The dynamic costs of quantitative restrictions are typically even more serious. With tariff-like restrictions, inflows of foreign financing can vary over time, whereas quotas limit foreign market penetration and insulate the domestic market from developments in international markets. A country with quotas would therefore not benefit from an influx of capital or lower domestic prices even if international interest rates were to drop or financial innovation were to lower the costs of intermediation. In addition, quantitative restrictions can undermine the development of financial markets and the quality of financial intermediation if protection reduces intermediaries' incentive to innovate and introduce new and better financial products. This, in turn, can undermine economic growth and development over the long term.
Protection generates a price difference across markets.
If the price difference is large enough, arbitrage through circumvention of controls is likely to take place in any market. Again, this incentive is strongest when prohibitions are applied to capital flows. Controls increase circumvention and smuggling. Various studies and anecdotes on foreign exchange rationing and other types of controls in a number of countries confirm that this is what happens. The debate on capital controls should take into account the lessons learned from experience with international trade policy.