The Political, Economic and Cultural Motives behind Government Intervention in Trade - Essay Example

The Political, Economic and Cultural Motives behind Government Intervention in Trade Student’s name Course Tutor’s name Date Introduction While it has been argued that free trade is vital for the world economy, it is rather obvious that governments have political, economic and cultural motives for curtailing the free trade notion through intervention. According to Hill (2011), free trade is possible where government do not restrict what the citizens can sell to or buy from another country. Notably, many countries are supposedly committed to free trade; however, this only happens on paper and rarely do governments keep off the trade agenda in their respective countries. Against this backdrop, this paper seeks to discuss the political, economic and cultural motives behind government intervention in trade. The concept of free trade The free trade concept was largely championed by the General Agreement on Tariffs and Trade (GATT), whose formation in 1947 was triggered by the protectionist trade policies common in the 1920s and 1930s. According to Bagwell and Staiger (2003, p. 14), “trade barriers became increasingly restrictive following World War I”, and the “situation worsened when the US enacted the Smoot-Hawley tariff Act in 1930”. Countries that traded with the US responded with retaliatory tariffs and thus as much as 50% tariffs were common in those days. A series of events following the realisation that uncooperative trade behaviour was not beneficial for world trade led to the formation of the GATT in 1947. GATT’s preamble indicates that its main objective was to raise the living standards of people by enhancing full employment and enhancing the real income volumes and effective demand. Further, the preamble indicates that GATT sought to develop maximum use of the world’s resources and “expanding the production and exchange of goods” i.e. trade (Bagwell & Staiger, 2003). Notably however, GATT did not indicate free trade as one of its objectives. However, it the preamble emphasizes the importance of tariff reductions and elimination of trade barriers as some of the factors that would enhance international trade. On its part, the World Trade Organisation was formed in the Uruguay Round of GATT negotiations and has been in operation since 1995. WTO embraces the rules and agreements made by GATT, and has been identified as an international organisation whose charter and dispute-settlement system plays an important role in streamlining matters and issues in international trade (Bagwell & Staiger, 2003). According to Hill (2011), there are seven main ways through which governments intervene in trade, hence curtailing any chance of having free trade. They include tariffs, import quotas, subsidies, local content requirements, voluntary export restraints, administrative policies and antidumping policies. Tariffs The use of tariffs is one of the simplest and oldest ways through which government intervenes in a market. Basically, a tariff is the tax levied on imported goods thus raising their costs compared to domestic products (Hill, 2004). Tariffs are categorised as either specific taxes or ad valorem taxes, with the former being a fixed charge levy for every unit of import, and the latter being a levy made in proportion to the value of imported goods. Key reasons for the prevalence of tariffs include domestic infant industry concepts which argue that small and emerging industries have a right to be protected by their respective governments from unfair competition posed by cheaper and perhaps higher quality products. Governments have a mixture of political, economic and cultural reasons for intervening in a market through the use of tariffs. On the economic front, tariffs provide governments with revenue in addition to forcing consumers to pay higher prices for the affected imports (Hill, 2011). On the political front, tariffs protect domestic producers and manufacturers against foreign competitors. On the cultural front however, tariffs are used depending on the prevailing cultures of the importing countries. Notably however, governments usually take a protectionist approach in order to shield local cultures from foreign influence. Overall, it has been argued that tariffs are anti-consumer and pro-producers since they expose consumers to higher prices or lower-quality products where they cannot afford high-quality products produced elsewhere due to the prohibitive costs. Additionally, they protect local producers and manufacturers hence making them less competitive in the international market where only the best quality products, with the most product prices have a chance to succeed. GATT has played an important role in regulating ad valorem tariff. As Bagwell and Staiger (2003) note, GATT is credited for facilitating negotiations that has seen the ad valorem tariffs imposed on industrial goods fall from 40% to less than 4%. Subsidies Hill (2011) simply defines subsidies as payments made by governments to the domestic producers. Ideally, subsidies are meant to help domestic producers to compete favourably against imports. Additionally, they are meant to make it easier for domestic producers to gain export markets. Subsidies are advanced to the producers as tax breaks, low-interests loans, or cash grants. Unfortunately, it is the consumer who in most cases bears the cost of subsidies. The economic reasoning behind subsidies is that they give a price advantage or reduce the price inequality that imports may have over domestic products (Hill, 2011). Additionally, it is argued that domestic manufacturers have more incentives to market in the international market partly because of subsidies. On the political front, it is worth noting that subsidies can be used to appease or please the citizenry even where the real benefits are questionable. For example, opponents of subsidies argue that instead enabling efficiency in production, subsidies offer protection to inefficient producers and also promote surplus production (Hill, 2011). Import quota, tariff rate quotas, voluntary export restraints, and quota rent An import quota is a restriction limiting the quantity of imports to a specific country, while tariff rate quotas are a mixture of a tariff and a quota whereby lower tariffs are imposed on imports falling within the quota, while those over the quota attract higher tariffs (Hill, 2011). Voluntary export restraints on the other hand are trade quotas issued by the exporting country, usually at the behest of the importing country (Hill, 2011). For example, Japan has a voluntary export restraint on the number of vehicles that can be exported to the US. Usually, the exporting countries issues voluntary export restraints for fear that non-intervention would lead to the importing country imposing even higher quotas. Finally, a quota rent is defined as the extra profits that producers earn as a consequence of import quotas creating a limited supply of the product. For example, limiting the number of Japanese-made vehicles in the US translates to a limited supply of the same, hence driving up prices. The resultant profits are simply known as a quota rent (Hill, 2011). Economically, import and tariff rate quotas, voluntary export restraints and quota rents all benefit the domestic producers. However, they disadvantage the domestic consumers who have to either pay more to access the affected imports, or make do with local products, something that may amount to compromising the consumers’ quality thresholds. Administrative trade policies Administrative trade policies are defined as the bureaucratic rules, which are designed with the intention of making it hard for imports to gain access to a country (Hill, 2011). Usually, such policies are politically motivated and are simply meant to lock out some imports from the domestic market. Unfortunately, such a political-instigated policy may have consequences on the economic and cultural fronts since consumers in the affected market cannot access foreign products, which may have superior cost benefits or qualities compared to the domestically produced items. Anti-dumping policies Antidumping policies are the laws or rules that illegalise the sale of goods in a foreign market for prices that are lower their production cost, or below what is termed as a fair market value. Hill (2011) observes that dumping occurs as foreign firms seek to unload surplus production in a foreign market, or as a predatory behaviour by manufacturers with the intention of driving the prices of a product down, thus driving competitors away from the market and raising the prices later in order to earn profits. Governments’ motives for using anti-dumping policies is usually to protect local producers from unfair competition by importers, and protecting consumers from the predatory price manipulators who seek to drive out competition from the market (Dixit, 1988). Political motives for government’s intervention Generally, there are six main motives that inspire governments’ intervention in trade, thus limiting the possibility of free trade. They include: i. Protecting domestic jobs and infant industries According to Hill (2011), infant industries are perceived as the most genuine avenues of job creation. Additionally, they are regarded as important for the development of a country. Protecting them from unfair competition especially from importers is therefore a political motive that governments have. ii. Protecting domestic industries perceived as important for the security of the country According to Hill (2011), governments cite the need to protect specific industries for national security reasons. Specifically, is argued that industries such as aerospace and other defence-related industries need government intervention especially because it is argued that the occurrence of war would restrict the availability of supplies used. An example cited by Hill (2011) indicates that the US government gave subsidies to Sematech - a semiconductors manufacturer - based on the national security argument. iii. Retaliating unfair competition by foreign companies Retaliation is defined as the act that governments take, or say they will take in response to activities or practices in another country. For example, a country may impose tariffs on products from a specific country in response to similar actions. China is identified by Hill (2011) as a country that has been on focus for its alleged infringement of intellectual property, and some of its major trading partners have threatened to impose trade barriers if it (China) does not reform. Under GATT/WTO, retaliation is permissible for purposes if obtaining mutually advantageous positions between two countries (Rhodes, 1993). Specifically, GATT/WTO allows countries involved in trade to balance concessions by either negotiating or through retaliation (Staiger & Guido, 1999). iv. Consumer protection especially by shielding them from products deemed as dangerous The consumer protection motive is advanced by governments which claim that the free flow of products would expose consumers to some harmful products. Often, such countries limit the amount of the alleged harmful products or ban them entirely. v. Furthering foreign policy goals and objectives In relation to furthering foreign policy goals and objectives, Hill (2011) argues that trade arrangements such as preferential trade agreements are contracted by parties that want to establish strong trade relationships. As such, they may use trade interventions such as tariffs, subsidies and other outside parties who are not part of such agreements. Additionally, Hill (2011) holds the view that companies that do not stick to international laws or set norms can be punished using governments’ intervention in trade. vi. Protecting the human rights of workers in the exporting countries Governments use the ‘protecting human rights’ motive as an argument that justifies intervention in trade especially where one country is perceived as lacking respect for human rights. A case in point was China in the 1990s where Dorn (1996) notes that in addition to having no respect for human rights; it also used political prisoners and was notorious for its failure to uphold the protection of intellectual property. At the time, US law makers were contemplating using economic sanctions, which included restricting the amount of product that the US imported from China, and curtailing the amount of foreign direct investments that US citizens were making in the Asian country (Dorn, 1996). Although opinions were divided regarding whether economic sanctions were the right way to force the Chinese government to pay more attention to human rights, there was no doubt that such could be used with considerable results. However, a more sober thought that advocated for giving China a Most Favoured Nations (MFN) status prevailed, where it was believed that the Asian country would most likely change its human rights record through engagement in international trade. Economic motives for government intervention According to Hill (2011), governments usually harbour two economic motives when intervening in trade. They include: Infant industry argument; and the strategic trade policy argument. Infant industry argument This argument suggests that governments should protect industries until they develop the capacity and viability to compete internationally. The WTO has accepted the infant industry argument as a justification for countries to impose trade restrictions (Hill, 2011). George (1991) argues that the infant industry argument seeks to encourage the growth of industries in home countries in order for them to attain the profits and growth needed to compete with other established foreign companies. George however points out that in most cases, countries use this argument to protect ‘home industries’ regardless of them deserving the label ‘infant’ or not. Opponents of the infant industry argument assert that although well-meaning, it creates inefficiencies in an economy especially because of the protectionism. Consequently, domestic consumers cannot access better-quality foreign products, and neither can they make use of the cost benefits that would come with the domestic market being opened up for competition (George, 1991). Specifically, critics argue that the infant industry argument is useless unless it enhances the efficiency of the protected industries. They add that firms should have the capacity to raise the necessary funds needed to be competitively positioned from their inception, especially if the host country is to have a viable competitive position in international trade. Overall, it is argued that infant industry protection can either focus on substituting imports with local products, or promote the export of local products. Either way, the argument proposes that the national welfare of the country will increase (Baldwin, 1988). Strategic trade policy Strategic trade policy refers to “a trade policy that affects the outcome of strategic interactions between firms in an actual or potential international oligopoly” (Spencer & Brander, 2008, p. 1). In other words, whether or not a country liberalises trade and the extent to which is does, is affected by the realisation that interactions between two countries have potential payoffs, either monetary or otherwise. To reap the benefits of the strategic interaction, countries must recognise that the decisions and choice they make concerning trade, price, investment and even output must serve the strategic objectives that they have. On the outlook, the strategic trade policy does not appear to have protectionist content since its does not advocate for trade barriers at the national level (Spencer & Brander, 2008). However, subsidies granted by governments to national firms enable them (firms) to have control of the world markets, thus disadvantaging foreign firms. Once the subsidised firms access large international markets while facing little or no competition, they are able to improve the economic dynamics at home with employment creation and other forms of wealth creation being cited as the major advantages (Pomfret, 1992). Not everyone supports the foreign trade policy argument though; Pomfret (1992) for example argues that although foreign trade policies “may yield short-run benefits in particular situations, these situations appear to be rare in practice. In addition, the proliferation of strategic trade policies will certainly reduce global welfare and the individual economic welfare of all trading nations” (pp. 51-52). Although the direct use of strategic trade policies is not pronounced, Edgeworth (1925) lamented that countries could abuse such policies considerably, hence perpetuating protectionism and limiting free trade even further. Cultural motives Simply put, governments have cultural motives for intervening in trade when they feel that their cultures are under threat from the importation of foreign culture (Sinclair, 1992). Cultural industries (which governments feel the need to protect through trade interventions), are defined as those “industries which give form to social life in sound and image, words, and pictures” (Sinclair, 1992, p. 3). In other words, the cultural industries create symbols which people use to communicate and share social ideals and aspirations. Additionally, such industries create products that help a people to have recognition, affirmation and identity in the same social values and ideals (Sinclair, 1992). Products that are perceived as being responsible of the cultural diffusion are hence at the receiving end of the government interventions. Some of the countries that have used the culture-protection argument include Canada, France and Australia, with Canada especially lamenting the influence that popular American culture is having on its domestic culture. In 1998 for example, the Canadian government restricted split-magazines (magazines that have little or no Canadian content yet they carry Canadian advertisements) arguing that they were an affront to the Canadian culture (The Council of Canadians, 1998). Additionally, it was noted that due to their popularity, they not only infiltrated the Canadian culture with foreign content, but also attracted more advertisers compared to locally manufactured magazines. Hence, it was obvious that they posed an economic disadvantage to the local publishers (McDonald, 1997). Observing the need to protect cultural industries in Australia, Cunningham and Jackal (1996) observe that people are not only consumers, but citizens in an autonomous nation-state with requirements for dependable information and the right to express themselves culturally. This then obligates governments to intervene in trade practices that are perceived to go against the citizenry rights and needs for cultural expression. As indicated in the Canadian case however, cultural motivations for intervening in trade have less legal backing compared to other forms of trade barriers. Additionally, modern trade agreements do not emphasise the culture cause, hence creating loopholes that can be utilised by the affected importing countries legally. In the case of split-magazines mentioned earlier for example, the US challenged Canada’s action under the WTO and won (McDonald, 1997). Conclusion In conclusion, it is worth noting that the incentives for free trade are not as convincing as those offered by calculated protectionism. Here, the term ‘calculated’ is used loosely to mean that governments usually consider the implications of their interventions before implementing them. That way, they are able to gauge the impact that such interventions have on their trade in future, and whether retaliatory moves from other countries should be expected. Overall, it is worth noting that all forms of government interventions come at a price either to the country as a whole or to consumers who have to shoulder the cost burden brought about by the interventions. Even the good-looking interventions such as anti-dumping have a negative aspect to them, since they limit foreign companies’ abilities to aggressively market products. Further, they reduce the potential welfare that consumers could have accessed through cheaper products. References Bagwell, K. & Staiger, R. W. (2003). 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The Canadian Encyclopaedia. Retrieved April 11, 2012 from http://www.thecanadianencyclopedia.com/articles/macleans/wto-rules-against-canadas-magazine-policy Pomfret, R. (1992). International trade policy with imperfect competition. Special Papers in International Economics, 17(august): 1-76. Rhodes, C. (1993). Reciprocity, US Trade Policy, and the GATT regime. New York: Cornell University Press. Sinclair, J. (1992). Media and cultural industries: An overview. CIRCIT Newsletter, August, 3-5. Spencer, B. & Brander, J. A. (2008). “Strategic trade policy” In SN Durlauf and LE Blume, (eds), The New Palgrave Dictionary of Economics. New York: Palgrave Macmillan. Pp. 1-12. Staiger, R. & Guido, T. (1999). Do GATT rules help governments make domestic commitments? Economics and Politics, XI (2):109-144. The Council of Canadian (1998). Time Magazine’s threatened lawsuit under NAFTA blackmail. Council of Canadians Media Release. 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