Motives for Government Intervention in Trade and Their Consequences - Coursework Example

Running Head: MOTIVES FOR GOVERNMENT INTERVENTION IN TRADE Motives for Government Intervention in Trade and their Consequences Introduction There are different reasons that make governments across the world to intervene in trade. For instance, governments can intervene in trade to helps protect local firms and jobs, to establish regulations for different aspects of trade, to enact laws, to protect the cultural heritages that are helpful within their countries, and to create hurdles for some companies so as to limit investments by certain types of companies. The different motives for government intervention in trade can be grouped into three main groups. These are political, cultural and economic motives. Therefore, this essay will discuss the three main motivations for government intervention in trade. While discussing these motives, the essay will also present the positive and negative consequences that are associated with each method that governments employ as part of their interventions in trade. Political motives By having political motives when they intervene in trade, governments have specific interests that they wish to attain. Political motives for governments getting involved in trade issues include protecting employment opportunities and protecting firms that are regarded important for the country’s security, among other interventions (Agrawal, 2001, p. 125). For instance, governments aim to protect their domestic companies and hence jobs when they intervene by protecting local and especially infant industries (Wild & Wild, 2015, p. 217). Since unemployment is a major issue for governments all over the world, governments will get concerned when trade threatens jobs in their nations. For instance, Chinese a state-owned company called Lucky Films faced near-collapse during the 2000s, forcing the government of China to form a partnership with the company’s main rivals (Tian, 2007, p. 98). The reason for the intervention by the Chinese government was that Lucky Films had employed very many people; hence, if the company collapsed, it would leave very many people without employment. Thus, the intervention by the government not only helped to save the company from collapse but also helped protect the jobs that were being provided by the company. The positive consequence of government intervention in trade to protect domestic companies and jobs is that doing so helps sustain local employment. In contrast, the negative consequence of such a move is that it can kill competition between the firms that are protected and other firms. This in turn can deny the population the wide variety of goods and services that would normally be found in an environment where there is high competition. Lack of competition may also result in high prices due to the limited number of goods and services that are available in the market. Governments also intervene in trade as a way of preserving national security and thus ensuring that their citizens are protected. Different countries may limit trade in some industries due to what they consider as security reasons. For example, in India, industries that are related to defence are listed under category A. This category is exclusively a preserve of the government sectors (Aswathappa, 2006, p. 170). What this means is that foreign companies or private Indian companies are not allowed to set up production units for defence-related goods or services. Thus, only the relevant government units are responsible for producing the goods or services in the specified categories as a security measure for India. The positive consequence of government intervention in trade to preserve national security is that doing so ensures that government security contracts are kept secret and are handled only by those people who are in charge of protecting the country. This ensures that the security of the country is not infiltrated by potential enemies. On the other hand, the negative effect of such interventions is that trade dealings involving security contracts are handled only by a few people, which increases the likelihood of corruption in such dealings. Economic motives There are various economic reasons why governments intervene in trade. The first one is to create revenue for the government (Cavusgil, Knight, Riesenberger, Rammal & Rose, 2015, p. 217). By intervening in trade through imposition of charges such as tariffs and taxes, governments aim at generating revenue for their countries (Cavusgil et al., 2015, p. 217). The same authors note that taxes and other types of intervention can create significant revenue for governments. Hence, governments will intervene in trade by imposing tax and tariffs on certain goods, whether they are locally made or imported, to generate revenue. The positive effect of taxes or tariffs, as mentioned above, is that it enables a government to get revenue, which it can use for the sake of the country’s development. On the contrary, the negative consequence of taxes or tariffs is that high rates of tax cause an increase in a country’s production costs, which ultimately results in a reduction in the country’s exports over the long-term (Beck & Chave, 2011). Beck and Chave (2011) also found that all types of tax (labour income tax, capital income tax and consumption tax) reduce the level of international trade. What this implies is that when governments intervene in trade by imposing high taxes or tariffs on the traded goods or services, they reduce the level of trade by making such goods or services less competitive in the market. Another economic motivation for governments to intervene in trade is to control the balance of payments (BOP) (Wild & Wild, 2015, p. 218). BOP is defined as a country’s national accounting system that keeps records of all payments being made into the country and all payments from the same country to parties in other nations (Wild & Wild, 2015, p. 217). Many governments regard intervention as the means through which they can manage their balance of payments, especially in relation to foreign direct investment (FDI). Given that inflows of FDI are recorded as additions to BOP, a country gets a BOP boost from an initial inflow of FDI. Countries can also require investors from other nations to ensure their investments promote local content (such as use of local labour and raw materials). Despite such measures, foreign companies can repatriate the profits that they earn from their investments back to their home nations. The resultant capital outflow can reduce the BOP of the host nations. Thus, to protect its BOP, the host nation can ban or limit the foreign company from repatriating profits back to its home nation (Wild & Wild, 2015, p. 218-219). The positive consequence of controlling the balance of payments is that it makes a country’s BOP favourable. On the other hand, measures such as requiring foreign companies to use local materials and labour may increase the foreign companies’ costs through expenses such as training the local population to acquire the required skills or obtaining licenses for local raw materials. Governments also intervene in trade in order to get benefits such as access to technology, management skills as well as employment (Wild & Wild, 2015, p. 219). Governments promote investment in technology because such investment tends to raise the competitiveness and productivity of their countries’ populations. For instance, many developing countries in Asia were introduced to technology through the multinational corporations that set up factories in those countries. Today, some of these developing countries are making attempts to develop their own technological expertise (Wild & Wild, 2015, p. 219). In regard to management skills and employment, some communist countries (such as China) formally lacked some of the skills required to be successful in the global economy (Wild & Wild, 2015, p. 219). By encouraging FDI, such countries have been able to attract skilled managers from the developed countries. The skilled personnel have trained the local people, thereby helping to improve global competitiveness in the host countries. The negative consequence of government intervention in trade that aims to increase access to technology, management skills and employment is that it can lead to a situation in which the host country over-relies on other countries for skills development. It can also result in altering of the local culture as new technologies and skilled people from other countries introduce foreign cultures to the host nation. Cultural motives Exposure to different products from different regions or countries can alter the culture of the host country. When countries realise that trade can significantly alter the culture of their nations, they intervene to avert such a situation. For example, France tries to keep the French language free of alien English words like hamburger and jeans (Wild, Wild & Han, 2003). As well, the law in France bans the use of foreign language words in nearly all forms of government and business communication (Wild et al., 2003). The same restrictions apply to the use of English words in TV and radio broadcasts, advertising and public announcements (Wild, Wild & Han, 2003). The ban on the use of foreign language words in France is no doubt a way of ensuring that the people in France use French as the official language of communication and advertising and promoting their products. This minimises foreign language influences on trade practices such as advertising, thus promoting the French culture. One country whose products and services have been shown to have much influence on cultures across the world is the United States. This is especially pronounced with respect to intangible products such as movies and music as well as tangible products such as consumer goods. For instance McDonald’s, a US fast food chain, has spread the American culture of eating fast food through what is referred to as ‘McDonaldization’ of the global economy (Adams, 2011, p. 51). Music and other forms of entertainment are also perceived to be factors that can easily change a people’s culture. Therefore, to reduce the influence of such products and services on the local culture, governments intervene by making regulations that guide the trading in or use of such products. Governments also pass laws to prevent the importation of products that are regarded to be harmful, such as tainted food (Cavusgil et al., 2015, p. 217) or other products or services are likely have a negative influence on the culture of the local population. The positive impact of government intervention in trade on cultural grounds is that it helps protect the welfare of the society. This is in terms of aspects such as health, culture, and other features that characterise the local population in a country. However, negative consequences arise from the fact that by controlling what people and firms can trade in or consume, governments may be denying their people some choices of goods or services that may be legitimate. This in turn reduces competition since locally-produced goods and services are not subjected to competition from their foreign-made counterparts. The result of this is that the local people may be denied access to some cheaper but legitimate foreign-made goods and services that they may desire. Conclusion In conclusion, it has been noted that the motives for governments to intervene in trade are divided into three main groups: political motives, economic motives and cultural motives. Political motives include the need by governments to protect domestic industries, to protect jobs that are provided by such industries, and to protect their countries’ security interests, among other considerations. The economic motives for government intervention in trade include creating revenue for the government, to control the balance of payments, and to derive benefits such as access to technology, management skills and employment. The cultural motives for government intervention in trade are mainly to prevent the proliferation of goods or services that can significantly alter the culture of a country. Such interventions ensure that government bar or limit the importation or trade in products or services that are perceived to be harmful or which can have a negative influence on the local people’s culture. While the reasons for such interventions can be regarded as the positive consequences of government actions, a wide range of negative effects that are associated with the different types of government intervention in trade have also been discussed. References Adams, F.G. (2011). Globalization, today and tomorrow. Abingdon, Oxon: Routledge. Agrawal, R. (2001). International trade. New Delhi: Excel Books. Aswathappa, K. (2006). International business (2nded.). New Delhi: McGraw-Hill Publishing Company Limited. Beck, S., & Chaves, A. (2011). The impact of taxes on trade competitiveness. Working Paper no. 2011‐09, University of Delaware. Retrieved from http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2011/UDWP2011-09.pdf Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G., & Rose, E.L. (2015). International business: The new realities. Melbourne: Pearson Australia. Tian, X. (2007). Managing international business in China. Cambridge, MA: Cambridge University Press. Wild, J.J., & Wild, K.L. (2015). International business: The challenges of globalization (8th ed.). Upper Saddle River, New Jersey: Pearson Education. Wild, J.J., Wild, K.L., & Han, J.C.Y. (2003). International business (2nd ed.). Upper Saddle River: Prentice Hall. Read More