Motives behind Government Intervention in Trade - Coursework Example

Motives behind government intervention in trade xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Instructor xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Task: Even though the world since WW II has witnessed great reductions in trade barriers, governments everywhere continue t restrict free trade. Discuss the political, economic and cultural motives behind government intervention in trade. Introduction Government intervention in trade refers to the actions taken by a government that affect the free market activities that happen in normal exchanges. This intervention in the normal market which ends up affecting voluntary market interventions may be in form of taxes, assorted regulations, subsidies, price controls as well as control of government spending. Justification for government intervention is that when markets are left on their own, the decisions made by both businesses and consumers do not achieve efficiency (Economic Glossary, 2008). Since World War II, governments all over the world are involved in activities that directly influence the normal market activities. Governments impose restrictions to free trade due to various economic, cultural, and political reasons. We will examine the various motives behind government intervention in trade. Economic Motives There are several economic motives why governments intervene in trade as discussed below. They are mainly aimed at guarding the economy of a nation from effects of trade policies that can harm it. 1. Protection of local infant industries This is one of the main reasons why governments realize they have to intervene in trade. The nature of economic trade means there is a lot of competition by multinational firms. Infant industries find it hard to establish themselves due to this competition and governments find it necessary to intervene in trade in order to protect them(Goldstein, 2007). This is done until they are sufficiently innovative, efficient and competitive internationally. Once this is done, protectionism is removed. This kind of intervention promotes competition among local industries (Hoekman et al, 2002, p. 150). Critics of this argument argue that it is hard and almost impossible for governments to determine the type of industries that need protection. Japan is used as an example because its protectionism of infant industries has become less efficient. Ideally, it’s only until after a long time that a government can correctly determine the industries to protect. The other criticism is that domestic industries become complacent and less innovative which limits their ability to become more competitive. Another criticism is that this hinders the ability of small promising business ventures to solicit for funds in capital markets. It is also argued that consumers suffer from having to pay high prices due to lack of competition among industries which is necessary for prices to go down. Protection means local companies do not look for creative ways of lowering production costs (Vorton, 2010). 2. To pursue strategic trade policies This is the other main economic reason why governments intervene in trade. Each country has its own trade policies that it aims to use to grow its economy. To execute these policies, the government has to intervene in trade with the aim of ensuring its policies will succeed. Proponents of this argument argue that this form of government intervention is important as it enables local industries to benefit from first mover advantage. They also benefit from economies of scale from operating in large scale and from the fact that only a few of such companies take up a market. The main benefit of this form of intervention is an increase in national income. Local companies benefit by earning high profits which helps them establish themselves even in the international market (Bossche, 2008). Critics of this form of intervention argue that it results in inefficiency and high production costs which eat on the profit margins of local forms. It may also lead to retaliation by other countries adopting the same policy. Additionally, governments lack the requisite intelligence to intervene well making this form of intervention unsuccessful sometimes (Carbaugh, 2009). 3. To address market failure The government sometimes intervenes to prevent situations where market efficiency would fail. A free market may not guarantee efficient supply of commodities demanded by consumers due externalities, market power, public goods and information problems. Free markets cannot provide public goods and services. A good example is national defense. No group or individual is willing to pay for it and the government has to intervene and render these services and goods. Consumers sometimes lack information on the products they consume and government has to intervene. For instance, it may require appropriate labeling to help consumers make informed choices (Hall & Lieberman, 2013). Additionally, in some markets, some suppliers have extreme market power which turns them into natural monopolies thus diminishing healthy competition. This is harmful to consumers. Governments intervene to regulate such market power. For instance, if high initial costs are the ones leading to such a situation, governments offer subsidies and tax cuts to new firms or directly supply the goods or services in some cases. A good example is the health sector, energy sector and water sector (Henderson, 2009). 4. To prevent dumping from other countries. Governments justify trade intervention policies as attemps to guard against dumping of products from other countries. Dumping occurs if a government is selling products in foreign countries at price that is below the cost in that market. This forces the industries located in the importing country out of business. This is a widely accepted reason for protectionism. It is similar to protection of infant industries though it is wide because it guards even the old and well-established industries. This form of intervention is mainly used by the less-developed countries to protect their local industries from competition by industries from the developed countries (McDonald, 1999 ). Political Motives Government policies are drafted by politicians in most countries. On the other hand, politicians are always bent towards pleasing voters in order to get reelected. As such, some policies through which governments intervene in trade are drafted for political reasons (Mohan, 2000). Such reasons include protection of jobs, responding to unfair trade practices by other countries, gaining influence over foreign nations and preserving national security. 1. To protect jobs Protection of jobs is the main political motive for government intervention in trade. Governments are conscious that with high unemployment rates, they cannot survive for long. They therefore come up with policies to protect local jobs whenever foreign trade threatens the jobs in the home country (Agrawal, 2009) A good example is the exemplary case of Guyana where the president advocated for the consumption of local commodities in order of imports as this would have meant the collapse of local industry and consequently the loss of jobs (Wild et al, 2013). 2. To retaliate for unfair trade policies by other countries Whenever a nation feels it is being treated unfairly when trading freely with another country, it responds in the same manner by taking prohibitive measures. The measures are meant to protect local firms and industries. Such measures may include high tariffs, import quotas, currency controls and local content requirements. Recently, the US government retaliated against the Japanese government which had imposed restriction on its local cellular phone equipment by threatening to impose sanctions on Japanese products (Agrawal, 2009). A government may also use unorthodox measures such as the closure of its ports from ships of the other nation. These measures are aimed making sure the other nation makes concessions to achieve a fair trading platform. However, it means the local industries will survive for political reasons rather than economic reasons (Taylor, 2007, p. 777). 3. To preserve national security Governments consider some industries to be very important for national security and therefore protect them. They protect them by prohibiting either imports or exports. On the side of imports, governments try to have domestic supply of items such as fuel, weapons, and land, sea and air transportation. This is evident in the case of countries such as the United States which contains to look for oil within its borders to ensure its energy supplies are assured in case of war. Countries also protect their agricultural industry by encouraging the consumption locally grown food instead of imported one because overreliance on imported food can lead to starvation in case of war (Deardorff, 2000). This is the case with France which gives its farmers subsidies to make agriculture financially viable since most of them farm in small scale. In spite of the importance of this kind of protectionism, there are some drawbacks such as high cost of production of these goods yet they could be supplied cheaply by international suppliers (Carbaugh, 2009). On the side of exports, some nations ban the exportation of some defense-related products t other nations for security motives. Some products and technologies with both military and industrial applications are required to be approved by the government before they can be exported. This type of protectionism was mainly used during the Cold War after the end of World War II (Wild et al, 2013). 4. To gain influence This is mainly the motive of the largest nations in the world in the world. Their aim is to gain influence over the smaller nations through trade. For instance, a country like Japan has become influential in Asia due to the large amount if exports it exports throughout the continent. It also lends the Asian countries large amounts of money thereby cementing its influence over the entire region. This is the same case with the United States and its control over both South America and North America (Wild et al, 2013). Cultural Motives Cultural objectives drive governments to intervene in trade sometimes. The main reason is to protect national identity. Cultures are influenced by the commodities consumed by the society hence the need to restrict the trade in some products and services. Governments mainly restrict the commodities that they believe are harmful or those that can bring unwanted cultural influence. Most of the dominant countries such as the US have spread their cultural influence to other parts of the world through trade. Governments are trying to reduce this influence to ensure it does not change the cultures of their countries (Anheier, 2008, p.38). In order to protect cultural identity, countries enact legislation aimed at minimizing the effect and influence of foreign products and services. For instance, Canada has enacted a law requiring Canadian radios to make sure that at least 35 percent of the music they play is by Canadian artistes. Countries like the United States are seen as the major threats to cultures of other nations all over the world. Consumer goods and entertainment products such as movies, music and magazines are visible all over the globe and this has led countries to consider laws aimed at controlling the amount of foreign media content in a bid to safeguard their indigenous cultural identities (Wild et al, 2013). Conclusion Though government intervention in trade is necessary, it has its own disadvantages. It brings high compliance costs for business and is largely inefficient. The costs reduce economic activities and raise prices for commodities thus affecting the consumers it is meant to protect (Alemanno, 2013, p.120). According to Peng (2011), the theory of free trade and the” invisible hand“advanced by Adam Smith in 1776 remains the main determinant of the scope and scale of economic activities. He argues that free trade should apply in international trade in the same manner as in domestic trade. Nevertheless, government intervention in trade is justified and it comes with numerous advantages. It protects local citizens from effects of unfair trade practices by foreign countries. It gives local industries a chance to establish themselves without exposure to tough completion from more established foreign countries. It also enables countries to pursue strategic trade policies and maintain their political influence (Brux, 2008).Governments will always find it necessary to intervene in trade for economic, political and cultural reason. References Agrawal, R. (2009). Instruments of Trade Policy. International trade (p. 125-130). New Delhi: Excel Books. Alemanno, A. (2013). The Perspective of Public Sector Economics on Regulation. Better business regulation in a risk society (p. 120). New York, NY: Springer. Anheier, H. K. (2008). Cultures and Globalization . The Cultural economy (p. 38). Los Angeles: SAGE. Bossche, P. V. (2008). Economic Globalisation And International Law. The law and policy of the World Trade Organization: text, cases, and materials (2nd ed., p. 23-24). Cambridge: Cambridge University Press. Brux, J. M. (2008). International Trade. Economic issues and policy (4th ed., pp. 314-315). Mason, OH: Thomson South-Western. Carbaugh, R. J. (2009). Trade Regulations and Industrial Policies. 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International business: the challenges of globalization (6th ed., pp. 176-201). Upper Saddle River, N.J.: Pearson Prentice Hall. Read More