Government Intervention in International Trade - Literature review Example

Government Intervention in International Trade Introduction The global business scenario is becoming increasingly competitive as the major market players are seeking out new ways to increase their market share and revenue generation. Internationalization is one of the expansion strategies that the major firms adopt to increase its customer base. However, moving the business operations to a different country needs to go though several government rules and regulations of both host and home country (Velde, 2001). The government have placed these regulations to protect the interest of the customers and business operations of domestic companies. The government intervention in international trade dictates the way the multinational companies operate. This paper is focused on different ways of government intervention in international trade and its influence on the nations and the firms. Discussion Government Intervention According to Poynter (2012) the government intervention can be described as the actions taken by the government in order to influence or interfere in the business activities of the private bodies or groups in terms of economic or social matters. The primary reason of the intervention is to protect the interest of the domestic firms from the predatory business activities of the large multinational firms. Warburton (2009) further added that the government policies regarding foreign trade offer both encouragement and restrictions to the multinational firms in a way that their business activities improve the economic condition of the host countries and at the same time do not impact the business operations of the smaller domestic firms. Thus the trade regulations set by the government act as a controlling authority that protects the interest of the domestic firms and looks after the social impact causing from the multinational firms. These regulations are important to ensure stability and growth of the domestic economy. Carbaugh, (2009) rightly pointed out that certain major multinational firms are so financially strong that their revenue is more than the GDP of certain small nations. Such firms have the necessary potential to control the business market of a developing nation if they diversify their business in that region. Therefore a regulatory policy has been set by the government so to limit the marketing activities of these firms. On the other hand, the internationalization of the multinational firms also improves the employment status of a nation. Therefore, the government of the developing countries often attract multinational firms within the national boundary to improve the social and economic structure of the nation. Ways of Government Intervention According to Cho (2003) the international trade is largely controlled by the level of government interventions of the host countries. In terms of Foreign Direct Investment (FDI), the government intervene to set certain boundaries for the multinational firms who are interested in buying controlling stakes of the domestic firms. This as a result limits the investing power of the firms thereby limiting their control over the business operations in the host country. Salvatore (2010) further added that the FDI regulations vary across countries and across industries as well. The government usually set a limit to how much percentage of the controlling shares the international company can purchase, which as simply put explains the level of control of the foreign firms over the domestic firms. Owing to the positive effects of inward FDI, the government of the developing nations try to make business collaboration with the multinational firms so that they are able to set up their business operations in that nation. On a different context Slomanson (2003) stated that the business activities of the multinational firms in the host country are highly dependent on the working relation with the local government. The government body usually goes into a business deal with the foreign countries which are mostly mutually beneficial in nature such that the business activities or the tax paid by the foreign firms helps government to improve the economic structure of the nation. Allard and Martinez (2008) further added that the business operations set up by the foreign company procures human resources from the host country thereby improving its employment conditions. In some countries the government intervention may be in favour of the foreign firms so as to encourage them to expand its business and in process help to improve the national economy of the country. Winham (2014) mentioned that the government policies based on international trade tax varies across nations. Tax regulations vary among nations. In some countries the taxes levied are quite high, which as a result is eating up on the revenue generation of several multinational firms. Moreover, the tax code of some nations favours certain companies or industries. This inequitable tax regulation creates opportunities of some firms, while the rest are left out. This often leads to formation of lobby between the government and the financially strong firms. Formation of lobby creates barrier to entry for the rival firms and at times the companies forming the lobby get more privilege than others, thereby giving them a competitive advantage in the industry. Sahadi (2014) also mentioned that in several countries, the tax regulation states that the foreign firms will only have to pay the taxes on the money that they bring to their home country. This regulation has allowed several companies to swim in cash stacked in offshore location. For example, Apple Inc. has $100 billion lying outside US; similarly Microsoft has around $93 billion outside the home country. These tax regulations set by the governments has acted in favour of both the host countries and the company itself. Helpman and Razin (2014) also mentioned that this regulation lets the companies to spend their revenues in the host country itself, which as a result improves the social and economic condition of the host countries. Simultaneously, the firms are also skipping large amount of taxes. Poynter (2012) highlighted the concept of “Free Trade” which dictates that the citizens are allowed to purchase products from another country or to sell products to another country. Most of the countries follow the free trade policy, but they do it with certain regulations. These regulations have been set to protect the interests of domestic firms and society. The local government uses several legal policies to intervene with the business operations of the firms. Chor and Manova (2012) further added that the tax tariffs levied by the government on the multinational firms increases the price of the imported goods compared to that of the domestic products. This as a result prevents the foreign firms to offer predatory pricing in the market. At times this price difference makes it difficult for the new entrant to attract the customers of the host country. These tariffs are either specific or ad valorem. The specific tariffs are levied as a fixed charge that the company needs to pay the government based on per unit of goods imported. On the other hand, the ad valorem tariffs are charged based on a certain proportion of the goods’ value. Terpstra, Foley and Sarathy (2012) pointed out that the government intervention are not only limited to the international trade but it also extends to the local business as well. The local government often offer subsidies to the local firms of certain industries to help them to boost their business operations. These interventions increase the competitiveness for the foreign firms, as the domestic business holders would become financially powerful enough to compete with the foreign firms. This as a result reduces the attractiveness of the low cost foreign imports. The import quotas set by the government also acts as a limiting factor for the foreign companies trying to penetrate in a host country. Meade (2013) further added that the import quotas restrict the number of units that a firm can import to a nation. This restriction is also in form of the Tariff rate quota, which offers tax slabs based on quality of goods being imported. The Voluntary Export Restraints are political collaborations between two nations, where the importing nations make a deal with the exporting nations that only a specified number of goods can be imported. These quotas limit the revenue generation of the foreign firms in the host country and it also limits their dominance in the market, thereby letting the domestic firms to flourish. Levinson (2013) highlighted that the Antidumping policies also known as the countervailing policies charge penalty to the foreign farms that try to sell products in the host country below the cost of production or below the fair value price. The financially strong firms often reduce their prices in the host market at an extremely low level. Their financial infrastructure allows them to run at a loss at the initial period of their business. The local firms cannot compete with such a low price and loses sale volume. In order to protect the domestic producers forms such predatory firms, the governments limits their pricing ability. This as a result prevents the penetrative strategies of the firms, which could be other lucrative for the company. Implications Economical Economical freedom The concept of economic freedom indicates the degree to which an individual is capable of conducting import, export and consumption (Scully, 2002). The government policies that allows the firms to easily commence its business activities thereby allowing them to control their economic flow has a higher economic freedom than the firms who are restricted by their respective government policies. A proper example can be stated by mentioning that America holds the 12th position in terms of economic freedom (RT, 2015). This states that the country has significant limitation sin terms of the rule of law, government limitations, regulatory efficiencies, etc. Protection of new industries In order to ensure that the economy of the nation records a steady growth, the government often intervene to help the new potential industries to grow. The protecting and facilitating industrial growth eventually helps the country to improve its economic status. The intervention is often in terms of financial support or lobby formation. As for example, the Tanzanian government has helped to promote the construction industry in the country. Several reforms have been undertaken by the government to support the construction industry (NCC, 2005). Strategic Trade Policy The concept of strategic trade suggests that the government at times adopt certain strategies that can influence the strategies of the dominant firms and it turns helps the smaller firms to grow. In certain situations an industry is dominated by oligopoly which as a result makes it difficult for the new entrants to prosper. Thus, keeping that in mind the government limits the potential of the firms by placing certain regulations (NCC, 2005). In India the government regulates the telecom sector in a manner that the major telecom companies cannot dominate the industry (Mani, 2008). Free Trades The concept of free trade suggests that the citizen of a particular country is free to conduct any business activities within or across the national border. Presence of free trade policies are seen in several countries such as Hong Kong, Singapore, Australia, but with certain limitations, that prevents foreign firms to conduct business at their full potential (Blinder, 2008; RT, 2015). Political Protecting Jobs Overseas business operations often affect the employment condition of the home country. Several well established companies such as Apple outsource their production unit in countries where the labour cost is relatively lower. This as a result causes in job displacement. Moreover, jobs are also protected by shielding the local firms from overseas competitions. In order to prevent this from happening the several nations have put forwards regulation, so that the workers of the home country get sufficient jobs. In US, the government has put up tariff and quotas for the sugar producers so as to protect them from competition. The government has made it costly for the American consumers to import the sugar from foreign countries, which compels them to stay dependent on the local producers (Riley, 2014). Protecting National Security National security is of primary concern for the governments. Therefore, the government intervene with the private companies to ensure that the overall security of the country is maintained. The Airlines sector in almost all the countries are controlled by the respective governments. The airline companies have to follow the regulations set by the government to operate. These regulations are in terms of maintaining strict security, proper checking of the passengers and their belongings, restrictions of items that can be taken across borders, etc (Martineau, 2000). Political relations At times the political relations between two nations are reflected in the overseas trading between them. Whenever US faces a bitter relationship with another country causing out of issues regarding terrorism or handling international crisis, then the country stops the overseas trade with that particular country. For example, US have kept deals with Russia on hold for its invasion in to Ukraine. US have kept on hold all the bilateral trade and investment deals with the Russian government (Chicago Tribune, 2014). Protection of consumers and Human Rights The government also ensures that the rights and interests of the customers are protected and also that the workers are given the proper wages and their rights are taken care of. In US, the government has set up several regulations to protect the interests of the customers by setting regulations for product standards and safety regulations (Helpman and Razin, 2014). Conclusion From the detailed discussion made in the above sections, it can be clearly stated that the government intervention in international trade is mainly conducted for protecting the interest of the nation in terms of social, economic and political reasons. There are several firms in the global business market who has the financial strength to practically alter the economic condition of the developing countries if they are allowed to have full freedom of business. It can be clearly stated that the financial strengths of these firms allows them to implement aggressing marketing strategies which the local firms may not be able to compete with. This as a result would drastically deteriorate the economic condition of the host countries. In order to avoid such conditions and to keep the powerful firms under leash, the governments have formulated a trade policy that involves certain limitations and taxes levied on the foreign firms which are seeking to penetrate in a host country. The governments often go for business a deal which are mutually beneficial in nature and allows the firms to earn revenues and at the same time helps to improve the economic condition of the firms. The local government intervene by using several tools such as tariffs on imports, setting limit on the number of goods that can be imported, fixing the lower limit of the prices, etc. These regulations allow the government to take care of the social and economic interest of the local stakeholder and at the same time hinders the business operations of the multinational firms. Reference List Allard, G. and Martinez, C.A., 2008. The Influence Of Government Policy And Ngos On Capturing Private Investment. OECD Global Forum on International Investment. March. Blinder, A.S., 2008. Free Trade. [online] Available at: [Accessed on 14 April 2015] Brander, J.A.,1995. Handbook of International Economics. Melbourne: Elsevier. Carbaugh, R.J., 2009, International Economics, Boston: Cengage Learning. 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Government Policies towards Inward Foreign Direct Investment In Developing Countries. London: OECD. Warburton, C.E.S., 2010. International trade law and trade theory, Journal of International Trade Law and Policy, 9(1), pp.64 – 82. Winham, G. R., 2014. International trade and the Tokyo Round negotiation. London: Princeton University Press. Read More