Political, Economic and Cultural behind Government Intervention in Trade - Coursework Example

Political, economic and cultural motives behind government intervention in trade Introduction After World War II, global trade agreements contributed immensely to the reduction of trade barriers. The General Agreement on Tariffs and Trade (GATT) for instance established a code of commercial conduct for its signatories and set out the rule of non-discrimination among signatories, which is outlined in the most favoured nation (MFN) clause. In spite of these achievements, governments everywhere continue to restrict free trade. As such, whereas has trade has largely been liberalised, it cannot be said that there is totally free trade. This paper seeks to discuss the reasons which make governments restrict trade. The motives behind government intervention could be political, economic or cultural. Thus, the discussion will centre on these three motives. Political motives The political arguments given for government intervention in trade cover a wide array of issues including protecting jobs, protecting industries or firms that are deemed significant for national security, imposing retaliatory measures to unfair competition, gaining influence and protecting human rights. These points are explained below. Protecting jobs Possibly the most common political argument for government involvement in trade is that doing so is necessary to protect local jobs from foreign competition. For instance, the voluntary export restraints (VERs), which provided some protection to the US automotive, steel and machine tool industries during the 1980s, were inspired by such considerations (Agrawal, 2001, p. 125). Along the same line, a developing country like India which has large force of youth who are not employed can argue that firms operating in India should not export jobs at the expense of the Indian population that is unemployed (Misra & Yadav, 2009, p. 95). Such an argument has been clear in the US, where many firms are outsourcing their functions out of India. For fear of losing jobs in the US, many states in the country are coming up with laws to outlaw business process outsourcing ventures (Aswathappa, 2005, p. 170). Another example is that of the import quota imposed by Japan on imports of rice, which is aimed at protecting jobs in the agricultural sector. Similarly, the Common Agricultural Policy (CAP) implemented by the European Union (EU) has job protection as one of the key objectives (Misra & Yadav, 2009, p. 95). National security States sometimes argue that it is essential to protect some industries for the reason that they are critical to national security. Industries that produce defence-related equipment often get such kind of attention. For instance, the US has argued that its semiconductor industry needs to be protected from foreign competition because semiconductors are essential components of defence equipment and it would be precarious to rely primarily on foreign suppliers. In this regard, the US government supports Sematech, a consortium of US semiconductor companies and provides $100 million annually as a subsidy to the consortium (Agrawal, 2001, p. 126). In both cases of protecting jobs and national security, the drawback involved is that import restrictions may require a country to incur costs of producing merchandise or services that it would have acquired from another country more affordably. In addition, the import restriction policy may be implemented for a longer time than it is necessary once it is adopted (Wild & Wild, 2012, p. 187). Retaliation It is argued that governments should use the threat to be involved in trade practices as a bargaining tool to help in opening up foreign markets and force trading partners to comply with the rules of the game (Agrawal, 2001, p. 126). For instance, there are antitrust regulations, or laws designed to prevent firms from fixing prices, sharing markets or gaining unfair monopoly advantages. Such laws attempt to offer consumers a wide array of products at competitive prices and are commonly imposed by the US and EU member states (Wild & Wild, 2012, p. 117). Another approach to retaliation is the threat of sanctions. Agrawal (2001) further reports that the US government used the threat of imposing trade sanctions on Japanese imports, together with punitive tariffs, to ensure that the Japanese market for cellular telecommunication equipment was opened to competition. The US government also used a similar threat to ensure that the government of China implemented its intellectual property laws (Agrawal, 2001, p. 126). Gaining influence Governments of large countries may intervene in trade to gain influence over smaller nations. For example, according to Wild and Wild (2012), the US has banned all forms of trade with Cuba since 1962 as a way of exerting political influence against communist leaders given that Cuba is a communist nation (p. 188). Protecting human rights Many democratic governments value the protection of human rights and can therefore restrict trade relations with countries that do not prioritise similar interests. It is for this reason that for a long time, accession of China to the WTO was opposed because the country had a poor human rights record (Aswathappa, 2005, p. 170). Similarly, many Western European countries demand certificates or reliable reassurance that no child labour is engaged in the production of various items supplied by Indian exporters (Misra & Yadav, 2009, p. 95). Economic motives The most common motives behind government intervention in trade include protecting infant industries, intervention as a strategic trade policy, and to a lesser extent, improving terms of trade. Protecting infant industries One major reason given why governments intervene in trade is that they intend to impose measures meant to protect infant industries. The infant industries argument was proposed by Alexander Hamilton in 1792 and argues that some countries have a comparative advantage in some industries, which are presently in the infancy stage in other countries. Hence, the infant industries cannot compete directly with the well established firms of other nations. The key argument therefore is that such firms or industries need to be supported and protected through tariff and non-tariff barriers for a temporary period, within which they can develop and start enjoying the economies of scale enjoyed by the already established firms (Misra & Yadav, 2009, p. 95). A good example in this case is that of the government of India which has been protecting small scale firms through various subsidy plans and incentives (Aswathappa, 2010, p. 78). The government does this to cushion the emerging industries from problems in areas such as financing and other requirements, which enable them to develop faster than they would on their own. The success of protecting infant industries is however debatable due to the difficulty in identifying the firms to protect, the argument that too much protection can cause firms to become complacent towards innovation, and the point that protection discourages competition (Wild & Wild, 2012, p. 188). There is also the industrialisation argument raised by developing countries so as to justify the restrictions they place on imports. These countries argue that the policy of industrialisation is beneficial for the nation in the long-term since: developed nations in general have a wider industrial base, industrialisation helps in import substitution and advancing exports, and industrialisation makes a nation self-reliant, among other reasons (Misra & Yadav, 2009, p. 95). Intervention as a strategic trade policy According to this way of thinking for protectionism, nations can become dominant in the export of certain items because of the first mover benefit enjoyed by some of their local firms. Thus, if such companies are accorded appropriate protection, they can capture international markets, make good profits, and plough the earned profits back to nation of origin. South Korea used such a strategy to build international conglomerates known as chaebol in Korean. For example, ship builders were granted several government subsidies that spanned years and included low-cost financing from the Korean Development Bank. The chaebol concept made it possible for firms to survive economic meltdowns because of the wide scope of industries in which they competed (Aswathappa, 2010, p. 78; Jwa, 2004, p. 5). One of the drawbacks of supporting a concept like chaebol however is that lavish government spending on firms in South Korea caused inefficiency as well as high costs (Jwa, 2004, p. 5). Additionally, when a government chooses to support particular firms, their choice is normally subject to lobbying by the groups that wish to have government support. In such a scenario, the some firms could end receiving support at the expense of consumers who may get no significant benefit like improved product quality (Wild & Wild, 2012, p. 189). Improving terms of trade Another argument why governments get involved in international trade is that protection helps to improve terms of trade. Terms of trade refers to the export price index divided by the import price index, or simply put, the rate at which exports and imports are exchanged (Silver, 2007, p. 34). The argument that government protection helps to improve terms of trade however has restricted relevance as it applies only to a nation that can exercise monopoly or monopsony of power by limiting the volume of imports or exports of one or a number of commodities, thereby influencing their prices – which effectively improves the country’s terms of trade. This argument’s relevance is however restricted because it is not common for one nation to have the requisite monopoly or monopsony of power (Lipsey & Harbury, 1992, p. 218). Cultural motives States often put restrictions on trade in goods and services to achieve cultural aims, the most common one being to protect national identity (Wild & Wild, 2012, p. 189). It is clear that the interaction of peoples and people with products or services from different regions changes the way people perceive certain cultures. This can lead to the infiltration of a foreign culture in a country where it is thought to be unsuitable. Such a situation can cause great distress to a government and instigate it to block imports that it thinks are harmful. For example, French law bans the use of foreign language words in virtually all government and business communications, TV and radio broadcasts, advertising messages and public announcements (Wild & Wild, 2012, p. 189). In Saudi Arabia, the importation of alcohol, pork products, illicit drugs, firearms, and used clothing is banned (Office of the United Stated Trade Representative, 2005, p. 532). As well, Canada tries to lessen the cultural influence of entertainment products originating from the United States. Canada has a policy that requires no less than 35 per cent of music played over Canadian radio to be by Canadian artists. Similarly, many countries are currently considering legislations to protect their media programming for cultural reasons (Wild & Wild, 2012, p. 190). The disadvantage of such restrictions is that they reduce the selection of products that consumers can sample. This is evident in the Canadian film and TV industry which has been put in a dilemma position because while the government wants to promote Canadian products in order to stimulate an indigenous industry that contributes to identity formation, consumers want products with a more universal content (Goff, 2007, p. 52). Conclusion Even though many barriers to trade were removed after World War II, governments everywhere continue to restrict trade due to political, economic and cultural motives. The political motives include protection of jobs, national security, retaliatory schemes to gain certain markets in other countries, gaining influence and protection of human rights. The economic reasons include protecting infant industries, intervention as a strategic trade policy and improving terms of trade. Finally the cultural motives include the need to protect national identity. Although most of the protective measures by governments are beneficial, they are also subject to many demerits such as denying consumers a wide range of products and services to choose from and stifling innovation and competition when firms are protected. In addition, protecting certain industries is not easily achievable since meticulous consideration has to be done on which firms to protect, and even then, this action may not guarantee efficiency. Furthermore, although an issue like national security is essential, restricting imports of certain products due to security issues puts governments in a situation where they have to manufacture those products even when they could easily acquire them affordably from manufacturers in other countries. References Agrawal, R. (2001). International trade. New Delhi: Excel Books India. Aswathappa, K. (2005). International business (2nd ed.). New Delhi: Tata McGraw-Hill Education. Aswathappa, K. (2010). International business (4th ed.). New Delhi: Tata McGraw-Hill Education. Goff, P. M. (2007). Limits to liberalization: Local culture in a global marketplace. New York: Cornell University Press. Jwa, S. (2004). The chaebol, corporate policy and Korea’s development paradigm. In I. K. Lee (ed.). Competition and corporate governance in Korea: Reforming and restructuring the chaebol. Cheltenham: Edward Elgar Publishing. Chapter 1, pp. 3-23. Lipsey, R. G., & Harbury, C. D. (1992). First principles of economics (2nd ed.). Oxford: Oxford University Press. Misra, S., & Yadav, P. K. (2009). International business: Text and cases. New Delhi: PHI Learning Pvt. Ltd., Office of the United Stated Trade Representative (2005). 2005 national trade estimate report on foreign trade barriers. Darby, PA: Diane Publishing. Silver, M. (2007). Do unit value export, import, and terms of trade indices represent or misrepresent price indices?, Issues 2007-2121. Washington: International Monetary Fund. Wild, J., & Wild, K. (2012). International business: The challenges of globalization (6th ed.). New Jersey: Pearson. Read More