A two stage rate shaping and scheduling system and method is implemented to control the flow of traffic to at least one output interface. The system and method involves initially queuing incoming packets into type-specific queues and applying individual rate shaping rules to each queue. A first stage arbitration is performed to determine how traffic is queued from the type-specific queues to interface-specific queues. Packets that win arbitration and pass the applied rate shaping rules are queued in interface-specific queues. Rate shaping rules are applied to the interface-specific queues. The interface-specific queues are further distinguished by priority and priority-specific and interface-specific rate shaping rules are applied to each queue. A second stage arbitration is performed to determine how different priority traffic that is targeting the same output interface is dequeued in response to interface-specific requests.