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Copyright © 2015 Pearson Education, Inc. 6-1

Economic Rationales for Government Intervention

p Why governments intervene in traden Economic rationales

p Fighting unemploymentp Protecting infant industriesp Promoting industrializationp Improving comparative position

n Non-economic rationalesp Maintaining essential industriesp Promoting acceptable practices abroadp Maintaining or extending spheres of influencep Preserving national culture


Fighting UnemploymentLearning Objective: Show the effects of pressure groups on trade policies


Fighting Unemploymentp The unemployed are the most effective pressure

groupp But, import restrictions

n can lead to retaliation by other countriesn are less likely retaliated against effectively by small

economiesn are less likely to be met with retaliation if implemented

by small economiesn may decrease export jobs because of price increases for

componentsn may decrease export jobs because of lower incomes

abroad


Protecting ‘Infant Industries’

Learning Objective: Compare the potential and actual effects of government intervention on the free flow of trade


Protecting ‘Infant Industries’

p The infant industry argument n government protection of import competition is

necessary to help certain industries evolve from high-cost to low-cost production

p Used by developing countries


Developing an Industrial Basep Countries promote industrialization

because itn brings faster growth than agriculturen brings in investment fundsn diversifies the economyn creates growth in manufactured goodsn reduces imports and promotes exportsn helps the nation-building process


Economic Relationships With Other Countries

p Trade controls can be usedn to improve the balance of paymentsn to gain fair access to foreign markets

pcomparable access argumentn as a bargaining tool

pbelievability and importancen to control prices

pdumpingpoptimum-tariff theory


Noneconomic Rationales for Government Intervention

p Noneconomic rationales includen Maintaining essential industriesn Promoting acceptable practices abroadn Maintaining or extending spheres of influencen Preserving national culture


Maintaining Essential Industriesp The essential industry argument

n protect essential industries so the country is not dependent on foreign supplies during war

p Countries mustn determine which industries are essentialn consider costs and alternativesn consider political consequences


Promoting Acceptable Practices Abroad

p Import trade controls can be usedn to promote changes in foreign countries’

political policies or capabilitiesn as a foreign policy weaponn to pressure governments to alter their stances

on a variety of issues phuman rightspenvironmental protection


Maintaining or Extending Spheres of Influence

p Governments provide assistance and encourage imports from countries that join a political alliance or vote a preferred way within international bodiesn Cotonou Agreement

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


Preserving National Culturep In order to preserve national culture,

countriesn limit foreign products and services in certain

sectorspCanada’s cultural sovereignty

n prohibit exports of art and historical items deemed important to national heritage


Instruments of Trade ControlLearning Objective: Illustrate the major means by which trade is restricted and regulated


Instruments of Trade Controlp Two types of trade controls

n those that indirectly affect the amount traded by directly influencing prices of exports or imports

n those that directly limit the amount of a good that can be traded


Tariffsp Tariffs are also known as duties

n refer to a government levied tax on goods shipped internationally

p Tariffs may be levied n on goods entering, leaving, or passing through

a country n for protection or revenuen on a per unit basis or a value basis

pexport tariffsp transit tariffsp import tariffs


Nontariff Barriers: Direct Price Influencers

p Subsidies n direct assistance to companies to make them

more competitivepagricultural subsidies povercoming market imperfectionspvaluation problems


Nontariff Barriers: Direct Price Influencers

p Aid and loansn tied n untied

p Customs valuationp Other direct-price influences

n special fees and requirements


Nontariff Barriers: Quantity Controls

p Quotasn limit the quantity of a product that can

be imported or exported in a given time framepVoluntary export restraint (VER)pEmbargoes


Nontariff Barriers: Quantity Controls

p “Buy local” legislationp Standards and labelsp Specific permission requirements

n import or export license p Administrative delaysp Reciprocal requirements

n Countertrade or offsetsp Restrictions on services


Dealing with Governmental Trade Influencers

Learning Objective:Demonstrate the business uncertainties and business opportunities created by governmental trade policies


Dealing with Governmental Trade Influencers

p Companies facing import competition cann Move abroadn Seek other market nichesn Create greater efficiency or superior products n Try to get governmental protection


Tactics For Dealing With Import Competition

p Convince decision makers of the merits of particular policies

p Involve the industry and stakeholdersp Prepare for changes in the competitive

environment


Dynamics and Complexityp Trade restriction changes bring about

winners and losers among countries, companies, and workers

p Gains to consumers from freer trade may come at the expense of companies and workers

p The international regulatory situation is becoming more complex

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