Political, Economical and Cultural Motives behind Government Intervention in Trade - Coursework Example

Running Head: Political, Economical and Cultural motives behind Government Intervention in Trade Government Intervention in Business Customer’s Name: Customer’s Course: Tutor’s Name: 23th April, 2012.   Introduction Free trade means business without limitations and restricts from government. In other words, free trade is a trend of imports and exports that happens in absence of trade barriers. Such businesses are characterized by exploitations and abuse of business ethics and in worse situations can lead to war between conflicting countries. Therefore, government impose restrictions to regulate free trade for three main reasons; political, cultural and economic. It enforces the reasons, government use instruments such as quotas, subsidies, and tariffs among other instruments. In most cases government intervene in trade to protect its citizens, reason being that they are the same people how voted them into power. Some of the main reasons are discussed below into details. Government’s political motive in trade Political environment within a government consists of structures, activities and process within which nation governs itself. In democratic nations, government officials are elected directly by people within the nation’s jurisdictions. The people eligible to vote can be both persons with 18 years and above, and people’s representatives (Baumol, 2002). In most democratic nations, individuals are voted from a group of people and they are given powers to govern them (representative democracies). In undemocratic nations, people are governed without their views being considered and any opposing views are not in any way tolerated. Under theocratic leadership, religious leaders are the one that govern the country. This kind of leadership is based on religious and totalitarian beliefs. Another kind of leadership is the secular totalitarianism which is characterized by political leaders depending on the military and bureaucratic power. It is normally come in three forms; communist, tribal, and fascist totalitarianism. Under all the forms of political leadership systems, there is the likelihood that government or the society will experience changes that may affect negatively the business sactivity. This is political uncertainty may arise from; frequent changes in the form of government, political involvement of religious or military leaders, corrupt or poor political leadership, unstable political systems and poor relations with other countries. If these uncertainties are not maintained and well managed, they can lead to one or all of the following risks; conflict and violence, property seizure, terrorism and kidnapping and local content requirements. Therefore, political environment determines the way things are done in and outside a country. It also dictates business relationships within domestic industries and those of other countries (Capuano, 2006). In general, favourable political relations lead to increased opportunity and stable business environments. If say, one political systems of a certain country differ from another political system which they have earlier established a business contract, it may cause uncertainties between the two countries. It is therefore, upon international business to protect the following; rights of property, intellectual property, antitrust regulations, taxation policies, product liability and ethical dilemmas. By so doing, the international trade ensures that there is peaceful coexistence between members though there political systems differ. Political motives for government interventions Due to above mentioned political issues, government officials more often than not make trade related interventions based on political motives. This is so because leaders are subject to people they represent in their country and group. They therefore intervene because they want to be re-elected and pleasing the voters who put them into office. The main common interventions based on political arena include; job protection, preserving national security, responding to other nations’ unfair trade practices and finally, gaining influence over other nations (Andersen, Bjørn-Andersen & Dedrick, 2003). To protect job means, government imposing policies that will in one way or another ban business people from importing goods which would have otherwise been bought within the country. The move makes sure local industries are protected from unnecessary importations that may hinder domestic industry production. On the same point, the policies protect against unemployment of its people in the sense that local industries act as potential job provider to the people within the country. So, by protecting the same industries the government protects the employment opportunities of its people (Montealegre, 1999). For example, the president of Guyana in South America requesting his citizens to endorses local products saying that imported products are not better than local ones. In addition, government responds to unfair trade that may affect negatively on the business of the host country. On the same point, many governments argue that there is no need to trade freely if other countries have imposed interventions. If for example, a certain country does not comply with another country’s trade demands, the host country may impose high tariffs or in worse situations close block the trade between the two countries. In other words, if a certain country thinks that another country is playing unfair trade it threatens to reciprocate the unfairness until an amicable compromise is made. Sanctions are also made to protect exports from a country i.e. to first satisfy the domestic customer demands before exporting goods to other countries. The move restricts companies within a certain country from exporting goods that would otherwise be consumed locally (Suarez-Balcazar & Harper, 2004). Consequently, the same policies are made to ban exports from other countries that may affect negatively on the economy of the host country. Furthermore, political based government interventions are put to gain influence of other country. Say, China in recent past years has flooded Africa and part of Asia with its products and donations. To other big economy countries like USA and Japan, the move is viewed as a threat to their economy since it hinders them for exporting their goods. In the right of this, USA and Japan are pushed to negotiating new trade deals with the neighboring countries with the aim of maintaining their economy and domestic industries. In conclusion, though the highlighted government interventions in trade are not exhaustive, it is important to look at some problems associated with these policies. In most cases, after a financial crisis there is widespread government interventions based on political arena. These imposed rules and regulations may lead to overregulation which may affect the economy of the host country. Afterwards policy makers forget about the policies and the reasons why they were imposed therefore calling for deregulatory process. There is therefore a need for government officials from whichever quarter of political background to be familiar with political interventions of other countries, mostly those they conduct business with (Haug & Krabbenhoft, 2006). This will aid in maintaining a peaceful coexistence between the two countries both in good times and through the economic storms that might befall either of the two countries. Economic reasons for government intervention Among other reasons for government intervention in business, an economic reason exists extensively and in complexity. The phrase economic reasons denote or refer to the art by which economic resources are identified consequently determined on how to be allocated. Economic resources have monetary value, scarce and unevenly distributed (Gregory& Stuart, 2003). Economic reasons for government intervention are therefore based on allocation of resources and hence the concept of opportunity cost and the answering the economic fundamental questions. The opportunity cost concept confers to the value of the forgone alternatives while dealing with a situation of mutually exclusive economic decision which on the other hand are faced by scarce economic resources. Fundamental economic resources are what to produce, how to produce them and for whom to produce them (Taylor & Weerapana, 2007). Understanding of the government economic reasons are based on the three economic market systems. The three economic systems are the free market economy, the planned market system and the mixed market system. A free market system refers to a market system that has no government intervention. Inherent of the characteristics associated with market system, a free market system does not exist in reality. A free market economy confers to an economy where the allocation of resources is solely dependent on the market forces of demand and supply. The free market system is also referred to as the laissez faire economy or a capitalistic economy (Gregory& Stuart, 2003). Allocation of resources is done dependently on the behavior and the matching of demand and supply. The demand and supply forces are matched by the use of demand and supply curves whose movements are opposite to each other since for a normal commodity, demand increases as the price decreases while the supply increases as the price increases and drawn to obtain an equilibrium point where resources are optimally applied and there are no excess demand nor supplies (Meade, 2012). A planned economy also referred to as a command market system is where allocation of resources is dependent on government policies, legislation and regulation. Consequently, the government reserves the right to set the prices, to determine what and how much is to be produced and how much, when and where to be sold (Eckstein, 1971). Generally, the government is responsible for decisions in reference of the economic fundamental questions on production and distribution. At one time or another, the government will respond on the market forces therefore forming the basis of a mixed economy. A mixed market economy refers when the policies of the government are mixed with those of the free market forces of demand and supply to allocate resources (Gregory& Stuart, 2003). In reference to a free market economy, there are many demerits that tend to out weight the merits. However, a mixed economy suits an economy best to allocate resources since the demerits of the free economy are substituted by the market forces. One key reason on government in business is the protection of the infant industry. Government has gone ahead with the protective policies of the tariffs and free trade restrictions in order to protect the infant industries from the economy being overwhelmed by cheap imports in the economy. Infant local industries are prone to poor performance to the extent of failing when cheap commodities are imported without restriction posing a very high competition on the local industries’ production declining their demand. Inherent of the protective policy on infant industries, the government also protects the economy at large from being a dumping site for poor cheap products by other economies (Meade, 2012). In reference of the cheap imported products, the government makes policies regarding the safety of such products and use tariffs alongside other restriction to harmful products as one of the consumer protection policies. For instance, many governments have enacted protective policy regarding high tariffs on products such as tobacco. This is because of its adverse effects on health and the economic distress caused. Apart from the tariff mechanism of protection, the government goes ahead to place a price floor where the price of such products should not fall below. The price floor is usually above the equilibrium point (Grieco & Ikenberry, 2002). A free market economy results to monopoly powers among other demerits. A monopoly business means that only one supplier for a certain commodity hence he can regulate the price as he may want (Eckstein 1971). This becomes dangerous when the commodity in subject is an essential one to the public. This leads to consumer exploitation hence the government intervention to counter the same. The government counters such behaviors by setting the prices themselves. This is economically done by placing a price ceiling for such products. Usually, the price ceiling is below the equilibrium point and sellers should not sell above that price. The price ceiling and the price floor can be demonstrated in the diagram below. Excess supply Supply curve Price floor Equilibrium point Price ceiling Excess demand Demand curve Equilibrium Quantity : Demand and supply curve with price floor and price ceiling in reference to the equilibrium point (Taylor & Weerapana, 2007). The government also cares for the producers’ welfare on the other side. This is done by helping them in the marketing of such products by engaging in bilateral and multilateral trade agreements with other states (Sklair, 1994). The government also makes essential policies in regard to essential goods and services. One of them is on providing such commodities where private investors are not willing. On the other hand, private investors might not have enough capital and may render certain essential services too risky to undertake. Henceforth, the government engages itself in such productions. Another policy regarding the same is that of subsidies, quotas and tax holidays to investors investing in some areas and to those producing essential products (Holcombe, 2005). Another key reason for government intervention is the control of sensitive information flow where private investors would hold for themselves. In addition, the government controls sensitive products in the market such as fuel and army equipments which would be risky if left in the hands of private investors. In the context of tariffs and taxes, the government is placed on important roles in regard to the public welfare. For this reason, the government is responsible of offering services regarding to health, education, defense and infrastructure among others. The social amenities offered by the government are very essential and risky too when left for private investors (Taylor & Weerapana, 2007). The social amenities in one way or another facilitate the economy in production and distribution of goods and services. When summing up the governments reasons in the economy, the sluggish response of the market forces of demand and supply would call for more government intervention since the changes would affect decisions regarding resource allocation (Lehne, 2005). In short, consumer protection, infant industry protection, price control, producer protection, facilitation of essential goods and services and control of harmful products may be summed up as the economic reasons for government intervention in business. Cultural Motive in Government Involvement in Trade To discuss the reasons way governments intervenes in trade based on cultural impacts, it is important to look at what characterizes government interventions in general (Musgrave & Richard 1959). To export or import goods or practices in presence of trade barriers is referred to as free trade. The reasons for government restricting free trade include cultural, political economic or a combination of the three. When governments intervene on these grounds, they are strongly supporting their domestic companies’ exporting activities. This is mostly done when nation’s economics is on a downturn. During these hard economic times, businesses and worker calls for governments for protection from imports that are reducing work and eliminating jobs in the domestic market. In addition, government inventions are to protect countries from other countries that are not fair and sensitive to other government policies (Chau & Tam, 1997). What is culture and how it differs across nations Culture is a set of values beliefs, rules and institutions held by a specific group of people. Different nations have different cultural background which in one way or another affect the economics of the country. In this respect, governments of every country all over the world intervene to protect its people’s culture from being affected by others as people interaction within different cultures as they trade. In every government, there are different cultures which are affirmed by building of museum and monuments. In addition, nations also intervene in business to help protect the national cultures from the unwanted influences. To achieve this, governments through ambassadors ensures that the cultures within their jurisdictions are not affected by members of other cultures (Zwass, 1997). This tendency to view ones culture as superior is referred to as ethnocentricity and ambassadors have the knowledge necessary to function effectively in another culture and protecting his own culture. Culture as a way of life of people involve interactions in the following ways; social structures, aesthetics, manner and customs, religion, personal communications, education, values and attitudes, and physical and material environments. In business, each of these components of culture affects the way business activities are conducted. For example, aesthetics determines on which colour and symbols are suitable for advertisements (Wild & Wild, 2012). Values influence people’s attitude towards work and achievement. In addition, different religions have distinct perspectives of work, savings and other material goods. Physical and material environments determine work habits as well as preferences regarding cloth and food. Education level within a certain culture affects the quality of the work force and standard of living. However, either of the components can be affected when people integrate into one culture through culture diffusion. This integration is accelerated by phenomena like globalization and technology. Say, when companies influence culture through importation of products and business practices it the host country. Culture can also impact organization in the way they conduct their business (organizational behaviour). For instance, much of the current information on international human resource management focuses around the idea that various national cultures varies and that managers who wish to successfully work in other cultures or with people from other cultures must be aware of these multicultural differences. This way, culture can be seen as the sum total of ways that in one way or another characterize a group of individuals which are passed down through generations (Giddens, 1979). Due to these differences in culture and ways, through which culture can be influenced i.e. directly or indirectly, government all over the world are left with no other choice but to intervene. Through theory of comparative advantage states that ‘ any country having a comparative advantage in the production of a certain product will proceed and produce that product if and only if the barriers to trade do not exist’. But with the global market, this theory does not accurately hold. Countries across the globe restrict trade of services and goods with the cultural objectives, with the most common one being to protect national identity. As discussed above, culture and trade are intertwined in more than one ways and impacts on one another greatly. Therefore, cultures of different countries are slowly changed through exposure to different people and products from other cultures. Furthermore, cultural influences in a nation can cause great distress and even cause government to block imports that it believes are ‘harmful’. For example, the French government is trying to protect its language from effects of English words like jeans and hamburger. It therefore bans use of foreign languages in all business and even in social Medias not unless there are no such words in French language. In other countries, they are banning media houses from broadcasting programs from the west which it highly believes are affecting the culture of the host country (Milos, 2000). More often than not, erosion of one country’s culture is associated with influence from other cultures which in one way differ from the existing cultures of that country. Say, a country like Canada is making attempts to mitigate the cultural influence of entertainment products like digital motion pictures and music mostly from United States of America. In particular, Canada government has imposed a policy that requires at least 35% of music played over Canadian radio to be solely from Canadian artists. The negative effects of these restrictions are that they reduce the selection of products available for customers. Finally, the theory of international trade comes face to face with the reality when USA is termed as the potential threat to most national cultures because of its global strength in media product and customer goods entertainment. Again, the diffusion of American English into other languages in different cultures is facilitated by international trade through all sorts of goods and services which are exposing people around the globe to new products, ideas, words and ways of life. To mitigate these repercussions, governments are restricting trade through the use of subsidies, tariffs, quotas and embargoes and currency controls. Some like embargoes are to ban from external culture influences while others like subsidies are to encourage the local cultures to thrive without any external influences. Conclusion A free market economy has its merits being outweighed by the demerits consequently raising the need for government intervention. However, the market forces of demand and supply cannot be neglected. The political, economic and cultural motives of governmental intervention in business are to counter or to customize the operations of the allocation of resources complementing the demand and supply forces directed on the welfare of its citizens. Therefore, the government works towards job protection, preserving the national security inherent of international trade, respond to unfair trade such as monopoly behaviours and gain influence as political motives. On the other hand, the government protects the local infant industry, set trade policies on essential commodities, consumer protection and producer protection alongside earning revenue from tariffs as economic motives. Culture protection in trade is also another governmental motive in business where the culture in production is motivated and protected. All the motives are directed towards public welfare in accordance to the role and functions of the government. References Andersen, K, Bjørn-Andersen N. & Dedrick, J (2003) ‘Governance Initiatives Creating a Demand-Driven E-Commerce Approach: The Case of Denmark’, forthcoming in the Information Society. Baumol, W (2002). The Free-Market Innovation Machine. Princeton and Oxford, Princeton Capuano, C (2006). Strategic noise traders and liquidity pressure with a physically deliverable futures contract. International Review of Economics and Finance, 15(1): 1–14. Chau, P & Tam, K. 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