The Political, Economic and Cultural Motives behind Government Intervention in Trade - Essay Example

Running Head: GOVERNMNET AND TRADE Government intervention in trade Name Course Lecturer Date Introduction While the global economy has witnessed great reduction in trade barriers, restriction on free trade by governments across the globe still persist. Free trade is basically described by the patterns of exports and imports that occur in the absence of trade barriers (Irwin, 2005). The question that many scholars have tried to find answers to is why governments impose strict restrictions on free trade irrespective of the notable advantages it possesses. Many of these scholars and economists have come to the consensus that governments are motivated to intervene in trade by three main reasons which are cultural, political and economic. They could be motivated by one of these factors, a combination of two or a combination of the three factors. The common reason why governments intervene in trade is to support exporting activities of producing companies in their countries. Besides that, a government can intervene in trade when its economy is underperforming. During tough economic times, workers and businesses often lobby government agencies to impose protective measures for imports that could potentially eliminate jobs and reduce work in the domestic market. This paper seeks to examine the economic, political and cultural motives for intervention of governments on free trade. Political motives Trade related decisions made by government officials are often based on political motives. This is because the survival of politicians in the political arena is dependent on how much they are able to please voters hence get reelected. Gwartney (2008) maintains that although most of the trade policies are formulated by political personalities, such policies might prove irrelevant in the long run if they are done purely on political motives. The main political motives behind intervention of governments on trade are to preserve national security, respond to unfair trade practices by other nations and to protect jobs in their domestic nations (Uradnik et al, 2011). Protection of jobs Naturally, governments will intervene whenever free trade seems to affect the rates of unemployment in their home countries (Breitenfeelner and Wagner, 2010). This mostly happens when there is excessive import of goods and services. The implication of excessive importation is that it tends to demine the production of local companies which might deteriorate to the extent of close up. This means laying off a substantial number of employees. In addition, locally produced products will be removed off the shelves which consequently reducing production. This can easily lead to companies laying off some of their employees in order to reduce production costs. Therefore, politicians will lobby government officials involved in trade to establish protective laws on employment for the sake of citizens in whom politicians have a direct interest. Preserve national security Certain industries that affect national security are often highly protected by the government. Similarly, certain imports and exports do receive government sponsored protection. Many governments regulate the exportation of specific commodities deemed precious to the nation such as oil and weapons. These commodities are quite rare and they would fall in extreme short supply at the eventuality of war (Huang, 2008). For example, many nations have strived to discover oil in their own nations to avoid disruption of this essential commodity in case war disrupts supply of oil from outside sources. Food is another commodity that receives massive protection from governments. Although food staffs are widely exchanged among countries, governments regulate the amount that is exported to other nations so that there are enough reserves at any given time to sustain the nation at the event of draught or war. France has particularly come under fierce pressure from other nations for its excessive protection on its agriculture sector. Agricultural subsidies in France are intended to provide farmers with fair financial returns who mostly operate on small scale hence incur low profit margins and high production costs. France therefore, rarely imports agricultural products that it is able to produce as a way of motivating its farmers to produce more. Contrary to that, many developed countries are exposing their agriculture sectors to the global market forces thus prompting farmers to discover new methods of increasing efficiency and managing risk. Other farmers are exploiting alternative methods of farming more so use of biotechnology and use of intensive land management techniques thus producing extra harvest for sale in international markets (Davis, 2011). Nevertheless, such impositions are not without their own share of drawbacks. The most common one is that a nation might be producing such commodities at relatively higher prices as compared to other nations consequently forcing its citizens to pay higher prices for commodities that would go for much less. Another way in which governments intervene in national security is by banning certain commodities from being exported to other nations. Industrialized nations have come up with agencies that review export requests on products and technologies that are said to have dual uses. This means that they have both military and industrial applications which require special government approval before they are exported. Export ban of dual-use product dates back during the years of the Cold War and was initiated between the Soviet Union and the Western powers. A recent example of export banning of dual-use technology is the case of the two US companies; Loral Space and Communications and Hughes Electronics Corporation that allegedly assisted China to improve its capabilities in ballistic missiles. Response to unfair trade Another political reason why governments intervene in trade is to respond to unfair trade. According to Dunkley (2003) governments around the nation can get involved in trade in order to gain influence over other nations. For example, Japan has control over many nations in Asia so as to assist them in recovering from financial crises. In addition, the United States maintains control over most events in North, South and Central America where it has established free trade initiatives. Economic motives Besides political motives for government intervention in trade, there are various economic factors that drive such interventions. Most of these factors are aimed at influencing international trade so as to promote strategic trade policies that favor individual nations and to protect infant industries in such nations. Protection of infant industries According to Sally (2001) infant industries require protection from superior competitors in the global marketplace. More importantly, their developmental stages need to be guarded so that they can also gain stability and sufficient competitiveness in the international arena. This is based on the argument that the learning curve is steep thus inadequate support is likely to cause downfall of the industry. Dunkley (2003) asserts that an industry can only become efficient, innovative and competitive if it fully grown and mature. Despite the fact that this argument is quite compelling there are several drawbacks that it presents. First, it requires governments to go an extra mile in determining the industries worth of protection and the ones that are not. This is however a difficult task that is almost impossible. Japan has for many years tried to protect its infant industries but this was only successful during the initial years from the 1950’s to the early years of 1980’s. Only little success has been registered since then. Essentially, governments should introduce concrete procedures for targeting and identifying infant industries otherwise supporting this kind of policy will remain a nightmare. Domestic industries can easily become complacent in development and innovation due to protection against international competition. Such companies tend to limit their capabilities and incentives in acquiring relevant knowledge that would earn them a competitive advantage. This comes as a result of lack of challenges presented by competitors that prompt companies to exploit better methods of doing business to make them distinct and highly competitive. A compelling example of industry complacency is the case of countries that were formerly communist. In the late 1980’s and the early 1990’s, when the policies of communist protection collapsed, almost all the government-owned companies were decades behind their counterpart capitalist nations in terms of innovation and technological advancements. In order to survive such incidences, state-owned companies need financial assistance either in form of out-right purchase or infusions of capital. Excessive protection can also cause more economic harm than good. Due to lack of competition, companies lack the incentives to improve quality of their products or services or to explore better methods of cutting production cost (Hill, 2006). As a result, consumers end up paying more for products that would be offered at less by competitors. This causes domestic companies to become over reliant on protection and can easily cause a split of a nation’s economy. The two-tier economy of Japan demonstrates the effects excessive protection of domestic companies. On one end are the highly competitive multinational corporations while on the other are the noncompetitive domestic companies. Domestic industries in banking, construction, property, local manufacturing and retailing are characterized by high wages, barriers of imports, higher costs and overregulation. On the contrary, the multinational companies benefit from low cost advantage through more efficient production facilities and operations in Latin America, Europe, Asia and the United states. Since these multinational companies usually face fierce rivals in the international markets, they adapt stronger strategies so ensure their survival. Protecting infant industries from the international markets also has negative impacts in barring them from external funding that would facilitate their growth. According to Gwartney (2008) infant companies have are not quite appealing for international capital market funding thus rely on financial assistance from their governments. Established companies free from such protection are open for funding by private sources in the international capital markets. Acquisition of strategic trade policy Another economic motive behind government intervention in trade is to pursue strategic trade policies. Many theorists believe that governments can intervene in trade so as to help their domestic companies become fast-mover industries and take advantage of economies of scale. Economies of scale limit the number of companies that can enter an industry hence giving existing companies the first-mover advantage. According Gwartney (2008) strategic trade policy has the benefit of increasing a country’s income. Companies that have acquired the first-mover advantage are in a better position to secure a solid place in global markets therefore, earning better profits. For instance, South Korea was able to build global conglomerates (chaehol) through strategic trade policies relative to its competitors. The chaehol enabled Korean companies to survive tough economic times as there was a wide range of industries to compete with. Despite having these advantages, the strategic trade policy also has several drawbacks. Most companies that receive lavish assistance from the government tend to become inefficient and operate at high costs as was with the case of most Japanese and South Korean companies in the 1990’s. The governments in these countries have strong concessions with local labor unions which results in companies to operating at very low profits due to high wages paid to employees. Most of the government supported companies in Korea came down during the 1997 currency crisis. It was during this period that the government decided to pull back some of its support from the companies in order to give them space for self growth. Laws were also passed to facilitate employee lay off in companies. Governments support on certain companies is, in most cases, driven by political lobbying by the specific groups that seek the support. This implies that only the specific interested group will receive the gain from the assistance with little or no benefit for the end user of the products or services. Consumers become ultimately exploited by paying more for products of less quality. Cultural motives The main cultural motive behind government’s intervention in trade is protection of national identity. Trade and culture are interconnected and often affect each other in various ways. Huang (2008) maintains that the culture of a country is gradually altered as it becomes exposed to products and people of other countries. Unwanted and inappropriate culture that is possibly harmful can cause great distress in a nation. Due to this, governments establish laws to block certain products and services for entering their boundaries as a way of protecting its citizens from potential harm they might cause. For instance, the French government has for many years strived to keep its local language free from certain alien English words. The specific laws ban foreign-language words virtually from all government and business communications, TV and radio broadcasts, advertising messages and public announcements. Canada is another nation making countless attempts in protecting itself from the influence of external culture more so that of the United Nations. The Canadian government requires that about 35% of the music played in local radio stations to by Canadian artists. Other nations across the globe have also followed this trend formulating laws that protect media programming for purposes of preserving their cultures. Davis (2011) observes that such restrictions hinder customers from a wide selection of products and services. Increased globalization has tremendously influenced exchange of cultures among nations. The United States is particularly seen as a threat to the cultures of other nations in the world. This is because the US has a global strength in media, entertainment and consumer goods. Such products have caused groups of people to lobby government agencies to formulate protection laws for the sake of cultural influence. Besides that, the US is quite advanced in technology relative to other nations which prompts other countries to enter into business with it. Although such advancements have great impact in ensuring successful business, some have proven to be extremely detrimental. For instance, the facebook is quite imperative in driving good business but some people have used it to spread obscene materials which circulates to almost everyone can access the internet. For this reason, the Chinese government has blocked facebook from its space as a way of protecting its people, especially the youths, from harmful effects of facebook (Woll, 2008). Conclusion Evidently, the government plays a fundamental role in trade. Although many economies have witnesses removal of most trade barriers, restrictions on free trade still persist in many countries. The reasons for government intervention in trade can be classified into three broad categories which are political, economic and cultural. Participation of politicians in trade is normally instigated by their desire to please voters hence get reelected. Such political reasons include protection of jobs for employees as well as protection of national security. The government tends to restrict excessive importation of commodities to avoid obsolescence of the roles of employees in the local industries. To ensure national security, governments restrict import of certain commodities deemed to be of dual-use. In addition, governments impose restrictions on export of rare commodities such as oil and weapons that have the potential of becoming completely unavailable in case of war breakouts. Another political reason why governments intervene in trade is to gain influence over other nations. One of the main economic motives of government’s intervention in trade is to protect infant companies from unfair competition in the international market. Another economic reason is to establish economies of scale among companies in the industry thus acquire first-movers advantages. The cultural motives that push government’s participation in trade are to maintain national identity and culture that basically distinguish a nation from others. References Irwin, D. (2005). Free trade under fire. London: Princeton University Press. Gwartney, J. (2008). Economic freedom of the world: 2008 annual report. Washington: Cato Institute. Breitenfeelner, B. and Wagner, N. (2010). Government intervention in response to the subprime financial crisis: The good into the pot, the bad into the crop. International review of financial analysis. Volume 19, pp. 289-297. Huang, B. (2008). Effective government intervention in establishment optimal financing frame for transnational operation of private enterprise. International journal of business and management. volume 3, issue 9, pp. 31-34. Davis, C. (2011). Food fight over free trade: How international institutions promote agricultural trade liberalization. Princeton: Princeton university press. Dunkley, G. (2003). Free trade: Myth, reality and alternatives. New York: Palgrave. Sally, R. (2001). New frontiers in free trade: globalization’s future and Asia’s rising role. Washington: Cato Institute. Hill, C. (2006). Global business today. Boston: McGraw Hill. Woll, C. (2008). Firms interest: how governments shape business lobbying on global trade. New York: Ithaca Cornell University Press. Uradnik K., Johnson, L. and Hower, S. (2011). Battleground: government and politics. Santa Barbara: Greenwood. Read More