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Governmental influence on trade
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- 2. Conflicting Results ofTrade 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. 2
- 3. 3 Rationale and Goalsof 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 directways, 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 inTrade 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 5
- 6. 6 Unemployment Unemployed can formeffective 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 shouldguarantee 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 ofsurplus 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—pricevariations 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— restrictingimports 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 withOther 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 withOther 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 Protectingdomestic 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 ofInfluence 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 TradeControl 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 15
- 16. 16 Instruments of TradeControl 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 Astax raises price, quantity sold decreases Trade Restrictions Based on Tariffs
- 18. Instruments of TradeControl: 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 TradeControl (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 TradeControl (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 TradeControl (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 Basedon Available Supply D P2 Q2 P1 Q10 Quantity Higher Sales Price HigherPrice SS1 Import restriction causes quantity sold to fall
- 23. 23 Nontariff Barriers: QuantityControls • “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 TradeControl (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 NontariffBarriers Effect onEffect on SubsidiesSubsidies Aids andAids and LoansLoans QuotasQuotas Buy LocalBuy Local PricePrice ProductionProduction MarketMarket MotivationMotivation TradeTrade
- 26. What measures firmscan 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 26
- 27. 27 Dealing with GovernmentalTrade 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: DiscussionQuestions 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. 28