Motives of Government Interventions at International Trade - Essay Example

Motives and Methods of Government Trade Interventions Author Institution Introduction Globalization of business has led to the interdependence of the international trade links that were initially autonomous. This has increasingly affected the economies of individual countries as the trends in global economy are so dynamic for some nations to cope up with (Steinemann, Apgar, & Brown, 2005). This raises the vulnerability of the countries going through global recession and the associated effects of such economic downturns. National governments are capable beyond measure to promote or limit globalization as well as influence their economies in a manner that their individual economies are cushioned from such risks and the well being of the economy and the country’s population in general (Trebilcock & Howse, 2007). Government intervention has and continues to be the only weapon used by various countries to control the influence of globalization at the domestic level. The effects of the intervention are further felt in the global business arena (Steinemann et al., 2005). There are various reasons and methods that are used by the governments to intervene international trade. Equally, there are advantages and disadvantages of these methods. This paper evaluates the motives for government interventions and evaluated the positives and the negatives associated with the methods that are used in trade intervention by the government. Motives behind Government Trade Interventions Most governments recognize that free trade pattern of exports and imports, reduce any trade barriers. The governments therefore impose some restrictions that will be discussed later. These motives of the government are politically, economically and culturally driven. In the context of political motives, governments intervene for a variety of reasons (Steinemann et al., 2005). First off, to preserve national security (Pearson Education, 2012). Each nation must protect some of the industries in order to guard its national security. These industries include aerospace, weaponry, advanced electronic and mining (Cavusgil, Knight, Riesenberger, Rammal, & Rose, 2015). The governments therefore restrict imports so as to assure national supply of the same goods (Pearson Education, 2012). Most of the nations have succeeded in protecting their agricultural sector so as to be self reliant during wartimes. The governments also do this to respond to unfair trade practices. This is mainly based with the motive of protecting the consumer’s rights. For example, most governments such as Pakistan and India have desisted from ordering apparels from china because they are reeled under severely acute respiratory symptoms conditions (Steers & Nardon, 2014). Additionally, EU also banned hormone treated beef to protect its populace from health complications. The third political motive is to protect jobs so as to curtail high brain drain rates as well as high unemployment rates. The governments therefore intervene to eliminate trade that poses a threat to the domestic jobs. The governments would also like to gain influence over other nations (Steers & Nardon, 2014). This has been the case with the developed nations having say over the less developed countries. For example the US wants to have control over Central, South and North America as well as the Caribbean Islands. Economically, the governments also intervene for specific reasons. Firstly, the governments do this to protect the infant industries, in their countries from indirect or direct competition (Trebilcock, Howse, & Eliason, 2013). Infant industries refer to a conglomerate of emerging industries that lack the capacity to compete globally, but can through time. Such protections are short-lived and are removed after the industries have achieved the capacity to be innovative, competitive and efficient all together (Trebilcock et al., 2013). The only drawback to this is the criteria to be use in selecting the industries as it has led to some industries being complacent with innovation and thus high pricing. Secondly, the government yearns to pursue strategic trade policy (Trebilcock et al., 2013). Proponents of the new trade theory argue that industries have economies of scale thus the global market will only support few firms so that the firms enjoy first-mover merits (In Peerenboom & In Ginsburg, 2014). This limits the number of firms in the industry. The governments support the firms so as to eliminate the trade barrier created by foreign first-mover beneficiary firms. Such an example has been used to support the Airbus industry from Boeing (Pearson Education, 2012). This makes the governments to survive poor economic periods. The governments also intervene so as to protect human rights of their trading partners (Poynter, 2013). This has been successful when all the trade participants have the same motive; else it is threatened when there are only few who champion for the institution human rights in their nations (Pearson Education, 2012). The last economic motive takes the foreign policy goals approach (Aikins, 2009). The governments realize that commerce is an essential tool in the achievement of foreign policy goals. The governments use this to obtain preferential treatment through establishment of strong relationships (Steers & Nardon, 2014). For example, EU has preferential treatment to bananas sourced from certain nations that were formerly her colony. This is also a move to prevent trade with enemies or helping enemies of such governments. Aikins (2009) opines that the governments also do this to ensure that the exchange rates of her currency are stable and favorable that is either too strong or less weak . The governments therefore intervene to solve the currency fluctuations (Poynter, 2013). Asian countries for instance want their currencies to be weak so as to boost the country’s export, reduce imports and allow the expansion of industries thus job creation (In Peerenboom & In Ginsburg, 2014). On the other hand countries like US that have strong currencies make the imports cheap but exports expensive. The governments also intervene with the motive of getting revenues from trade through export taxes and tariffs among others. Additionally, the governments also restrict the export of technology so as to gain comparative advantage over other nations. Culturally, most governments would like to preserve their cultures that also serve as their identities or national symbols (Aikins, 2009). Culture is eroded as people and products flow is allowed. The governments intervene so as to reduce unwanted cultural influences that would cause distress. The governments also protect the nation from communications that are likely to change the perception of its populace. The governments also yearn to reduce the influence of Western culture that has been linked with several cultural degradations. Positives and Negatives for the Methods used in Government Interventions There are seven methods used by the government in trade intervention. These include: subsidies, tariffs, import quotas, voluntary export restraints, local content requirements, antidumping policies, and administrative policies (In Peerenboom & In Ginsburg, 2014; Sam, 2014). Each of the aforementioned methods has its positives and negatives. Tariffs refer to taxes that are levied on imports that effectively increase the cost of imported products relative to the domestic product (Madura, 2006). There are specific tariffs that are fixed charge on every unit of goods imported and ad valorem tariffs that are levied as a proportion of value of the goods that are imported (Sam, 2014). Tariffs ensure that the producers benefit, while the consumers lose since the imports are priced higher than the domestic products (Sam, 2014). When the exports are of better quality, the consumers have to buy them at higher costs. According to Trebilcock & Howse (2007), tariffs also impede the global economy in that it discourages the production of goods that could be produced at low cost in other nations. The other method is subsidies where the government gives the domestic producers support in form of tax breaks, cash grants, low interest loans, product price supports and firms’ participation in government equities (Steers & Nardon, 2014). This protects the domestic producers by fending off the global competitors (Madura, 2006). The other advantage is that it helps domestic firms gain exports and compete favorably in the global markets. The negative of this is that it encourages excess production that reduces competition as well as increases the presence of poor quality goods from inefficient producers (Cavusgil et al., 2015). Third way is through the use of import quotas. These are direct restrictions on the quantity of some goods that can be imported into a country (Sato & Ramachandran, 2012). This could be through tariff rates quotas where low tariff rates are applied to imports within, than those over the quota. Another is the voluntary export restraints that are imposed by the exporting country upon the request of the importing country. The quotas affect the cost of production of companies in a negative manner since they are not able to get good market for their products (Sato & Ramachandran, 2012). The positive of this is that the consumers in the VER imposing nations will enjoy lower prices as a result of great supply (Madura, 2006). VER also ensures that jobs are secured since the imports are threatened thus domestic producers are able to benefit and expand their production (Horn & Mavroidis, 2013). The domestic producers are ensured of markets for their products as well thus maintain high market shares and prices through retaining of the competition (Sato & Ramachandran, 2012). Cavusgil et al. (2015) assert that the negative impact of this intervention is that, those domestic producers that primarily depend on raw materials that are imports will have high costs of production thus higher prices that keep off buyers. Local content requirements refer to regulations or laws that stipulate that the producers in the local domestic market must supply a given amount of service or goods (Sam, 2014). The advantage of this is that the developing nations are able to foster industrialization to advanced levels (Rugman & Brewer, 2009). The domestic producers are also protected from the price advantage achieved by other countries that are based in low-wage countries. It also ensures that foreign companies create jobs through local sourcing for production (Cavusgil et al., 2015). The downside of this is that it may implicitly affect the international business since firms have to cope up with high production in one country. This raises the cost of production and business as well especially if the firms are sourcing their production to different specialized producer nations (Rugman & Brewer, 2009). The government also uses administrative trade policies as a non-formal way of creating trade barriers. Bureaucratic rules are tailored to make it difficult for imports to enter a country (Pearson Education, 2012). There are numerous ways the government infringe the imports success within its own borders. The ways are unethical practices meant to delay the flow of the imports (Horn & Mavroidis, 2013). This has the advantage of protecting the domestic markets. On the other hand it increases the cost of production especially for perishable products that may require further special conditions during the delay (Horn & Mavroidis, 2013). The governments may also place embargoes on some nation’s imports and exports so as to ban trade ills. While this protects consumers, it reduces the supply of cheap and quality product as well as trade between nations. Lastly, the government also intervenes through antidumping policies. These policies are meant to protect domestic producers from unfair competition from the foreign based firms where the country is filled with excess products (Steers & Nardon, 2014). The goods are always of poor quality and underpriced than their fair market price. The World Trade Organization has anti-dumping policies so as to punish those that engage in such unsculprous business (Coppens, 2014). The non compliant governments have to pay countervailing duties (Coppens, 2014). This is a good move to protect the markets in the countries and thus boost the economy. It could lead to poor government relations especially when there lacks merit for the countervailing duties imposed on a country for five years. Conclusion There are many motives for government interventions, all geared towards the negation of the influences of free trade. The motives are always political, economical and cultural driven as have been shown. In a nutshell, the motives include: the protection of national security and jobs, protection of human rights and culture, for strategic global trade policies as well as foreign trade policy goals achievement. Other reasons include the protection of the national health, reduction of exporting technology and reduction of competition. Some of the methods used by the government include tariffs, subsidies, administrative trade delay policies, local content requirements, embargoes, quotas and anti-dumping policies among others. As has been seen in the paper, there are positive and negative implications of each of the methods used by the government to intervene. The global market should have such interventions for the good of the consumer’s health and rights, the global market in general and the global economy as well. However, when there are drawbacks associated with each method and thus there should be a balance prior to adopting such methods. References Aikins, S. K. (2009). Global Financial Crisis and Government Intervention: A Case For Effective Regulatory Governance. International Public Management Review · electronic Journal, 10(2), 23-43. Cavusgil, S. T., Knight, G. A., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2015). International business: The new realities (2nd ed.). Melborne: Australia: Pearson. Coppens, D. (2014). WTO disciplines on subsidies and countervailing measures: Balancing policy space and legal constraints. Cambridge: Cambridge University Press. Horn, H., & Mavroidis, P. C. (2013). Legal and Economic Principles of World Trade Law: Economics of Trade Agreements, Border Instruments, and National Treasures. Cambridge: Cambridge University Press. In Peerenboom, R. P., & In Ginsburg, T. (2014). Law and development of middle-income countries: Avoiding the middle-income trap. New York: Cambridge University Press. Madura, J. (2006). International financial management. Mason, OH: Thomson/South-Western. Pearson Education. (2012). Government Intervention in International Business. Retrieved from http://wps.pearsoned.com.au/au_be_cavusgil_intbus/217/55593/14232050.cw/index.html Poynter, T. A. (2013). Multinational enterprises & government intervention. New York: St. Martin's Press. Rugman, A. M., & Brewer, T. L. (2009). The Oxford handbook of international business. 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