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    International Business: Governmental Influence On Trade

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    Urstruly Chakri
    Governments intervene in international trade for both economic and noneconomic reasons. Economic rationales include protecting domestic industries and jobs, while noneconomic reasons involve national security or political influence. Governments use tariffs and nontariff barriers to restrict imports and promote exports. However, extensive intervention can also harm trade and domestic consumers through higher prices and reduced competition.

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    International Business: Governmental Influence On Trade

    Uploaded by

    Urstruly Chakri
    66 views18 pages
    Governments intervene in international trade for both economic and noneconomic reasons. Economic rationales include protecting domestic industries and jobs, while noneconomic reasons involve national security or political influence. Governments use tariffs and nontariff barriers to restrict imports and promote exports. However, extensive intervention can also harm trade and domestic consumers through higher prices and reduced competition.

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    International Business

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    Governments intervene in international trade for both economic and noneconomic reasons. Economic rationales include protecting domestic industries and jobs, while noneconomic reasons involve national security or political influence. Governments use tariffs and nontariff barriers to restrict imports and promote exports. However, extensive intervention can also harm trade and domestic consumers through higher prices and reduced competition.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    66 views18 pages

    International Business: Governmental Influence On Trade

    Uploaded by

    Urstruly Chakri
    Governments intervene in international trade for both economic and noneconomic reasons. Economic rationales include protecting domestic industries and jobs, while noneconomic reasons involve national security or political influence. Governments use tariffs and nontariff barriers to restrict imports and promote exports. However, extensive intervention can also harm trade and domestic consumers through higher prices and reduced competition.

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    You are on page 1of 18

    International

    Business
    Chapter Six
    Governmental Influence on
    Trade
    Rationales for Government
    Intervention in Trade
    ECONOMIC RATIONALES NONECONOMIC RATIONALES

    Prevent unemployment Maintain essential


    industries
    Protect infant industries Deal with unfriendly
    countries
    Promote industrialization Maintain or extend
    spheres of influence
    Improve position com- Preserve national identity
    pared to other countries
    2
    Economic Rationales for Government Intervention:
    Prevent Unemployment
    By limiting imports, local jobs are retained as
    firms and consumers are forced to purchase
    domestically produced goods and services.
    ► Unless the protectionist country is relatively small, such
    measures are usually ineffective.
    ► Such measures are likely to lead to retaliation unless either
    the protectionist or the affected country is relatively small.
    ► Such measures may decrease export-related jobs because
    of (i) price increases for components or (ii) lower incomes
    abroad.
    Governments must carefully balance the costs of higher prices
    with the costs of unemployment and the displaced production
    that would result from freer trade.
    3
    Economic Rationales for Government Intervention:
    Protect Infant Industries
    Infant Industry Argument [Alexander Hamilton, 1792]:
    A government should temporarily shield emerging
    industries in which the country may ultimately
    possess a comparative advantage from international
    competition until its firms are able to compete in
    world markets.
    Hamilton reasoned that eventual competitiveness would result
    from: • movement along the learning curve
    • the efficiency gains from achieving the
    economies of large-scale production
    Ultimately, the validity of the argument rests on the expectation
    that the future benefits of an internationally competitive industry
    will exceed the costs of the associated protectionist measures.
    4
    Economic Rationales for Government Intervention:
    Promote Industrialization

    Industrialization Argument:
    The development of national industrial output
    should be supported, even though domestic prices
    may not be competitive on the world market.
    • Terms of trade describes the quantity of imports that
    a given quantity of a country’s exports can buy.
    • Export-led development encourages national economic
    development by harnessing a country-specific advantage and
    building a vibrant manufacturing sector through the
    stimulation of exports.
    Many of today’s emerging economies emulate historical practices
    and use protectionism to spur local industrialization.
    [continued]

    5
    Supporters of the industrialization argument
    claim that:
    ► surplus workers can more easily increase manufacturing
    output than agricultural output
    ► foreign investment inflows promote sustainable growth
    ► fluctuating prices are a major detriment to those
    economies that depend on just a few commodities
    ► demand for and prices of raw materials and agricultural
    commodities do not rise as fast as the demand for and
    prices of finished goods
    ► export promotion, and possibly import substitution,
    lead to sustainable economic development
    ► industrialization helps the nation-building process
    6
    Economic Rationales for Government Intervention:
    Improve Relative Economic Position
    Countries may impose trade restrictions
    to improve their relative competitive
    posi-tions. Their primary motivations
    are:
    • balance-of-payments adjustments
    • comparable access, i.e., “fairness”
    • price-control objectives
    [continued]

    7
    ► The comparable access argument, i.e.,
    “fairness,” promotes the idea that a country’s
    firms are entitled to the same access to foreign
    markets as foreign firms have to its market.
    ► Dumping refers to the practice of pricing exports
    below cost, or below their home-country prices,
    i.e., below their “fair market value.”
    ► The optimum-tariff theory claims that a foreign
    producer will lower its prices if the destination
    country places a tariff on its products. So long
    as the price is reduced by any amount, some
    shift in revenue goes to the importing country,
    and the tariff is deemed an optimum one.
    8
    Noneconomic Rationales for
    Government Intervention

    ► Maintenance of essential industries


    Essential industry argument: a government applies
    restrictions to protect essential domestic industries
    (particularly defense) so that the country is not
    dependent on foreign sources of supply
    ► Prevention of shipments to “unfriendly” countries
    ► Maintenance or extension of spheres of influence
    ► Preservation of national identity

    9
    Instruments of Trade Control
    Instruments of trade control can:
    -directly limit the amount that can be traded
    -indirectly affect the amount traded by directly
    influencing prices
    ► Tariffs (also called duties) are taxes levied on
    (internationally) traded products.
    ► Nontariff barriers (NTBs) represent administrative
    regulations, policies, and procedures, i.e., quantitative
    and qualitative barriers, that directly or indirectly
    impede international trade.
    While tariff barriers directly affect prices and subsequently
    the quantity demanded, nontariff barriers may directly affect
    price and/or quantity.
    10
    Instruments of Trade Control:
    Tariffs
    Tariffs, i.e., taxes levied on (internationally) traded
    products, include:
    • exports tariffs, levied by the country of origin
    on exported products
    • transit tariffs, levied by a country through
    which goods pass en route to their final destination
    • import tariffs , levied by the country of
    destination on imported products
    A tariff increases the delivered price of a product, and,
    at the higher price, the quantity demanded will be less.
    [continued]

    11
    • 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.
    If both a specific duty and an ad valorem tariff are
    assessed on the same product, it is known as a
    compound duty.
    While raw materials frequently enter industrial countries
    tariff free, an ad valorem tariff is often applied to the
    total value of manufactured goods. Critics argue that the
    effective tariff on the manufactured portion, i.e., the
    value-added portion, is higher than the published tariff.

    12
    Instruments of Trade Control:
    Nontariff Barriers—Direct Price Influences

    ► Subsidies: 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.
    ► Aid and loans: tied aid and loans require that the
    recipient spend the funds in the donor country
    ► Customs valuation: determining the true value
    and/or origin of traded products
    ► Other direct price influences: special fees, deposits,
    minimum price levels
    13
    Instruments of Trade Control:
    Nontariff Barriers—Quantity Controls

    ► Quota: 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): negotiated
    limitations of exports from one country to another
     Embargo: an outright ban on imports from or
    exports to a particular country
    Because of the increase in the equilibrium price,
    a quota may increase per unit revenues for participants
    within the protected market.
    [continued]

    14
    ► “Buy local” legislation
    ► Specific permission requirements
     Import and export licenses
     Foreign exchange controls
    ► Administrative delays
    ► Reciprocal requirements
     Barter
     Offset
    ► Restrictions on services
     Essentiality
     Professional standards
     Immigration
    15
    Dealing with Government Intervention

    Firms can deal with trade restrictions by:


    • moving operations to lower-cost countries
    • concentrating on market niches that attract
    less international competition
    • adopting internal innovations that lead to
    greater efficiency and/or superior products
    • trying to secure government protection

    16
    Implications/Conclusions
    ► When governments choose to impede the
    flow of imports and encourage the flow of
    exports, they simultaneously provide direct
    and/or indirect subsidies for their domestic
    industries.
    ► It is difficult to determine the real effects
    of trade barriers due to the likelihood of
    retaliation and the fact the imports and
    exports can both have positive effects.
    17
    ► Much government interference in the
    international trade process is motivated by
    political rather than economic factors.
    ► A company’s particular international strategy
    will determine the extent to which it might
    benefit from protectionist measures.

    18

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