Governmental Influence on Trade

Governmental Influence on Trade

Chapter 7

Governmental Influence on Trade

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

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Learning Objectives (1 of 2)

7-1 Recognize the conflicting outcomes of trade protectionism

7-2 Assess governments’ economic rationales and outcome uncertainties with international trade intervention

7-3 Assess governments’ noneconomic rationales and outcome uncertainties with international trade intervention

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Learning Objectives for the chapter.

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Learning Objectives (2 of 2)

7-4 Describe the major instruments of trade control

7-5 Classify how companies deal with governmental trade influences

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Learning Objectives for the chapter.

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What is Protectionism?

Objective 7-1

What is protectionism?

Why do governments intervene in trade?

Stakeholders and protectionism

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Learning Objective 1: Recognize the conflicting outcomes of trade protectionism.

Governmental actions to influence international trade are known as protectionism.

Despite free-trade benefits, governments intervene in trade to attain economic, social, or political objectives

Proposals on trade regulations often spark fierce debate among people who believe they will be affected—the so-called stakeholders. Of course, those most directly affected are most apt to speak out, such as workers, owners, suppliers, and local politicians whose livelihoods depend on the actions taken.

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Institutional Factors Affecting the Flow of Trade

Objective 7-1

Figure 7.1 Institutional Factors Affecting the Flow of Goods and Service

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Learning Objective 1: Recognize the conflicting outcomes of trade protectionism.

This figure illustrates the variety of factors that can affect trade restrictions and trade enhancements.

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Economic Rationales for Trade Restrictions

Objective 7-2

To fight unemployment

To protect infant industries

To develop an industrial base

Economic relationships with other countries

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Learning Objective 2: Assess governments’ economic rationales and outcome uncertainties with international trade intervention.

Import restrictions to create domestic employment

may lead to retaliation by other countries,

affect large and small economies differently,

reduce import handling jobs,

may decrease jobs in another industry, or

may decrease export jobs because of lower incomes abroad.

The infant-industry argument says that production becomes more competitive over time because of

increased economies of scale, and

greater worker efficiency.

To develop an industrial base: Since the industrial revolution, countries increasing their industrial bases grew their employment and economies more rapidly. This observation led to protectionist arguments to spur local industrialization. These arguments have been based on the following assumptions:

Surplus workers can increase manufacturing output more easily than agricultural output.

Import restrictions lead to foreign investment inflows, which provide jobs in manufacturing.

Prices and sales of agricultural products and raw materials fluctuate widely, which is a detriment to economies that depend heavily on them, especially if the dependence is on just one or a few commodities.

Markets for industrial products grow faster than markets for both agricultural and raw material commodities.

Economic Relationships with other countries: Nations monitor their absolute economic situations and compare their performance to other countries. Among their many practices to improve their relative positions, four stand out: making balance-of-trade adjustments, gaining comparable access to foreign markets, using restrictions as a bargaining tool, and controlling prices.

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Why Government Intervenes in Trade

Objective 7-2

Table 7.1 Why Governments Intervene in Trade

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Learning Objective 2: Assess governments’ economic rationales and outcome uncertainties with international trade intervention

This table illustrates the economic and noneconomic reasons governments intervene in trade.

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Noneconomic Rationale for Trade Restrictions

Objective 7-3

Maintain essential industries

Promoting acceptable practices abroad

Maintain or extend spheres of influence

Preserve national culture

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Learning Objective 3: Assess governments’ noneconomic rationales and outcome uncertainties with international trade intervention.

Maintaining essential industries (especially defense): not dependent on foreign supplies during hostile political periods.

Promoting acceptable practices abroad: Governments limit exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies. They also limit exports and imports to compel a foreign country to change some objectionable policy or capability. The rationale is to weaken the foreign country’s economy by decreasing its foreign sales and by limiting its access to needed products, thus coercing it to amend its practices on some issue such as human rights, environmental protection, military activities, and production of harmful products.

Maintaining or extending spheres of influence: Governments use trade to support their spheres of influence—giving aid and credits to, and encouraging imports from, countries that join a political alliance or vote a preferred way within international bodies.

Preserving national culture: To help sustain a collective identity that sets their citizens apart from other nationalities, governments prohibit exports of art and historical items deemed to be part of their national heritage. In addition, they limit imports that may either conflict with or replace their dominant values.

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Instruments of Trade Control: Tariffs

Objective 7-4

Tariff (Duty)

Why are Tariffs levied?

Types of Tariffs

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Learning Objective 4: Describe the major instruments of trade control.

Tariff barriers directly affect prices, and nontariff barriers may directly affect either price or quantity. A tariff (also called a duty) is a tax levied on a good shipped internationally. That is, governments charge a tariff on a good when it crosses an official boundary— whether it be that of a nation or a group of nations that have agreed to impose a common tariff on goods crossing the boundary of their bloc.

Tariffs may be levied:

on goods entering, leaving, or passing through a country,

for protection or revenue, or

on a per-unit basis, a value basis, or both.

A tariff assessed on a per-unit basis is a specific duty, on a percentage of the item’s value an ad valorem duty, and on both a compound duty

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Instruments of Trade Control: Non-tariff (1 of 3)

Objective 7-4

Subsidies–Definition

Agriculture Subsidies

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Learning Objective 4: Describe the major instruments of trade control.

Subsidies offer direct assistance to companies to boost their competitiveness. Although this definition is straightforward, disagreement on what constitutes a subsidy causes trade frictions. In essence Governmental subsidies may help companies be competitive.

But there is little agreement on what a subsidy is.

Agricultural subsidies are difficult to dismantle. Especially to overcome market imperfections because they are at least controversial

The one area in which everyone agrees that subsidies exist is agriculture especially in developed countries. The official reason is that food supplies are too critical to be left to chance. Although subsidies lead to surplus production, they are argued to be preferable to the risk of food shortages.

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Instruments of Trade Control: Non-tariff (2 of 3)

Objective 7-4

Aids and Loans

Quotas

Embargo

Buy Local Legislation

Standards and Labels

Specific Permission Requirements

Administrative Delays

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Learning Objective 4: Describe the major instruments of trade control.

Aid and Loans: When governments require foreign aid and loan recipients to spend the funds in the donor country, a situation known as tied aid or tied loans, some otherwise noncompetitive output can compete abroad. For instance, tied aid helps win large contracts for infrastructure, such as telecommunications, railways, and electric power projects.

A quota limits the quantity of a product that can be imported or exported in a given time frame, typically per year. Import quotas normally raise prices because they (1) limit supplies and (2) provide little incentive to use price competition to increase sales. A specific type of quota that prohibits all trade is an embargo. As with quotas, a country or group of countries may place embargoes on either imports or exports, on particular products regardless of origin or destination, on specific products with certain countries, or on all products with given countries.

Buy local legislation sets rules whereby governments give preference to domestic production in their purchases.

Standards and Labels: Countries can devise classification, labeling, and testing standards to allow the sale of domestic products while obstructing foreign-made ones.

Specific Permission Requirements: Countries may require that importers or exporters secure governmental permission (an import or export license) before transacting trade.

Administrative delays: Closely akin to specific permission requirements are administrative customs delays that may be caused by intention or inefficiency.

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Instruments of Trade Control: Non-tariff (3 of 3)

Objective 7-4

Service Industries

Four factors to consider

Essentiality

Not-for-Profit Services

Standards

Immigration

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Learning Objective 4: Describe the major instruments of trade control.

Service is the fastest-growing sector in international trade. In deciding whether to restrict service trade, countries typically consider four factors: essentiality, not-for-profit preference, standards, and immigration.

Essentiality Governments sometimes prohibit private companies, foreign or domestic, from operating in some sectors because they feel the services are essential and provide social stability. In other cases, they set price controls or subsidize government-owned service organizations that create disincentives for foreign private participation. Some essential services

in which foreign firms might be excluded are media, communications, banking, utilities, and domestic transport.

Not-for-Profit Services Mail, education, and hospital health services are often not-for profit sectors in which few foreign firms compete. When a government privatizes these industries, it customarily prefers local ownership and control.

Standards Some services require face-to-face interaction between professionals and clients, and governments limit entry into many of them to ensure practice by qualified personnel. The licensing requirements include such professionals as accountants, actuaries, architects, electricians, engineers, gemologists, hairstylists, lawyers, medical personnel, real estate brokers, and teachers.

Immigration Satisfying the standards of a particular country is no guarantee that a foreigner can then work there. In addition, governmental regulations often require an organization— domestic or foreign—to search extensively for qualified personnel locally before it can even apply for work permits for personnel it would like to bring in from abroad.

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How Companies Deal with Governmental Influences

Objective 7-5

Threats from import competition

Options for companies

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Learning Objective 5: Classify how companies deal with governmental trade influences.

When companies are threatened by import competition, they have several options, four of which stand out.

Move operations to another country.

Concentrate on market niches that attract less international competition.

Adopt internal innovations, such as greater efficiency or superior products.

Try to get governmental protection.

Activity Minute:

Of these, which do you think is the best option for companies? Does it depend on the industry?

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Copyright

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.


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