Governmental influence on trade

1. Governmental Influence on Trade

2. Conflicting Results of Trade Policies
Why governments intervene?
- Governments intervene trade for the good of the citizens
(or, does it really?)
- Arguments for and against trade policies
Protectionism refers to those government restrictions and
incentives specifically designed to help a county’s
domestic firms compete with foreign competitors at home
and abroad. Protectionist measures are likely to lead to
retaliation by affected stakeholders.
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3. 3
Rationale and Goals of Trade and
Investment Policies
1.Government policies are designed to regulate,
direct, and protect national activities. The
exercise of these policies is the result of national
sovereignty, which provides a government with
the right to shape the environment of the
country and its citizens.
2.The domestic policy actions of most
governments aim to increase the standard of
living of citizens and to improve the quality of
life, and to achieve full employment.
3.These policies affect international trade and
investment indirectly.

4. 4
4.In more direct ways, a country may also pursue
technology transfer from abroad or the exclusion of
foreign industries to the benefit of domestic infant
firms.
5.Government officials can also develop regulations on
imports to protect citizens.
6.Nations institute foreign policy measures designed
with domestic concerns in mind but explicitly aimed to
exercise influence abroad.
7.A major foreign policy goal is national security.

5. Why Governments
Intervene in Trade
ECONOMIC RATIONALESECONOMIC RATIONALES NONECONOMICNONECONOMIC
RATIONALESRATIONALES
Fighting unemploymentFighting unemployment Maintaining essentialMaintaining essential
industriesindustries
Protecting infantProtecting infant
industriesindustries
Promoting acceptablePromoting acceptable
trade practices abroadtrade practices abroad
PromotingPromoting
industrializationindustrialization
Maintaining or extendingMaintaining or extending
spheres of influencespheres of influence
Improving comparativeImproving comparative
positionposition
Preserving nationalPreserving national
identityidentity
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6. 6
Unemployment
Unemployed can form effective pressure group for import
restrictions
Problems stemming from restricting imports to create jobs
in the domestic economy
• Retaliation by other countries
– less tendency to retaliate against small countries
– restricting country will gain jobs in one place and
lose them somewhere else
• Pressure against protectionism among workers in
industries dependent on imports
• Import restrictions indirectly cause loss of export
income
• Potential costs of import restrictions include both
higher prices and higher taxes
– such costs should be compared with those of
unemployment

7. 7
Infant-Industry Argument
Government should guarantee an emerging industry a
large share of the domestic market until it becomes
efficient enough to compete against imports
Initial output costs may make products noncompetitive in
world markets
• Over time costs will decrease due to:
– greater economies of scale
– greater worker efficiency
Problems with argument
• Hard to identify industries with high probability of
success
– even when industries can be identified, not clear
that government should provide protection
• Protection may serve as disincentive for managers to
adopt innovations needed to become competitive

8. 8
Industrialization Argument
Use of surplus workers—many workers can leave the
agricultural sector without affecting output
• Influx of workers into industrial sector may result in
several problems
– heavy demands on social and political services
– agriculture may be a better means of effecting
additional output than industry
– government must decide which industry to protect to
minimize consumer price and tax increases
– development possibilities in the agricultural sector
may be overlooked
Promoting investment flows—import restrictions may increase
foreign direct investment
• Influx of foreign companies may hasten industrialization
• Investment inflows may add to employment

9. 9
Industrialization Argument (cont.)
Diversification—price variations due to uncontrollable
factors can wreak havoc on economies dependent on
exports
• Change from agriculture to industry in emerging
economies may simply shift the dependence from
a few agricultural products to a few industrial
products
• Greater growth for manufactured products
• Terms of trade—quantity of imports that a given
quantity of a country’s exports can buy
– prices of raw material and agricultural
commodities do not rise as fast as prices of
finished goods
– deterioration in emerging economies
» demand for primary products grows more
slowly
» cost savings passed

10. 10
Import substitution— restricting imports in order
to produce for local consumption goods that
formerly were imported
• Not the best way to develop new industries
• An initial response to industrialization
Export-led development—creation of industries
for which export markets should logically exist
• A later stage in the industrialization process

11. 11
Economic Relationships with Other Countries
Balance-of-payments adjustments—governments attempt to
modify import or export movement in a free market
Comparable access or “fairness”
• In industries in which increased production will greatly
decrease cost, producers that lack equal access to a
competitor’s market will have a disadvantage in
becoming cost competitive
• Equal access discussed in terms of fairness
– arguments against fairness doctrine
» there are advantages of freer trade, even if
imposed unilaterally
» may escalate economic tensions among trading
partners
» cumbersome and expensive to negotiate
separate agreements for all products that could
be traded internationally

12. 12
Economic Relationships with Other Countries
(cont.)
Price-control objectives
• Export restrictions may:
– raise costs of smuggling prevention
– lead to substitution
– keep domestic prices down by increasing
domestic supply
– give producers less incentive to increase output
– shift foreign production and sales
• Import restrictions may:
– prevent dumping—exports priced below cost or
home-country price
– get other countries to bargain away restrictions
– get foreign producers to lower their prices

13. 13
Maintaining Essential Industries
Protecting domestic industries during peacetime so that
country is not dependent on foreign sources of supply
during war
• Popular argument to support import restrictions
• Countries must
– determine which industries are essential
– consider costs and alternatives
– consider political consequences
Dealing with “Unfriendly” countries
Prevention of exports that might be acquired by potential
enemies
• May lead to retaliation that prevents securing other
essential goods
• Trade controls on nondefense goods also may be
used as a weapon of foreign policy

14. 14
Maintaining Spheres of Influence
Governments may:
• Provide aid and credits to, and encourage
imports from, countries that are political
allies
• Impose trade restrictions to coerce foreign
countries to follow certain political actions
Preserving Cultures and National Identity
Countries have a common sense of identity that
separates them from other nationalities
• May limit foreign products and services to
protect their separate identity

15. Instruments of Trade Control
 Tariffs (also called duties) are taxes levied on
(internationally) traded products.
Exports tariffs, transit tariffs, import tariffs, levied by
the country of destination on imported products
A specific duty is a tariff that is assessed on a per unit
basis. An ad valorem tariff is assessed as a percentage of
the value of an item.
 Nontariff barriers (NTBs) represent administrative
regulations, policies, and procedures, i.e., quantitative and
qualitative barriers, that directly or indirectly impede
international trade.
 Trade barriers have often been the sources of conflict
among nations and in WTO negotiations
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16. 16
Instruments of Trade Control
Tariffs—a tax governments levy on goods shipped
internationally
• Most common type of trade control
– export tariff—collected by exporting country
– transport tariff—collected by country through
which the goods have passed
– import tariff—collected by importing country
» most common type of tariff
• Used to protect domestically produced goods
• Used as a source of governmental revenue
– specific duty—tariff assessed on per unit basis
– ad valorem duty—assessment is a percentage of
the value of the item
– compound duty—combination of specific duty
and ad valorem duty on the same product

17. 17
D S
P2
Tax
Q2
P1
Q10
Quantity
Higher Sales
Price
HigherPrice
As tax raises
price, quantity
sold decreases
Trade Restrictions Based on Tariffs

18. Instruments of Trade Control: Nontariff
barriers (NTB)
Nontariff barriers (NTB): Direct Price Influences
Subsidies
Aids and Loans
Customs valuation
Nontariff barriers (NTB): Quantity Controls
Quotas: VER, Embargoes
“Buy Local” legislation

19. 19
Instruments of Trade Control (cont.)
Nontariff Barriers: Direct Price Influences
• Subsidies—direct government payments to
domestic companies to compensate them for
losses incurred from selling abroad
– other types of government assistance makes
it cheaper or more profitable to sell abroad
» potential exporters provided with an
array of services
– subsidies to overcome market imperfections
are least controversial
– there is little agreement on what a subsidy
is
– there has been a recent increase in export-
credit assistance
• Aid and loans—given to other countries with the
proviso that the funds be spent in the donor
country
– repayment insurance for exporters

20. 20
Instruments of Trade Control (cont.)
Nontariff Barriers: Direct Price Influences (cont.)
• Customs valuation—procedures for assessing value
when customs agents levy tariffs
– may be based on
» invoice price
» value of identical goods
» similar goods coming in at the same time
» final sales value or on reasonable cost
– valuation problems created by the large number of
products that are traded
• Other direct price influences
– special fees
– customs deposits
– minimum price levels

21. 21
Instruments of Trade Control (cont.)
Nontariff Barriers: Quantity Controls
• Quotas—limits the quantity of a product allowed to be
imported in a given year
– Most-common restriction based on quantity
– amount frequently reflects guarantee that domestic
producers will have access to a certain percentage
of the domestic market
– problems with quotas
» transshipping goods among countries
» transforming product into one for which there is
no quota
– export quotas
» assure domestic consumers a supply of goods
at low price
» prevent depletion of natural resources
» raise export prices
– Embargo—quota that prohibits all trade

22. 22
Trade Restrictions Based on Available Supply
D
P2
Q2
P1
Q10
Quantity
Higher Sales
Price
HigherPrice SS1
Import restriction
causes quantity
sold to fall

23. 23
Nontariff Barriers: Quantity Controls
• “Buy local” legislation—governments favor
purchasing goods produced domestically
– legislation that prescribes a minimum percentage
of domestic value
• Standards—classification, labeling, and testing
standards limit sales of foreign products
• Specific permission requirements
– import license—potential importers or exporters
require governmental permission before
conducting trade transactions
– foreign-exchange control—importer required to
apply to a governmental agency to secure foreign
currency to pay for a product
• Administrative delays—intentional delays that create
uncertainty and raise the cost of carrying inventory

24. 24
Instruments of Trade Control (cont.)
Nontariff Barriers: Quantity Controls (cont.)
• Reciprocal requirements—governmental requirements
that
– exporters take merchandise in lieu of money
– exporters promise to buy merchandise or services in
the country to which they export
– countertrade or offset—barter transaction
• Restriction on services—exist for three reasons
– Essentiality—countries do not want to depend on
foreign companies for strategic services
– Standards—ensure qualifications of providers
» little reciprocal recognition in licensing from one
country to another
– Immigration—protect employment of country’s own
citizens
» require local search for qualified personnel before
hiring a foreigner

25. Effect of Nontariff Barriers
Effect onEffect on SubsidiesSubsidies Aids andAids and
LoansLoans
QuotasQuotas Buy LocalBuy Local
PricePrice
ProductionProduction
MarketMarket
MotivationMotivation
TradeTrade

26. What measures firms can take to deal with
governmental intervention
Move operations to lower-cost countries
 Concentrate on market niches that attract less
international competition
 Opt for internal innovations leading to greater efficiency
and/or superior products
 Try to secure government protection
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27. 27
Dealing with Governmental Trade Influences
When faced with import competition, companies may
• Move production to a lower-cost country
• Concentrate on market niches in which there is less
international competition
• Effect internal adjustments
Companies may require assistance of government to limit
imports or open foreign markets
• Governments deny some requests for assistance
companies attitudes differ toward protectionism
• Companies likely to lose from protectionism
– those that depend heavily on trade
– those that have integrated production in different
global locations
• Companies likely to gain from protectionism have single
or multidomestic production facilities

28. Chapter 7: Discussion Questions
1. Explain the rationale for and against governmental
intervention in trade.
OR
1. What is protectionism? What are the arguments for and
against protectionism?
2. How governments intervene trade with the help of non-tariff
barriers? Explain.
3. What are the effects of subsidies (or quotas) on price,
production, market, motivation and trade? Explain.
4. What measures firms can take to deal with governmental
intervention? Explain.
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