Motives behind Government Interventions in Trade - Coursework Example

Motives behind Government Interventions in Trade (Insert Name of the Student) (Insert Name of the Instructor) (Insert Name of the Course) (Insert Code of the Course) (Insert Submission Date) Introduction International free trade has been encouraged since World War II ended to foster economic welfare prosperity of nations. There have been efforts by the World Trade Organisation (WTO) and General Agreement on Trade Tariffs (GATT) to encourage free trade in the world. However, very few countries have adapted it. Hong Kong is the only port known to practise free trade in the world. The oil crisis, currency crisis, high unemployment, debt crisis and trade deficits have created a rising need to impose trade barriers as countries reel from the effects of such crises (Cherunilam, 2007) . This argument is also supported by Kyung-Hoon (2013) who acknowledges that the financial crisis of 2009 has pushed many developed countries to increase trade barriers as a measure of recovery. The developed countries are also aware of the success in industrialisation of the developing countries and in retaliation; they are imposing non-tariff barriers such as health and safety regulations to counter an influx of imports from the developing economies. Though the World Trade Organisation has managed to have most countries partisan to it commit, there has been growing concern on its effectiveness to regulate manufacturing malpractices. Kerr (2010) questions whether it is time countries rethought of the World Trade Organisation. Environmental lobby groups are also increasing the pressure on their governments to impose restrictions on countries that do not have good environmental practices. For these reasons, exclusive free trade has remained to be an elusive issue. Governments seem to always have reasons to justify their protectionism on basis of genuine concerns or for selfish gain. This paper provides an in-depth look into the motives behind government intervention in trade. It breaks down the motives into political, economic and cultural motives for a thorough understanding. Political motive Some governments will use trade barriers to gain political and commercial advantage over their competitors. History supports this mercantilism theory with countries such as Britain using India as their cheap labour market. Some analysts argue that trade-off between countries with almost the same commercial power is likely to cause conflict as opposed to those with a relative difference. Therefore, some governments will use trade protectionism to gain leverage over their competitors (Hanson, 2010). Norway, for example, is a powerful political country in regards to fish exports within the EU. In 1966, they were able to escape the export dumping tariffs introduced by the EU after they imposed quotas on salmon food (Korneliussen & Blasius, 2008). Governments also argue that trade restrictions are essential for purposes of national defence. Lack of the capacity to produce essential military items predisposes the country to dependence on other countries for support. This argument, therefore, necessitates many governments especially in the developed world to restrict trade. The economist Adam Smith, though a campaigner of free trade, is reported to have recognised the importance of this issue saying that defence is more important than opulence. Suppose a good can be locally made as opposed to exporting it and consequently raise the military presence, then a government will explore this option. A good example of this thought process is handling of the satellite launch pad by the United States of America. The United States in 1986 depended on foreign satellite launch pad that is credited to the accident of the Challenger Shuttle (Dunn, 2004). Some governments will impose trade restrictions as a non-military means of tasking an offensive government to change its practices. These offending practices may not necessarily be of a trading commodity nature; for example manufacture of nuclear weapons. The risk of military action against such a country are quite diverse especially on loss of human lives and with the growing international pressure on protection of human rights, most developed countries are opting to have trade sanctions against the offender. Examples of this practice are on Serbia after they broke away from Yugoslavia, The USA on Cuba, and on Iraq after the gulf war (Kerr, 2010). Countries due to their natural geographical disposition tend to have comparative advantage in production of some goods over others especially those of a natural nature for example oil. Governments of such countries knowing that their comparative advantage can help them negotiate better terms with their trading patterns increase trade barriers. Oil, for example, is a very emotive issue and a shift in oil prices affects dollar prices which is the currency that determines market prices worldwide. The oil producing countries will therefore maximise their influence on this comparative advantage to gain more political power or influence. There has also been increased pressure by national lobby groups and activists on governments to impose stricter measures on imports. Consumer lobby groups are demanding the government to be keener on environmental protection, infringement of intellectual property rights, and manufacturing processes especially on food imports. Environmentalists want to know fishing practices adopted by some countries especially on tuna fish and whales. They want the government to ban fish caught by some practices which they term as not eco-friendly (Perdikis & Kerr, 1999). The US for example, uses trade sanction threats on countries that do not adhere to the set regulations in the International Whaling Commission and has done so successfully (Gordon & Kerr, 2000). Lobby groups claim that intellectual property piracy deters firms from investing in research and development and thereby slowing down economies. They also want countries exporting counterfeited goods to be exempted from importing to their countries. The World Trade Organisation has no mandate to sanction countries that disregard responsible environmental practices, labour standards or animal welfare processes and this therefore gives governments the right to set their own standards on such. Economic motive One of the arguments put forward by governments is that by erecting free trade barriers it protects the infant industries which would otherwise not prosper in the presence of foreign competitors. It does this by imposing high tariffs on imports to discourage dumping and lowering taxes on exports to encourage local production. The government may also increase subsidies to producers of export goods so as to lower their production costs thus motivating them to produce more. Protection would thus enable new industries to enjoy economies of scale, give them ample time to improve their technology, marketing, manufacturing, and managerial skills. This is an argument adopted mostly by developing countries where the governments feel vulnerable to external markets. Most of these governments, however, argue that this is only temporal and once the infant industries come of age, the protection will be pulled down (Jing Ma, 2011). Trade barriers are also a source of revenue for the government through trade tariffs. For a subsistence economy, imposing tariffs on the imports is an easy way of gaining more revenue than local taxes. The imports are also easier to keep track of since the goods come in through established centres which require recording as opposed to the local taxes which use more of the paper currency with minimal records. This is therefore a strong justification of trade barriers by emerging economies. Tariffs imposed on imports especially those that the country cannot produce locally can raise quite a huge sum of money. The British government in the late 19th century collected tariff revenue solely from imports such as wine, tobacco, tea, spirits and other goods not locally produced (Dunn, 2004). Imposing trade restrictions is viewed as a means to protect the economy from shocks within the country such as unemployment. Free trade translates to cheaper imports which mean that even for an established industry the influx of cheaper imports will undermine their potential to operate at full capacity. Suppose the imports are cheaper than locally produced goods, the local buyers will favour purchase of these imports. This means lower production levels and consequently layoff of workers as the industry tries to cut costs and maximise profits. A good example is the US textile industry. Due to non-stringent laws on imports, industry players found it cheaper to import finished clothing from third world countries where there was an abundance of cheap labour. Many employees in the local textile industries have since lost their jobs and they blame the government for this (McEachern, 2008). Most government will therefore impose the trade barriers to avoid such scenarios. Governments especially in the developing countries protect their industries with the argument of improving their balance of payment. It is well known that for countries to have a surplus, their exports value should exceed their import value. A negative balance of payment means a shortage of foreign exchange. Countries will therefore control imports so that they can use their foreign exchange to export their limited exports (Cherunilum, 2007). Developed countries will impose trade restrictions as a strategic trade policy. They argue that government support is essential to the success of key industries such as the technology industry which is important in the future of these nations. This argument is akin to the infant industry protection argument for developing countries. For example, Russia is the largest manufacturer of commercial airplanes in the world and outside Russia only Boeing, Airbus and Mc-Donell-Douglas Corporation exist. The only ways that Airbus can maintain competition with the rest is by having the government increase or maintain subsidies, otherwise it will close down. A successful example of the strategic trade policy is the steel industry of Japan in the 1950’s (Cherunilam, 2007). Cultural motive A country must be well versed with the culture of another country before they can engage in trade so as to adequately the market’s tastes and preferences (Madura, 2007). According to Bilkey and Tesar (1977), countries are naturally inclined to trade with those of whom they have the shorter cultural differences. Erikson, Majkgard & Sharma (2000) assert that as the cultural distance increases, the exporters find it more difficult to analyse the market expectations. Governments henceforth, form trade blocs with member countries who share a common culture to foster their regional prosperity and also as a counter move against trade barriers imposed by other countries (Korneliussen & Jorg, 2008). An example of a culture bloc is the European Union (EU), which allows goods and services, capital and people within the member countries. The governments involved will argue that it is easier to understand the trade dynamics of countries that they share similar cultures with for example anti-dumping laws and halal certification in Muslim majority countries. Most of the advanced nations protect the agriculture sector in order to secure their food security, boost the agricultural output and improve payment balance (Hoekman & kostecki, 2001). Some governments fear cultural extinction. They want to protect their locals from external cultural influence especially through audio-visual media. Also, if the demand for local culture is low and the international appeal high, the government will chose to build their local capacity first so as to be able to compete in the same level. Such governments fear that these external cultural influences may have far reaching consequences economically if the citizens develop a taste for foreign goods. This means that, demand for imports will increase surpassing that of exports and causing a negative balance of trade. Culture differs with precise distinction among countries and therefore governments use this cultural advantage to negotiate trade relations far beyond the arts and culture. This is known as soft power. Cultural mediums can be used as non-military way to advance foreign policy as was witnessed during the cold war when the Voice of America was used to spread news about the west into the Soviet Union (Throsby, 2010). Governments will want to preserve their national identity and therefore they will do anything possible to hold onto this. The UK for example requires individuals willing to sell artefacts to foreign countries to consult with the government first. The government then carries out a research to determine whether the artefact should be disposed off or retained locally maybe through public collection (Throsby, 2010). Arts and artefacts bearing a national connotation are perceived to carry their nation’s pride hence governments go to such extreme measures to protect their export. Culture tourism plays an important role in the economy of any country. National festivals, arts, artefacts, heritage sites serve as a tourist attraction. They are also a sense of national pride and famous monuments are landmarks that distinguish between countries for example the statue of liberty. This industry offers employment to locals either directly or indirectly, and the visitors’ spending is a source of revenue for the government. The multiplier effect of this spending can be felt in the entire economy thus governments are very keen to protect this industry. Conclusion The attention that the government places in the international trade shows just how much trade barriers are important to national economies. Developing countries have been able to encourage local production through trade tariffs thereby developing their economies. This is also a great way of minimising reliance on foreign aid. By use of trade sanctions wars have been avoided as in the case of Cuba where despite the US having divergent political relations, it opted not to go the military way. This not only averts deaths but serves to stabilise the economy of the world as a whole. On a cultural perspective, countries are able to preserve their cultures and national symbols. The acceptance of these divergent cultures has not only promoted national pride but also enhanced tourism. Many economists are however against the preference for these kinds of interventions arguing that they are a hindrance to world cohesion. References Bilkey, W. J., & Tesar, G. (1977). The export behaviour of smaller-sized Wisconsin manufacturing firms. Journal of International Business Studies, 8 (1): 93-98. Cherunilam. (2007). International business: Text and cases. PHI Learning Pvt. Ltd. Dunn, R.M. (2004). International Economics. Routledge. Erikson, K., Majkgard. A., & Sharma, D. D. (2000). Path dependence and knowledge development in the internationalization process. Management International Review, 40 (4), 307-328. Gordon, D.V., Hannesson, R., Kerr, W.A. (2001). Of Fish and whales: The credibility of threats in international trade disputes. Journal of Policy Modelling, 23 (1): 83-98. Hanson, D. (2010). Limits to free trade: Non-tariff barriers in the European Union, Japan & United States. Northampton USA: Edward Edgar publishing Hoekman, B. M., & Kostecki, M. M. (2001). The political economy of the world trading system. Oxford: Oxford University Press Kerr, W. A. (2010). Conflict, chaos and confusion: The crisis in the international trading system. Edward Edgar Publishing. Korneliussen, T. & Blasius, J. (2008). The effects of cultural distance, free trade agreements and protectionism on perceived export barriers. Journal of Global Marketing, 21 (3): 217-229 Kyung-Hoon, K. (2013 January). Rising protectionism in emerging countries. SERI Quartely, 6 (1), 51-56. Ma, J. (2011). Free trade or protection: A literature review on trade Barriers. Research in World Economy, 2 (1): 69-76. Madura, J. (2007). Introduction to business. Cengage Learning. McEachern, W. A. (2008). Macroeconomics: A contemporary introduction. Cengage Learning. Throsby, D. (2010). The economics of cultural policy. United Kingdom: Cambridge University Press. Perdikis, N., Kerr, W.A. (1999). Can consumer based demands for protection be incorporated in the WTO? The case of genetically modified foods. Canadian Journal of Agricultural Economics, 47 (4): 457-65. Read More