Assignment 2.2 International Business

MGMK 4710

INTERNATIONAL BUSINESS

Chapter 7. GOVERNMENT INFLUENCE ON TRADE

I. INTRODUCTION

Despites the benefits of free trade, governments intervene in trade by devising policies aimed at limiting imports and/or encouraging exports. Such policies are protectionist. Protectionism refers to government restrictions and incentives that are specifically designed to help a county’s domestic firms compete with foreign competitors at home and abroad. There are economic and noneconomic rationales for influencing trade

II. ECONOMIC RATIONALES FOR GOVERNMENTAL INTERVENTION

There are several economic reasons used by governments to intervention in trade:

A. Fighting Unemployment

Displaced workers often do not find jobs that provide comparable compensation. Also, governments must provide unemployment benefits. Persistent unemployment pushes many groups, especially organized labor, to call for protectionism. However, protectionist policies do little to limit unemployment. To the contrary, it may result in a decline in export-related jobs because of (i) price increases for components or (ii) lower incomes abroad. Further, protectionism may increase the prospect of retaliation.

B. Protecting “Infant Industries”

The infant-industry argument holds that developing countries need to temporarily shield young and therefore weak industries until firms in those industries are able to effectively compete in world markets. One problem is whether governments are able to identify those industries that have a high probability of success. Another problem is local consumers will initially pay higher cost of inefficient local production.

C. Economic diversification

Many developing economies rely on just a few commodities (agricultural products, raw materials). As the demand and the prices of commodities experience high fluctuation, developing nations would want to diversify their economies by formulating policies that promote manufacturing companies.

D. Economic relationships with other countries

Some countries impose trade restrictions to improve their competitive positions. This is done for a number of reasons, including to reduce or even eliminate trade deficit primary motivations for doing so are outlined below.

1. Balance-of-Trade Adjustments. If the balance of trade is in deficit (exports lower than imports), a government may restrict imports and/or encourage exports in order to balance its trade account.

2. Comparable Access or “Fairness.” The comparable access argument promotes suggests that a country’s firms are entitled to the same access to foreign markets as foreign firms have to its market.

3. Restrictions as a Bargaining Tool. Import restrictions may be levied as a means to try to persuade other countries to lower their import barriers.

4. Price-Control Objectives. Countries may withhold products from international markets in an effort to raise world prices and thus improve export earnings. One example in point is what the Organization of Petroleum Exporting Countries (OPEC) does

III. NONECONOMIC RATIONALES FOR GOVERMENT INTERVENTION

Governments may also intervene in international trade for noneconomic reasons. Those reasons include:

A. Maintaining Essential Industries

The essential industry argument states that a government applies restrictions to protect essential domestic industries during peacetime so that the country is not dependent on foreign sources of supply during war. Protecting an inefficient industry, however, will lead to higher costs and possibly political consequences as well.

B. Promoting Acceptable Practices Abroad

Governments may restrict trade with some countries to force them to change unacceptable behavior (e.g. human rights violation). One example is the Cuban Democracy Act.

C. Maintaining or Extending Spheres of Influence

To maintain their spheres of influence, governments may encourage imports from countries that join a political alliance or vote a preferred way within international bodies. For example, for years, the US “tolerated” a trade deficit with Japan to keep Japan as an ally of the US

D. Preserving National Identity

Countries are partially held together through a unifying sense of cultural and national distinctiveness. To sustain this collective identity, governments may limit the presence of foreign products in certain sectors. The French minister of culture was adamantly opposed to Euro Disney because it would influence the French culture.

IV. INSTRUMENTS OF TRADE CONTROL

Governments have a range of tools (or instruments) they can use to influence international trade:

A. Tariffs

A tariff (also called a duty) is a tax levied on (internationally) traded products. A tariff increases the delivered price of a product, and, at the higher price, the quantity demanded will be less. Import tariffs are levied by the country of destination on imported products. They are the type of tariff that are the most used. Some developing countries also use exports tariffs (to increase government revenues). A transit tariff is levied by a country through which goods pass en route to their final destination

B. Nontariff Barriers: Direct Price Influences

Nontariff barriers represent quantitative and qualitative barriers that directly or indirectly impede international trade.

1. Subsidies. Subsidies consist of direct or indirect financial assistance from governments to their domestic firms to help them overcome market imperfections and thus make them more competitive in the marketplace. One of the most popular forms of government subsidy can be seen in the agriculture industry.

2. Aid and Loans. Governments may give aid and loans to other countries but require that the recipient spend the funds in the donor country; this is known as tied aid or tied loans. In this way some donor products that might otherwise be noncompetitive may find international markets.

3. Other Direct Price Influences. Other direct price influences include establishing special fees for consular and customs clearance and documentation, requirements that customs deposits be made in advance of shipment, and minimum price levels at which products can be sold after they receive customs clearance.

C. Nontariff Barriers: Quantity Controls

Governments use a variety of nontariff barriers to directly affect the quantity of imports and exports. Quantity barriers include:

1. Quotas. A quota represents a numerical limit on the quantity of a product that may be imported or exported in a given period of time. Voluntary export restraints (VERs) are negotiated limitations of exports from one country to another. An embargo is an outright ban on imports from or exports to a particular country.

2. “Buy Local” Legislation. Buy local legislation represents laws that are intended to favor the purchase of domestically sourced products over imported products, particularly with respect to government procurement.

3. Local content requirements: These are regulations requiring that a certain percentage of total costs be incurred within the local country (usually measured as a percentage of total costs), fall within this category.

4. Standards and Labels. The professed purpose of standards is to protect the safety or health of the domestic population. However, countries may also devise classification, labeling, and testing standards that facilitate the sale of domestic products but obstruct the sale of foreign-sourced products.

5. Specific Permission Requirements. An import or export license requires that firms secure permission from government authorities before conducting trade transactions. Such procedures directly restrict trade when permission is denied and indirectly restrict trade because of the cost, time, and uncertainty involved.

6. Administrative Delays. Intentional administrative delays create uncertainty and increase the cost of carrying inventory. However, competitive pressures can motivate countries to improve inefficient administrative systems.

https://www.youtube.com/watch?v=5ITyd1Pzek0 Free trade vs. protectionism

https://www.youtube.com/watch?v=xT6TQSxlDOY Fair trade