Political and Economic Motive of Governments Intervention in Trade - Coursework Example

Running Head: Government Intervention on Trade Government Intervention on Trade Customer’s Name: Customer’s Course: Tutor’s Name: April 21, 2012 Introduction: Governments Invention in Trade The absence of government in trade creates conditions for free trade. However, governments since time in memorial have been known to impose trade barriers (Neary, 1991). The basic question arises as to why governments intervene in trade and what are the motives behind governments’ interventions in trade? There are three basic reasons as to why governments intervene in trade among them political, cultural and economic motives or the collective combination of the three motives. However, among the most important of the reasons of governments’ intervention in trade is when a government intervenes when the economy of a country is experiencing harsh economic times (Brander & Spencer, 1987). Political motive of Government Intervention in Trade Governments all over the world have a record of making decisions in trade which are based on political and personal motives of the government. This is primarily because the survival of key politicians and governments in a country’s politics largely depends on the politicians making decisions that are pleasing to the voters in seeking election or re – election in office (Brander & Spencer, 1985). National security Governments intervene in trade to ensure that there is national security through the protection of industries that are deemed vital to the security of the country, for instance industries that deal with the defense of a county. Taking a closer example, South Africa has a defense industry which was built with the aim of avoiding impositions of embargoes by other countries (Paul, 1999). South Africa, therefore become an exporter of arms to other countries. In addition, governments must have full control of the imports and exports of commodities that are considered vital to the security of the country. For instance, a government that exports arms like South Africa to other countries must have full knowledge of the activities of the importation and exportation of the commodity in such a way that in case of a war emergency, the government is aware of its supplies of arms. Not only arms are considered vital in protecting national security, other governments may consider agricultural products for food security purposes as commodities vital to national security and hence seek to protect these commodities (Holcombe, 2005). Governments can also ban the importation and exportation of defense commodities from and to other countries for security purposes. For instance, some technologies are deemed as security threats to be imported or exported to other countries. Response to Unfairness in Trade Unless trading partners come to trade concessions regarding fair trade, governments will always seek to respond to unfair trade practices by a nation. For instance, if a nation has imposed trade tariffs on another, the other nation may decide not to allow free trade between the nations in order to be at par with the country which is playing unfairly. In so doing, a government that responds to unfair trade through imposing of trade tariffs to another country is said to retaliate through the use of trade barriers to make or gain better deals of trade with that country. For the purposes of Gaining Political Influence Governments may engage in trade to gain influence of other nations and expect goodwill from the nations that they have influence in. In most cases, big nations which have resources are always the ones that exert influence on smaller nations. Taking an example of Japan, it exports and imports many of its commodities from Asia and South East Asia and also helps the Asian countries through lending them money in the effort of helping the countries recover from harsh financial crisis (Eckstein, 1971). Countries may also seek to gain influence in other smaller nations in participating in internal politics of the smaller nations for instance, the U.S involvement in political activities in Central, South and North America politics. Protection of Jobs in a Country Governments become threatened if there is high unemployment in their countries for this becomes a threat to them. Therefore, governments actively get involved in trade in the effort of protecting local jobs. Many are also the times when governments seeking election or re – election in office will always campaign in the name of creating jobs to the jobless citizens. Hence job protection and job creation in a country becomes a key reason as to why governments may involve in trade so as to promote the creation of local jobs for instance through encouraging the consumption of local products (Eckstein, 1971). Economic Motives of Governments Intervention in Trade Though governments all over the globe intervention in trade due to other reasons like cultural and political motives, they also intervention due to economic motives (Capuano, 2006). There are several economic reasons that trigger governments to intervention in trade with the most cited one being to protect the developing (infant) industries from competitors from other industries outside the country. These reasons include but not limited to; Infant Industries Protection Governments intervene to protect their own ‘infant’ industries from competitors from other countries who have developed into global marketers. Industries in their developing stage need government protection from other big industries that are able in export their goods to the host country hence affecting the economy and development of such industries. The reason is based on the fact that, infant industries have not mastered enough knowledge in process like competition, innovation, and efficiency for them to be involved in the global competitions. Thus governments must come in and enact policies that will ban industries from outside their territories from exporting goods to their country. These way governments give domestic industries a chance to grow slowly and dominate the local market before advancing to trading internationally (Haug & Krabbenhoft, 2006). There is a criticism about the protection of the infant industries that argue that protection of such domestic industries does no good unless the protection helps the industries to be efficient and effective. On the same note, the protection is viewed as governments’ strategy to protect their domestic investment since governments run to these domestic industries to borrow funds in times of economic downturn. Strategic Trade Policy Pursue Recall that new theorists have the notion that through government interventions, industries can take advantage of the market (economies of scale) therefore being the first industries of their nature in a certain industries. This way the industries will take the advantage since economies of scale limit the number of industries which can thrive within a government’s jurisdiction. Moreover, the intervention will protect domestic industries from the ‘first movers’ from other countries thus giving the local ones to be the first movers. In the long run, the industries will form the main contributor of revenue to the government hence increasing the national income (Walker, 1976). According to these arguments, governments should apply subsidies to encourage and support local promising industries so that they can mature to be first movers. In addition, strategic trade policy helps the government to remove the first movers if the mover is no from the host country. In other words, if an industry from another country was the first mover in a certain country, then after the domestic industries have developed to become global marketers, government intervenes and removers the foreign first mover hence give the local industries a chance. The strategic trade policy have been associated with the following benefits to the host country; it result to increased revenue collected hence raising income, policies make some of the infant industries to make it and become the first movers within other own market, and through subsidies as an incentive to the local industries increase the efficiency the local industries (Aharoni, 1997). On the other hand, there are setbacks (drawbacks) associated with strategic trade policy. This include; demoralizing the foreign industries by supporting the domestic one through quotas and subsidies thus making the foreign industries inefficient and incur high losses. Furthermore, the policies make government to impose policies that require workers to be paid high wages thus foreign industries collecting low profits. This will make the foreign industries to fire some of the workers from the industry so that they can receive a substantial profit. Eventually, the strategic policies trade policies the same government has enacted turns against them. In most cases, most of the government intervention in trade is triggered by political factors; hence it is likely that people with special interest will capitalize on these and gain the assistance from the government with little or no benefits to the customers. Thus the customers will continue paying more for the same low quality goods. Negative Externalities Protection Externalities refers to any ‘third party effects’ coming from either consumption or production of services and goods which do not have appropriate compensation. If the benefits of production and social cost (effect) are not put into account, the externalities can lead to market failure within a country. In absence of clearly set policies in protection of property rights in a certain country exporters can be steal trademarks and other intellectuals. This like other externalities affects the economy is the host country negatively (Copp, 2000). The externalities which have negative effects to the economy of a country include the following; smoking of tobacco products, air and other kind of pollution, and drug abuse. The diagram below illustrates how negative externalities affect economy and society if governments do not intervene in their respective countries. To mitigate such externalities governments enact policies that restrict industries and businesses with these negative effects with the aim of protecting their citizens (Brander & Spencer, 1987). Cultural Motives behind Government Intervention in Trade A country’s culture and trade are often integrated to the extent that they affect one another. Governments may intervene in a country’s trade in order to achieve the cultural objectives of the country for it is definite that through the exposure of another people’s culture, the culture of the country may completely change (Milos, 2000). This notwithstanding the fact that times have changes and the world slowly has turned into a global village where a country’s culture is within reach through the click of a button and that many other cultures are emerging through intermarriages and the emergence of multi – cultural groups for instance the Asian – Australian multicultural make – up, governments still continue to intervene in trade on cultural motives. In addition, cultures being the norms that regulate the way people behave in the society and consequently the products that people consume and dictates the way people live, there is every reason for the government to engage in trade through the cultural motive (Chau & Tam, 1997). One of the cultural motives of governments’ intervention in trade is to prevent the influence of other county cultures that can result in the distress of a nation and thereby forcing a particular government to block its imports from such a country. For instance, in most developing nations, the citizens are a bit backward in the way they dress or in their dress code. When such people are exposed to other cultures from developed nations for instance the U.S.A through tourism, they developed nation’s citizens may want to dress like their counterparts in the developed countries and hence craze for cloths imports from the developed countries the resultant which would be the collapse of local infant industries in the developing nations due to the influence of clothing fashion from the developed countries. Governments may therefore intervene and block such imports in the effort of preserving the culture of the nation. Some countries have cultures which have strong influences to other cultures in the world and hence such countries which have global strength in influencing other countries cultures are among the reasons of governments’ interventions in trade. For instance, the strong global strength of the Coca Cola products from the U.S.A has made its influence in other countries in such a way that other beverages which are not from Coca Cola have to compete with the culture of the U.S.A of consuming Coke (Pelaez, 2009). Such cultures which are very strong always force other governments to intervene in trade in order to protect the cultures of their countries. To protect the identity of a country whereby governments may intervene in trade to eliminate cultural experiences which are unwanted for instance, some countries have imposed laws which protect the media from programming certain programs for reasons which are cultural. Hence, a government comes plays the role of imposing the laws so that the identity of the nation is protected. Conclusion In conclusion , there is no doubt that there is every reason for governments’ intervention in trade which without the intervention of government in trade, there would be no sobriety of nations when trading and no regard for any nation to the other when trading. Despite the theorized benefits of free trade, a nation cannot simply open its doors open to trade freely with other nations for this can have a great impact of either swimming or sinking the businesses in the domestic nation (Fridson, 2006). The above discussion therefore illuminates as to why governments have and continues to engage in trade with the WTO (World Trade Organization) in collaboration with the Global Trading System attempting to strike the balance between when a government is involving in trade for its own desires of political, cultural and economic with desires which have a motive for free trade. In as much as the notion that government intervention in trade is majorly centered in satisfying the motives of the government, there is every reason to believe that government intervention in trade is vital in a county. References Aharoni, Y (1997) .Changing Roles of State Intervention in Services in an Era of Open International Markets, Suny Series in International Management Vol. 1, pp. 235-265 Brander, J & Spencer, B (1985): "Export subsidies and international market share rivalry,” Journal of International Economics. Vol.18, pp. 83-100. Brander, J & Spencer, B (1987): "Foreign direct investment with unemployment and Endogenous taxes and tariffs," Journal of International Economics. Vol. 22, pp. 257-279. Capuano, C (2006). Strategic noise traders and liquidity pressure with a physically deliverable futures contract: International Review of Economics and Finance. Vol. 15(1), pp. 1–14 Chau, P & Tam, K. (1997) .Factors affecting the Adoption of Open Systems: An Exploratory Study’. MIS Quarterly. Vol. 1, pp. 1-21. Copp, E (2000) .Regulating Competition in Oil: Government Intervention in the U.S. Refining Industry, 1948-1975.USA: Texas, A & M University Economics Press. Eckstein A. (1971). Comparison of Economic Systems: Theoretical and Methodological Approaches. Berkeley, CA: University of California Press. Eckstein, A. (1971). State Power and World Markets: The international Political Economy. New York: Norton & company. Fridson, M (2006).Unwarranted Intrusions: The Case against Government Intervention in the Marketplace. New Jersey: Wiley. Haug, R & Krabbenhoft, A (2006) .Model for strategy and organizational development interventions: An article from: Journal of Academy of Business and Economics. Thomson Gale Vol.1, pp. 20 Holcombe R. (2005). Public Sector Economics: The Role of Government in the American Economy. New York, Prentice Hall. Milos, J. (2000) .The Free-Market Innovation Machine. Princeton and Oxford: Princeton. Milos, J. (2000). “Social Class and Economic Sociology: Social Classes in Classical and Marxists Political Economy.” American Journal of Economics and Sociology 59(2):283–302. Neary, J. (1991): "Export subsidies and price competition”, International Trade and Trade Policy, Cambridge, Mass.: MIT Press, 80-95. Paul, L (1999) .The True Size of the Government. Washington: Brookings Institution Press. Pelaez, C (2009) .Government Intervention in Globalization: Regulation, Trade and Devaluation Wars. USA: Palgrave Macmillan. Walker, W (1976). International limits to government intervention in the market-place: Focus on subsidies to the private sector, Lectures in commercial diplomacy; Vol. 1, pp. 15 Read More