IAF 605 - International Business Management

Week 6

Government Influence on Trade

Agenda

review Week 5

Chapter 7 –Governmental

Influence on Trade

Chapter Objectives

• To explain the rationales for governmental policies that enhance and restrict trade

• To show the effects of pressure groups on trade policies

• To describe the potential and actual effects of governmental intervention on the free flow of trade

• To illustrate the major means by which trade is restricted and regulated

• To demonstrate the business uncertainties and business opportunities created by governmental trade policies

Physical and Social Factors Affecting the Flow of Goods and Services (p257)

The Role of Stakeholders

direct interest

consumers

Why Governments Intervene in Trade

4 Economic Rationales

• fighting unemployment

• protecting “infant industries”

• developing an industrial base

• economic relationships with other countries

Fighting Unemployment

Steel workers demonstrate during a protest march in Marseille. France’s trade unions called public and private sector workers out on strike to demand more action from government and companies to protect jobs and salaries.(Jean-Paul Pelissier/Reuters)

Image source: http://flickr.com/photos/7320687@N02/

Fighting Unemployment

one problem is other countries might retaliate with their own restrictions (i.e. USA protected

steel and EU, Brazil and Japan threatened to restrict US products like oranges – US

rescinded!

Image source: http://flickr.com/photos/7320687@N02/

Restricting imports may lead to retaliation by other countries. Even if no country retaliates…restricting country may gain jobs in one sector only to lose jobs elsewhere

fewer imports mean fewer import-handling jobs

may decrease export jobs because of price increases for components.

restricting earnings abroad will have a negative effect on domestic earnings and employment

Restricting imports…

Video source: http://www.youtube.com/watch?v=n-dXS-Xkrh0

Protecting “Infant-Industries”

The infant-industry argument for protection holds that governmental should protect an emerging industry until it is able to

compete on its own

Protecting “Infant-Industries” – Assumptions and Risks

initial output costs for a small-scale industry in a given country may be so high as to make its output non-competitive in world markets…protection required until companies gain economies of scale and higher productivity through experience

over time, gov’t gets higher domestic employment, lower social costs and higher tax revenues

BUTrisk that costs never fall enough to be competitive – gov’t needs to identify industries with high probability of success; also, taxpayer $ could be spent elsewhere like education and infrastructure

Developing an Industrial Base - assumptions

Brings faster growth than agriculture.

Brings in investment funds.

Diversifies the economy.

Brings more income than primary products do.

Reduces imports and promotes exports.

Helps the nation-building process.

Developing an Industrial Base

Video source: http://www.youtube.com/watch?v=3JzoBTpM-bs

Developing an Industrial Base – surplus workers

growth occurs because underemployed resources become employed

Problem with shifting workers out of agriculture…

Image source: http://apimages.ap.org

Developing an Industrial Base – investment inflows

import restrictions may increase FDI (giving capital, technology and jobs)

Maruti Suzuki – 1 million cars in India

Image source: http://apimages.ap.org

Developing an Industrial Base – diversification

uncontrollable factors can affect supply/demand

but..depending on manufacturing does not guarantee diversification of export earnings

Image source: http://www.flickr.com/photos/john_lustig/

Developing an Industrial Base – growth in manufactured goods

terms of trade (quantity of imports that a given quantity of a country’s exports can buy)

raw materials/ commodities prices do not rise as fast as finished goods

quantity of primary products demanded does not rise as fast as mfg’dgoods

Developing an Industrial Base – import substitution and export-led development

developing countries may restrict imports to boost local production / consumption

BUT

if companies are not efficient, local customers support via higher prices or higher taxes

export-led development: promoting development of industries that export their output

Developing an Industrial Base – nation building

industrialization helps build infrastructure, advance rural development and boost the skills of the workforce

Using Trade Controls to Improve Economic Relations with Other Countries

balance-of-trade adjustments

comparable access or “fairness”

restrictions as a bargaining tool – 2 criteria: believability and importance

price-control objectives

prevent dumping

optimum-tariff theory

Why Governments Intervene in Trade

• maintaining essential industries

• dealing with unfriendly countries

• maintaining or extending spheres of influence

• preserving national identity

Noneconomic Rationales

Maintaining essential industries - protect essential domestic industries during peacetime so a country is not dependent on foreign sources of supply during war

Determine which ones are essential.

Consider costs and alternatives.

Consider political consequences.

Preventing Shipments to “Unfriendly” Countries

motivated by:

• political rather than economic concerns

• maintaining domestic supplies of essential goods

• preventing potential enemies from gaining goods that would help them achieve their objectives

Maintaining or extending spheres of influence

Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodies.

A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not.

China delayed permission for Allianz, a

German insurance group, to operate in

China after Germany gave a reception for

the Dalai Lama

Video source: http://www.youtube.com/watch?v=xQ42xltm02M

Maintaining or extending spheres of influence

Preserving national identity

Canada has a ban on

foreign ownership or

control of publishing,

cable TV and

bookselling…

China controls film

distribution and can

prevent movies from

being shown (like

Avatar 3D)

Preserving national identity

Video source: http://www.youtube.com/watch?v=XKjicnkplDY

Instruments of Trade Control

directly affect price and indirectly affect quantity

• tariffs (or duties)

• subsidies

• customs-valuation methods

• special fees

Nontariff Barriers: Direct Price Influences

directly affect price

• subsidies

• overcoming marketing imperfections

• aids and loans

• customs valuations

• consular fees; customs clearance/documentation

• deposits in advance of shipment

• minimum price levels

Nontariff Barriers: Quantity Controls

directly affect quantity

• quotas (including embargoes)

• voluntary export restraint (VERs)

• “buy local” legislation

• standards and labels

• licensing arrangements/forex control

• specific permission requirements

• administrative delays

• reciprocal requirements

• restrictions on services

• immigration

Options when facing Import Competition

Move abroadSeek other

market niches

Make domestic output

competitive

Try to get protection

may not be realistic if you don’t have the expertise, resources or management to shift production

abroad

finding profitably niches is difficult

being innovative might help but others can rip you off/copy the innovation

can ask the gov’t to restrict imports or open export markets

Reminder

Jun 23rd: mid-term exam

chapters 1-4 and 6-7

cases

class discussions