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

Political, Economic and Cultural Motives behind Government Intervention in Trade Introduction The post world war II trade system was marked with conflict between America and Britain at the Bretton Woods Conference (Gilpin, 2001, p. 217). The conference was aimed at introducing free trade and open foreign markets. After the World War II, GATT (General Agreement on Tariffs and Trade) was formed to reduce barriers to world trade. The GATT was formed in 1947 and was an agreement among nations to help in tariff and non- tariff barrier reduction with the aim of promoting trade (Gilpin, 2001, p. 222). GATT was designed to govern international commerce. It was later absorbed by the World Trade Organization (WTO). WTO has more extensive and more binding rules. Since then, trade barriers have gradually been removed but governments still have reasons for restricting free trade between states. Government reasons for restrictions to free trade are to avoid possible loss, maintain domestic economy autonomy, avoid currency shortage and avoid failure to achieve a full employment economy among others. Governments have several reasons for their participation in trade with all the reasons revolving around social, economic and political motives. This paper seeks to discuss these reasons under political, economic and cultural contexts. Political reasons Political reasons are aimed at attaining specific government motives. Governments aim to create job opportunities and protect jobs. Unemployment is a major concern for governments worldwide. Government will become involved when trade threatens jobs in their nations. For example, in China, a Chinese stated owned company named Lucky Films, which offered employment to many Chinese was to collapse due to stiff competition. In an effort to save the company, the government of China got involved and formed a partnership between the company and its major competitors. This way the government was able to save a large number of workers that would otherwise become unemployed (Tian, 2007, p. 98). Preservation of national security is also another major political concern. Organisations and firms offering security to a state are usually in close contact with their governments. These industries often receive assistance from their government, for example through funding. The firms also receive government sponsored protection. These industries receive protection through their respective governments restricting importation or exportation of goods and services. For instance, Japan uses the argument of food security to protect its rice farmers (Jordan et al, 2009, p. 260). A country importing food supplies may be faced with severe starvation in times of war and vice versa. Exportation of defence related goods will also call for government intervention. Government may ban exportation of certain defence related products to other nations in order to preserve national security. Unfair trade will definitely call for government intervention to trade. Unfair competition may lead to collapse of companies thus resulting to poor economic performance of that country. Governments will therefore participate in trade to regulate unfair trade activities. In response to unfair trade activities, a government may result to raising or imposing trade tariffs or closing its ports if then nation participating in unfair trade does not comply with the demands of the affected nation. Influence to small countries can also push a government especially those from powerful nations to engage in trade activities. Japan and China has great influence on Asia as it accounts for a large portion of the imports and exports of many countries throughout Asia (Kathie & Kharas, 2004, p.22). For example, the United States has gained strong influence on countries in South and North America. These links between the US and the other countries depend on the United States trade activities and a disruption in such agreements can ruin any existing economic activity between the US and any of these trading partners. Economic reasons Government protect upcoming companies in their countries until they become well equipped to face the highly competitive international market. The reasoning behind this is that the industries in their infant stages need time and protection in order to become innovative and efficient (Tucker, 2008, p. 443). Protection can be removed after the growing company gains knowledge of how to become innovative, efficient, and competitive. However, governments make mistakes in differentiating which companies to term as infant. Government protection mostly results into low performance by these domestic firms as they end up enjoying the protection and in turn, they lack innovation. The firms limit their competitiveness and price their goods and services at extremely high prices as compared to the already established firms. Today, infant companies can get direct funding from their governments (Vorton, 2010, p. 3). Fast mover advantages can help firms have strong positions in their industries. First mover advantages help firms to establish themselves. Strategic trade policy has a number of benefits in a nation’s economy. It results in increased national income as companies make more profits as their position in the industry is solid due to first mover advantage. Strategic trade policy has its demerits though. For example, in South Korea and Japan, lavish government assistance caused the domestic companies to be inefficient as it resulted to high wages and thus low profit margins (Vorton, 2010, p. 1). Cultural reasons Culture and trade are intertwined and greatly affect one another. A country’s culture can be greatly influenced through trade. In efforts to protect its national identity, a country would forgo the benefits it acquires from trading with another country. The cultures of countries are slowly changing due to exchange of goods and services with other cultures. Trade can cause great diversion from local culture and this can force governments to stop imports that result to change of a country’s way of life. Traditions in a country can greatly be influenced by trade. In order to avoid erosion of a country’s way of life, the government must come in. For instance, the French government tries to avoid American English by banning the use of English words in any kind of trade. Another example is the United States. The United States entertainment industry has a great capacity to influence the cultures of other nations and thus, the country is viewed as a threat to other countries’ way of life. The US has worldwide strength in production of intangible consumer products such music and movies. Music and other forms of entertainment are perceived to be elements that can easily erode a country’s culture. Canada is another country trying to preserve its culture. The government of Canada has made it law that at least 35 % of music played in their local radio stations be by Canadian artists (Karagiannis, 2007, p. 9). Failure of government intervention in trade activities that influence culture over time will result to complete erosion of a country’s norms and traditions. In the collective effort of avoiding culture erosion, protecting infant businesses, creating job opportunities for its citizens, curbing unfair trade and so on, governments have over the years come up with ways to be involved in trade. Government involvement entails promoting trade in their countries. The methods of promoting trade that governments over the world have adopted are subsidies and creation of special government agencies among others as discussed below (Steers & Nardon, 2006, p. 64-65). Subsidies are a form of assistance to domestic companies by their governments. The assistance given by governments to these producers takes many forms such as: direct finance, low interest loans, product price supports, tax cuts and cash payments. Subsidies are aimed at helping domestic companies to compete with their counterparts in the corporate world (Behboodi, 2003, p. 44). Companies that are mostly issued with subsidies are mainly in the entertainment industry. However, subsidies have setbacks. They can result in a company failing to advance so that it can continue receiving the government support. This way, consumers are manipulated as the money government uses to support the companies is taxed from the consumers. Export financing is another way governments participate in trade. By promoting exportation through financing companies in their export activities, governments are directly involved in trade activities. Governments promote exportation by giving companies loans at low interest rates. The government can also promote trade by agreeing to be a company’s guarantor in case it fails to repay its loan. This is termed as loan guarantee. For example, the United States uses two agencies for export financing. The Export-Import Bank and the Oversees Private Insurance Corporation (OPIC) assist companies to access export financing. OPIC offers insurance against war, revolution, currency inconvertibility and insurrection. Export financing is best for companies just starting the exportation business (Yager, 2009, p. 1). A foreign trade zone is an area designed to allow products to pass through to a country at lower custom duties. Such zones reduce the procedures involved in exportation and importation. Foreign trade zones reduce production costs for companies and also allow the products reach the market faster than they would take had they gone through the ports. These zones allow some products to undergo their last assembly. Special government agencies are establishments for promoting exportation activities n nations experiencing a shortage of foreign currency. They organise trips for business personnel and officials when they wish to visit other countries. They also have offices in foreign countries which assist companies to export products. An example is the Japan External Trade Organization. These agencies also inform local companies to access regulations that are in place in the countries that they are exporting their goods. The government is also involved in restriction of trade. Restriction is necessary where a certain form of trade has more disadvantages than advantages to a country. Governments use the following tactics to restrict a certain form of trade. Quotas are restrictions on amounts of goods that can enter or leave a country. Quotas are administered by governments through granting licenses to foreign companies or governments. Examples are the import quotas and domestic quotas. Import quotas protect domestic companies by putting a limit on the amount of goods that can enter a country. This thus assists domestic producers maintain market share. Export quotas help a country to maintain supplies in the local market. A country may restrict supply of its products on world markets to push up the international price. A Voluntary Export Restraint (VER) is a special kind of export quota a nation can issue on its exports. It is usually at the request of the importing nation. Embargoes are a complete ban for certain products. This can be either imports or exports of a country. It is the most restrictive nontariff trade barrier and often it is backed by political goals. Local content requirement are rules and regulations stipulating that domestic producers must produce a certain amount of goods in the market. This laws are aimed at forcing the local companies make use of local resources to the maximum. Through this, the government is able to increase employment as the companies are forced to maximise on the labour force. Developing countries use local content requirement to boost industrialisation. Governments can use administrative delays to restrict trade in their countries. Administrative delays are regulatory measures aimed at impairing the excess flow of imports into a country. Administrative delays can require international cargo planes to land in inconvenient airports and understaffing custom offices to increase clearance and inspection. Administrative delays can also be in the form of requiring importers to possess special licences that take a long time to acquire. Governments reduce imports by stipulating an exchange rate that is unfavourable to potential importers. This way, the government controls the currency of its country. Governments can also reduce the exchange rate of its currency to another’s country thus giving exporters favourable rates and thereby encouraging exportation. However, governments have not fully opened their boundaries to other countries. This is so especially in the agricultural sector (Csaki & Nash, 1999, p.36). To date, governments continue to be involved in trade within and outside their countries in the collective effort of ensuring a stable economy. Conclusion The main motives behind government intervention in trade revolve around political, cultural and economic reasons. Governments choose to be involved in trade to influence the allocation of scarce resources. Politically, the government’s motive is aimed at maintaining the welfare of its citizens by creating and maintaining job opportunities, maintaining national security, responding to unfair forms of trade and gaining influence over other countries. Economic motives are aimed at protecting new industries as this will increase the general economic performance of a country’s citizens. Lastly, governments aim at preserving their countries’ cultures. Governments’ social motive of engaging in trade is to maintain their countries’ way of life as they try to preserve the traditions and norms of their citizens References Behboodi, R 2003, Industrial Subsidies and Friction in World Trade, Routledge Publishers, New York. Csaki, C & Nash, J 1999, Regional and International Trade Policy: Lessons for the EU Accession in the Rural Sector--World Bank/FAO Workshop, USA. Gilpin, R 2001, Global Political Economy: Understanding the International Economic Order, Princeton University Press, Princeton. Jordan, A A, Taylor, Jr., W J, Meese, M.J, Nielsen, S C & Schlesinger, J 2009, American National Security, 6th edn, JHU Press, New York. Karagiannis, N 2007, Modern State Intervention in the Era of Globalization, Edward Elgar publishers, London. Kathie, L.K & Kharas, H.J 2004, East Asia Integrates: A Trade Policy Agenda for Shared Growth, World Bank Publications, Washington. Steers, R & Nardon, L 2006, Managing In The Global Economy, M.E Sharpe, New York. Tian, X. 2007, Managing International Business in China, Cambridge University Press, Cambridge, MA. Tucker, I B 2008, Survey of Economics, 6th edn, Cengage Learning, New York. Vorton, J 2010, Methods of Promoting International Trade, Macmillan Publishers, New York. Yager, L 2009, Export-Import Bank, Diane Publishers, New York. Read More