two government agencies are involved in the establishment of quotas: the office of the U.S. Trade Representative (USTR) and the Committee for the Implementation of Textile Agreements, which is made up of representatives from the departments of State, Commerce, Labor, Treasury and Agriculture. Quotas are generally negotiated for each country at one time to last for several years.

Currently, the United States has negotiated absolute quotas with 47 countries. Once a quota is assigned to a country, the U.S. government doesn't get involved in the process by which the country divvies up its quotas. As a result, there's great opportunity for corruption and favoritism in exporting countries. Some countries hold quota auctions, where quotas go to the highest bidders. Others allocate their quotas to specific factories. And, as you can probably guess, the friends and family of those in power are often awarded large portions of certain countries' quotas.

Like it or not, as an entrepreneur trying to import a product you've manufactured offshore that has an assigned quota, you're now a pawn in this game and must pay to play.

Tomima Edmark is the inventor of the TopsyTail and several other products and is author of The American Dream Fact Pack ($49.95), available by calling (800) 558-6779. Questions regarding inventions and patents may be sent to "Bright Ideas," Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.

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This article was originally published in the December 1998 print edition of Entrepreneur with the headline: Portion Control.

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