Reasons for Government Intervention in Trade - Coursework Example

THE POLITICAL, ECONOMIC AND CULTURAL MOTIVES BEHIND GOVERNMENT INTERVENTION IN TRADE Name Institution Date Introduction Since World War II, literally all countries have experienced a rapid growth and development in the global economy. This has been through increased economic activities and more particularly global trade and international foreign investment. In 1960, for instance, the period which characterized by the chaos of postwar years finally came to an end and the world began its journey of exponential growth, the cumulative ratio of global foreign trade and gross domestic product (GDP) was at 25 percent (Caves & Johnson, 1968). Apart from the periods of global depression, this figure has consistently increased and by 1999 it had risen to 52 percent. In simple terms, the postwar period was characterized a rapid rate of globalization, embedded in multilateral trade negotiations ; liberalization of trade as well as investment; deregulation and privatization of state industries; and progressively more cheaper cost on foreign trade as a result of technological improvements in the transportation and telecommunications sectors. With liberalized trade, perhaps it will be important that we comprehensively understand the policy of free trade. Under this policy, governments do not necessary discriminate against imports by applying imposing tariffs or interfere with exports by applying subsidies. In regard to the law of comparative advantage that governs the free trade; trading partners are awarded an equal ground and mutual benefits from trade of goods and services. According to the free trade policy, prices are determined by the equilibration on demand and supply, and are the exclusive determinant of resource allocation. This is contrary to other kind of policies in trade where product and service allocation as is influenced by price strategies that may be different from those emerging from deregulation. These controlled prices are due to the government market intervention through adjustments on prices or supply restrictions; for instance protectionist policies (Altschiller, 1988). The government interventions would subsequently result to a decrease or increase in the cost of goods and services. Over the years, countries have progressively decreased tariff barriers as well as currency restrictions in order to facilitate international trade. However this has not comprehensively been achieved due to other barriers like; taxes, import quotas, and different means that have been embraced to subsidize domestic industries. Government interventions Free trade may result to turbulence in diverse sectors of a domestic economy, for instance in the manufacturing industries that are already vulnerable to global competition. Therefore to controls such a negative influence many governments intervene through the following strategies; Subsidy A subsidy is simply a grant or any other kind of financial aid given by one country for the development or support of another (Hufbauer & Shelton, 1984). Essentially, a subsidy is a strategy to keep consumer price below the standard market levels or to keep producer prices above market levels or on the other hand reduces costs for both consumers and producers by giving indirect or direct support. However the conventional understanding of subsidy is the payment made by the government to a producer. Subsidies may be direct; cash grants and interest-free loans or indirect; for instance insurance, tax breaks, low-interest loans, and depreciation write-offs. This kind of aid has been known to be illegal, legal, unethical or ethical. Many governments have embraced subsidies as a protectionism strategy for domestic markets (Altschiller, 1988). Consequently it has also served as a barrier by giving domestic goods and services artificially competitive advantage against imports. To some extent use of subsidies has been criticized by the international market for its ability to distort markets, and therefore finally imposing large economic costs. Subsidies have a spillover effect to other economic sectors and industries (Adams & Brock, 2004). A subsidized good sold in the global market reduces the price of the product in other nations. This is because subsidies often lead to decreased revenues for other producers from foreign countries; in fact such subsidies have raised concern and have been a source of tension between the developed west and the poorer developing countries in Africa. While subsidies seem to provide perceived immediate benefits to an industry, in terms of long term they pay evidence to unethical, negative impacts. The intent of subsidies is to support public interest (Altschiller, 1988), though, they have been known to can violate the set legal principles; especially when they result to an increase in consumer prices or as well discriminate against some producers to serve for impartial benefit to others. For instance, domestic subsidies provided by an individual state may be regarded illegal and unethical if they discriminate against out-of-state producers, therefore violating their rights , privileges and Immunities for free trade. Tariffs A tariff refers to tax impose on exports or imports or exports . Economist argue that Tariffs are a primary constituent in international trade where by the tariffs help in controlling the flow of trade by increasing or decreasing the price of targeted products to create what an artificial competitive advantage (Reback, 2009). Many countries continue to use tariffs as in regard to minimizing or maximizing revenue flow rather than in regard to maintaining or creating a competitive advantage. Consequently, the influence of tariffs on the economic wellbeing of the country is at best minimal but many a time is counter-productive. For instance, the 2002 United States steel tariff introduced a 30 percent tariff on various imported steel products for a three year period. American based steel producers supported the move but the tariff was criticized by the Cato Institute. In the political realm, tariff has been embraced as a used as an essential tool in establishing a sovereign nation; for instance, the 1789 Tariff Act in the United states , was an economic plan towards achieving the political goal of an independent and sovereign and United States. Occasionally, tariffs have also been used as a campaign tool during an electioneering period in order to woe voters. For example, in the 2007 Australian Federal election, the Labor Party of Australia announced that it would undertake a major review on the Australian car tariffs if elected. Additionally, if tariffs are integrated in technology strategy of a country, they can go a long way in increasing as well as maintaining the economic health of a country. It is argued that tariffs can play a critical role in supporting technology strategies that will enable a state to outmaneuver the competition in the attainment and use of technology to produce goods and services that will excel and satisfy customer needs for a competitive advantage both in foreign and domestic markets. Non tariff barriers These are trade barriers that limit imports but usually do not come in the form of a tariff. Good examples in this category would include countervailing duties and anti-dumping measures, which, even though regarded as non-tariff barriers, will eventually have influence on the tariffs once enacted (Grieco, 1990). The use of non tariff barriers has progressively gained popularity. They have been deemed essential in protecting environmental health, sanitation, safety, or protection against depletion of natural resources. On the contrary, non tariff barriers have been criticized for being a means by which parties evade free trade rules; for instance, The World Trade Organization and the European Union agreements that control the use of tariffs. Non-tariff barriers can be put into several categories (Grieco, 1990). Some scholars categorize them to; health and sanitary regulations, internal taxes, government procurement policies and administrative barriers. Others classify non-tariff barriers into more general categories such as; charges on imports, customs and administrative entry procedures, government participation in trade, and other categories. The initial category entails methods that directly impose restrictions to protect certain industries such as: import deposits, licensing and allocation of import quotas, countervailing duties, antidumping and countervailing duties, voluntary export restraints, the system of minimum import prices, etc. The second category on the other hand includes indirect restrictions like administrative bureaucracy, whose actions, for example: customs procedures, norms and technical standards, sanitary standards, labeling, packaging, and bottling may inhibit trade. Legislations Governments usually operate under set laws which may be specific to a country. Legislation may play many purposes in regulating free trade: to regulate, authorize, proscribe, sanction, grant, to declare or even restrict. Reasons for government Intervention Based on the discussions above, we can rightfully argue that governments often intervene on free trade due to three reasons: political, economic, cultural, or a combination of the three (Aharoni, 1997). At times, nations will intervene in free trade with an intention of protecting the domestic markets. Governments may also intervene during hard economic times, for instance when employees feel they will lose their jobs in local industries if imports are no regulated. To drive the point home, let us discuss the motives of government intervention in free trade in details; Political Motives Government officials are often involved in making trade oriented decisions. In many occasions such decisions are made based on individual interests or to suit the political party’s motives (Spero, 1990). Some of the major political motives in government intervention in free trade include; Protecting Jobs Governments may intervene, for instance by providing subsidies in local economies to protect local industries from global completion (Altschiller, 1988), thus thrive to provide jobs for the citizens. For instance, Lucky Film of China which has been in competition with a more dominant Kodak for a greater share in the china photographic film market; fearing that China Luck Film industry would totally lose out, the government of china offered grants up to a tune of CLF $240 million and low interest loans to boost its film industry, and further introduced a ban on joint ventures in film manufacturing industries within the country. To Preserve National Security Some industries are essential to state security and in such industries government is likely to have a significant intervention. For instance, such industries attract state funding and government will play a vital role in their policy formulation and implementation; this is true for exports and imports.  Gaining influence over other nations Governments of more developed and dominant nations in many cases often start trade relations with smaller countries to exploit them. For instance, the developed western countries i.e. united States have developed strong trade relations with the developing countries in Africa. Consequently the African countries have been on the receiving end in the free market economy. Economic Motive Governments increasingly intervene in international free trade for economic reasons .They include; To Protect Infant Industries Infant industries heavily rely on government for protection from stiff international competition especially during their early developmental stages until they become adequately competitive in the global market (Altschiller, 1988). These extremely important because infant industries needs time to grow to maturity to acquire the capacity necessary in becoming more innovative and efficient thus increase the chances of not only surviving global completion but also become a highly competitive force in the international market. To Pursue Strategic Trade Policy Governments argue that strategic trade policies are likely to increase levels of national income. Firms will generate more profits only if they begin to reap first-mover advantages, therefore solidify their position in the global market. Cultural Motives Lastly but no least, governments may also restrict trade as means of achieving cultural objectives (Medema & Boettke, 2005); the most common intention being protecting a countries’ national identity. A less desired cultural influence in a nation can result to great concern from the natives, and at times the government may be forced to stop the importation of some products that may be regarded as culturally offensive. A good example is in Canada, 35% of all the music aired on radio stations in Canada must be played by Canadian artists. Conclusion Despite the fact that free trade has necessitated great reductions in regard to trade barriers, governments across the global divide continue to directly or indirectly control free trade. Through the discussion in this paper, it is evident that governments often intervene on free trade due to three reasons: political, economic, cultural, or a combination of the three. At times, nations will intervene in free trade with an intention of protecting the domestic markets, protect jobs, preserve national security, gain influence over nations, pursue strategic trade policy, or achieve cultural objectives. 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