Protectionism is a Flawed Tactic - Case Study Example

International Business Name Name of Institution International Business Introduction International trade offers individuals and business immense opportunities for growth. For instance, businesses can achieve significantly higher sales volumes by marketing their products in foreign markets. In the same way, local markets can benefit from the increased options that come with international trade. Despite the acceptance of the benefits of international trade to the modern world, governments still feel like they have to intervene in international trade. The reasons for intervention can include economic, social, or political objectives (Cavusgil 2014). This paper examines the main motives for these government interventions in international trade. In addition, the paper examines the defensive and offensive methods that governments use to intervene in international trade, as well as their positives and negatives. Motives for Government Intervention in Trade Infant Industry Protection According to Cavusgil (2014), one of the prominent reasons for intervention in trade is the desire to protect infant industries. Countries develop at different paces, and there are situations where a particular industry starts to emerge. This emerging industry might hold significant promise, and its success might give a country a competitive advantage in international trade. Therefore, a government might deem it necessary to protect such emerging industries as they go through their learning curves. It is worth mentioning that the learning curve might subject the country to a lot of disadvantages. An appropriate example can be seen in the electronics industry where a country can tolerate low-quality electronics as it gives local manufacturers the opportunity to gain experience. Eventually, the country will get access to improved electronic devices that are cheap and locally made. There is the further possibility that the infant electronics manufacturer will gain access to the international market, thereby benefiting the country through a vastly improved balance of trade. Industrialization Industrialization is one of the rationales for intervening in international trade. International trade often results in an environment where the most innovative firms prosper while the rest are shut down. This can lead to a lot of dependence on foreign producers which inhibits local industrialization. Governments intervene in international trade to allow their countries to industrialize (Cavusgil, 2014). This allows local workers to get employment opportunities as a result of the desire to boost productivity and eliminate dependency on foreign goods. The intervention also allows a country to diversify. This might be critical for a country, say in Africa, which fully relies on agricultural produce that can be wiped out when there are extreme weather conditions. Intervention also fosters industrialization since foreign companies chose to invest in the country instead of missing out on its entire market. In turn, the local investment benefits the country through employment opportunities and improvements in infrastructure. Other advantages of the local industrialization are enhancing living standards, developing rural areas, and improving the overall skills of the workforce. The government also benefits as industrialization attracts businesses that will pay considerable taxes in the long run. Foreign Policy goals As in the case of industrialization, different countries have different foreign policy goals. For instance, many European nations have a desire for eventual full integration into the European Union. In the same way, emerging countries like India, China, and Brazil want to increase their levels of cooperation in order to gain a bigger say in the global platform. In contrast to these desires for more trade, trade between Cuba and America has been virtually non-existent as a result of foreign policy that views Cuba as a non-friendly country. These foreign policy goals influence the choice of the countries that will be given preferential treatment in trade and those with whom trade will be restricted. Preferential treatment amounts to intervention in international trade since factors like price and the quality of final products can be ignored. It is evident that foreign policy can be a key motivation for intervening in international trade. National Security and the Safety of consumers National security and the safety of consumers are additional reasons for government intervention in international trade. In the present world, there are many ways through which countries can attack each other. For instance, a combination of advanced software and the internet can be used to launch a cyber-attack on a country that is halfway around the world. In the same way, commodities like uranium can be used to create advanced weapons that can kill millions of people. These national security concerns motivate governments to limit trade in particular goods that are considered vital to national security (Cavusgil, 2014). In the same way, a country can prevent the importation of critical goods like staple foods to prevent over-reliance on foreign nations. This creates self-reliance, a factor that contributes to national security. When it comes to safety, some imports can pose a threat to the health of citizens. The most obvious group of commodities that can harm a society are drugs like heroin, cocaine, and methamphetamine. Apart from drugs, different types of food imports have been known to carry dangerous micro-organisms. For example, China once banned U.S. beef after the discovery of mad cow disease at a farm in Washington State (CNN 2003). CNN also notes that the Australian government took the same step to protect its citizens while its beef exports grew as a result of the ban on American beef in China and other Asian nations. This example shows that the safety of consumers is one of the rationales for positive and negative government intervention in global trade. Emotional Arguments Various inventions of the past century like air travel, television, and the Internet have significantly altered global and national cultures. However, there has always been a desire for countries to maintain their unique national and cultural products. For instance, Australia has historically valued its various vehicle manufacturers like Holden. Emerson (2012) noted that the car maker benefited from a co-investment from the government that would allow the firm to remain operational until 2022. This would satisfy the emotional needs of those want to drive a locally made car while ensuring that thousands of employees would keep their jobs. When it comes to the global stage, Japan considers rice as a ‘sacred’ commodity and it has intervened in international trade to protect its local rice production (Brasor 2011). This shows that in addition to economic and political factors, government can use sociocultural factors as motivation for intervention in international trade. Methods of Intervention The presence of one of the above motivations for intervention can lead to the need for different outcomes. For instance, a motivation to protect infant industry can create the need to increase the price of foreign options in a significant way. If national security is the motivation, there will be a need to control quantities sold in the global market. The need for different outcomes has resulted in the creation of various methods of trade intervention and control. These methods can be classified into intervention by either tariff or non-tariff barriers (Cavusgil 2014). Tariffs According to Steers & Nardon (2014), a tariff defines the taxation of internationally traded goods. It is worth mentioning that tariffs have a profound impact on the prices of imports and exports. These levies can be collected at the point of exit, transit, and the final destination of the goods. However, the description of the rationales for government intervention in trade shows that most of the tariffs are imposed on the points of entry. The need to protect local businesses is one of the main reason for the use of tariffs. Governments can also impose these taxes as a means to boost their revenues. This is evident in commodities that are considered to be luxuries and which pose no threat to local businesses. As stated, the main advantage of tariffs is that they protect local industries by making imports more expensive. They also increase government revenue, which can benefit society through government expenditure on health, infrastructure, and other projects. However, there has been a global realization of the negative impacts of tariffs. For instance, most developing nations rely on agriculture as their main economic activity. The presence of tariffs reduces their access to many markets, thereby confining their countries to persistent poverty. It has also been found that high tariffs reduce government revenue in the long run (Cavusgil, 2014). An additional disadvantage of taxes on imports is that they reduce the choices available to consumers. Non-tariff barriers According to Cavusgil (2014), non-tariff barriers define those government measures that restrict trade without the imposition of taxes or duties. The use of these measures has increased significantly over the past years sometimes because they can be hidden from organizations that scrutinize trade (Cavusgil, 2014). Examples of non-tariff barriers include import licenses, quotas, regulations and technical standards, bureaucratic procedures, subsidies, embargoes, and local content requirements. Each of these policies works in a different way, but they assist the government in having a degree of control over international trade. In certain cases, governments mandate that importers should get import licenses before they can begin operations. This can be considered as a barrier owing to the manner in which these licenses are issued. The licenses can be allocated to importers on a competitive basis where the most qualified business gets the right to import a certain commodity. On the other hand, governments can give the licenses to a few businesses on a first come first served basis (Cavusgil 2014). It is clear that the need to get a license to import a certain commodity limits the amount of imports in the targeted sector. The government can monitor the imports of each licensed importer and determine the firm’s whose licenses can be renewed, thereby controlling net imports. Quotas work in the same way as the import licenses as they restrict the amount of imports. The major difference is that the government sets the allowed physical quantity or value of imports (Cavusgil 2014). It is worth noting that governments can set voluntary quotas where businesses have the responsibility of limiting exports of certain products. Regulations and technical standards also fall under the non-tariff barriers. An example would be a government’s decision to set extremely high standard to limit the number of exporters who can legally sell products in the local market. The other non-tariff barrier comes in the form of bureaucratic procedure that make it difficult for importers to begin operations. This can be done by introducing numerous steps at the local, regional, and state level that make it a challenge for businesses to get approval to participate in international trade. It is worth noting that countries like Australia, Britain, New Zealand, and the United States do not use this strategy (Cavusgil 2014). An alternative method of intervention is the use of subsidies. Governments can take the initiative to offer financial support to local businesses or entire industries (Aswathappa, 2010). The strategy aims at allowing local industries to compete with international competitors, and it can also be used to secure employment and protect industries that are vital in social, economic, or political ways. Local content requirements also affect international trade by forcing local manufacturers to ensure that all products have a certain percentage of local raw materials (Aswathappa, 2010). Finally, embargoes are the most extreme form of non-tariff barrier as they prohibit all trade with a particular country (Cavusgil, 2014). It is evident that governments have many options when it comes to imposing non-tariff barriers. The main advantage of these measures is the support they give to protectionist policies. Nations can protect emerging industries from foreign competitors. In the same way, they bar countries that intend to dump products from entering local markets and forcing local business to collapse. The use of non-tariff barriers can also protect local employment, increase local production, and help countries to boost industries that are of cultural importance or critical to national security (Aswathappa, 2010). Non-tariff barriers also have several disadvantages. International trade has many advantages that should be sought by every country. The use of these methods hinders free trade and its many benefits. For instance, local industry can remain inefficient as a result of lack of foreign competition. This inefficiency can force consumers to pay very high prices. Additionally, competition is often an incentive for growth and innovation, and the use of these methods can prevent competition and thereby limit the growth potential of local industries. The other disadvantage of using the non-tariff barrier is that they can lead to trade wars. For instance, if country A prevents the entry country B’s main export to its local market, country B can also restrict the entry of products from country A. It is evident that if many countries embrace these methods, the resulting trade wars can reverse the gains that have come with international trade. Conclusion In conclusion, this paper began with an examination of the rationale for government intervention in international trade. The finding is that governments influence international trade because of a desire to protect infant industries, national security, and local consumers. Other reasons for intervention are the desire to facilitate industrialization, and achieve foreign policy goals. Finally, national emotions that come from culture also cause governments to intervene in trade. When it comes to the methods of intervention, the paper has found that governments can use the tariff and non-tariff barriers. In recent years, there has been a realization that tariffs have more disadvantages than advantages. For this reason, governments prefer the use of various non-tariff barriers to intervene in international trade. References Aswathappa. K. (2010). International Business, 4E. Tata McGraw-Hill Education Brasor, P. (2011). The sticky subject of Japan’s rice protection. The Japan Times. Retrieved 23 March 2015 http://www.japantimes.co.jp/news/2011/02/20/national/media-national/the-sticky-subject-of-japans-rice-protection/#.VRKeWOGKv_g Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International Business. Pearson Australia. China bans U.S. beef. (2003). CNN. Retrieved 25 March 2014 http://www.cnn.com/2003/BUSINESS/12/24/madcow.reax/ Emerson, C. (2012). Protectionism is a flawed tactic. The Australian. Retrieved 25 March 2015 http://www.theaustralian.com.au/national-affairs/opinion/protectionism-a-flawed-tactic/story-e6frgd0x-1226347130287 Steers, R. M., & Nardon, L. (2014). Managing in the global economy. Routledge. Read More