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International Business


International Business Chapter Seven Governmental Influence on Trade – PowerPoint PPT presentation

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Title: International Business

International Business
  • Chapter Seven
  • Governmental Influence on Trade

Chapter Objectives
  • To realize the rationales for government policies
    that enhance and restrict trade
  • To interpret the effects of pressure groups on
    trade policies
  • To understand the comparison of protectionist
    rationales used in high-income countries with
    those used in low-income countries economies
  • To comprehend the potential and actual effects of
    government intervention on the free flow of trade
  • To understand the major means by which trade is
    restricted and regulated
  • To grasp the business uncertainties and business
    opportunities created by government trade policies

  • Protectionism refers to those government
    restrictions and incentives specifically designed
    to help a countys domestic firms compete with
    foreign competitors at home and abroad.
  • Governments intervene in the trade process to
    attain economic, social, and/or political
  • Whenever governments impede the flow of imports
    and/or encourage the flow of exports, they
    simul-taneously provide direct and/or indirect
    subsidies for their domestic firms.
  • Protectionist measures are likely to lead to
  • by affected stakeholders.

Fig. 7.2 Physical and Societal Influences on
Protectionism and Companies Competitive
Fig. 7.1 Import Market Shares of Clothing in the
U.S. before and after the Multifiber Arrangement
Rationales for Government Intervention in Trade
Prevent unemployment Maintain essential industries
Protect infant industries Deal with unfriendly countries
Promote industrialization Maintain or extend spheres of influence
Improve position com-pared to other countries Preserve national identity
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.

Economic Rationales for Government Intervention
Protect Infant Industries
  • Infant Industry Argument Alexander Hamilton,
  • 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

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 countrys
    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 todays emerging economies emulate
    historical practices and use
    protectionism to spur local industrialization.
  • continued

  • Supporters of the industrialization argument
    claim that
  • surplus workers can more easily increase
    manufacturing output than agricultural output
  • foreign investment inflows promote sustainable
  • 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
  • industrialization helps the nation-building

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
  • leverage as a bargaining tool
  • price-control objectives
  • continued

  • The comparable access argument, i.e., fairness,
    promotes the idea that a countrys 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.

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

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

Fig. 7.4 Comparisonof Trade Restrictions
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
  • 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

  • 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.

Instruments of Trade Control Nontariff
BarriersDirect 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
  • Aid and loans tied aid and loans require that
    the recipient spend the funds in the donor
  • Customs valuation determining the true value
    and/or origin of traded products
  • Other direct price influences special fees,
    deposits, minimum price levels

Instruments of Trade Control Nontariff
BarriersQuantity 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
  • 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

  • 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

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

  • 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.

  • Much government interference in the international
    trade process is motivated by political rather
    than economic factors.
  • A companys particular international strategy
    will determine the extent to which it might
    benefit from protectionist measures.
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