Methods and Motives of Government Trade Interventions - Case Study Example

Methods and Motives of Government Trade Interventions Authors Name Institution Affiliation Introduction The recent changes in the business arena have made most governments to form global links. The countries most of which were initially independent economies have thus become part of the globalized economy. The transformation of the individual country economies has been so dynamic that most countries have been lagging behind in globalizing their businesses (Sam, 2014). However, these countries have been faced by the threat of financial crisis that is unpredictable and has many downsides. The governments are very much able to have control over the trade that transpires within and beyond their borders through a variety of ways that shall be discussed in this paper. When the governments intervene the key interest is to protect the population of the country as well as the economy from any adverse effects such as recession (Sam, 2014). Most countries have used this silent weapon to their advantage as well as to guard the influence of globalization that is always felt at the domestic levels. This paper explores the various motives the governments have when intervening in international business. The paper also evaluates the positives and negatives associated with each method of government intervention in trade. Motives for Government Intervention in International Trade Free trade has long been allowed by most government thus allowing imports and exports to cross the bordered of countries without any trade barriers (Bissa, 2009). However, most governments have realized that it is important to intervene in international cross border trade so as to guard the political, economic and cultural interest of the country. Politically, the government intervenes into trade so as to protect national security (Taras & Gonzalez-Perez, 2014). According to Bissa (2009), every nation must ensure that some of the core industries that the economies of such countries depend on are shielded from the interference by other countries. These industries include the weapons, electronics, mining and air transport industries that bring a lot of revenue to the respective governments (Taras & Gonzalez-Perez, 2014). When the resources for these industries are widespread in the country, the government restricts imports that would otherwise jeopardize the exploration of resources in the country. Some countries like Japan that have less energy reserves thus have to ensure that the import of the commodity is assured so as to ensure natural security. The second reason why governments politically intervene into trade is to guard unfair trade practices. The principle reason behind this form of intervention is to protect the consumer’s rights in the respective countries (Sam, 2014). Steers and Nardon (2014) insist that most Middle East and Asian countries such as India, no longer order apparels from china because they are reeled under severely acute respiratory symptoms conditions (SARS) prone conditions. Governments also intervene so as to prevent high brain drain rates that have been the cause of slow economic progress (Goldstein, 2007). The governments also protect trade so as to reduce the gap between the jobs available and the unemployment rates (Taras & Gonzalez-Perez, 2014). To effectively do this the governments engage methods that result in job creation and protection of the existing jobs in the nation. Governments that have ultimate control over cross-border businesses have been seen to have influence over other countries (Trebilcock & Howse, 2007). The right example of this is the developed nations that have been able to have power to make critical economic and political decisions over the developing nations (Taras & Gonzalez-Perez, 2014). This is also done to protect the national health through elimination of trade on food products that are suspected to harm the populace of a country (Sam, 2014). A good example of this is the EU region that banned beef from US basing their actions on the fact that the beef contained growth hormones that were otherwise harmful to human life (Krissoff et al., 2010). There are various economical reasons why the governments intervene into international trade. First off, the governments need to guard the infant industries from any indirect or direct competitors (Sam, 2014). Infant industries are those that are emerging and thus that lack the capacity to compete globally as well as have less market share in the global business (Trebilcock & Howse, 2007). However, such industries when weaned properly and protected have the ability to perform better at the global level. The governments protect such industries so that they are able to become large enough to overcome the competition from other similar industries across the globe. A good example is the US directive that restricted trade with England so as to protect the jobs and the industries in US. The protections of these sorts are never permanent and have a period after which they are removed (Taras & Gonzalez-Perez, 2014). The period is dependent on the ability of the infant industries to innovate, compete and efficiently produce. The only drawback is in coming up with the criterion of choosing the industry to protect as not all of the industries can be protected. The other argument is towards the achievement of foreign policy goals (Kerr et al., 2007). Governments pursue commerce since it is an essential component in attaining foreign policy goals (Trebilcock & Howse, 2007). Steers & Nardon (2014) note that, most governments participate in commerce so as to have preferential treatment that ensures a strong inter-country relationships. The European Union for example has preferential trade treatment to banana producing countries (Poynter, 2010). On the same note, governments also intervene with this motive so as to prevent their allies from trading with their foes that would jeopardize their existence and economy (Goldstein, 2007). Through this drive the government is able to balance the foreign exchange rates so that their currencies are either too weak or too strong (Kerr et al., 2007). It is a known fact that when the exchange rates are higher like the US and UK currencies, the imports will be cheaper compared to the costly exports thus higher profits (Poynter, 2010). On the contrary, weak currencies mean that the exports are cheaper than the imports (Goldstein, 2007). This boosts trade with other countries resulting to stability of the economy and job creation. The government also intervenes to restrict a particular technology that confers it competitive advantage within its borders. The other economically related reason is so as to get revenues from trades that accrue as a result of exports and imports flow. The other chief economic motive is for strategic trade policies (Kerr et al., 2007). The new trade theory is based on the argument that industries bear economy scales and that the international market is very discriminative against the industries that it can favorably allow to operate and enjoy the first mover advantages (Arndt, 2013). The number of industries in the global market is thus regulated (Kerr et al., 2007). The governments come in between so as to do away with the trade barrier created by the firms that are enjoying first mover advantage (Poynter, 2010). The main motive is to shield the industries and the economy during economic surges. The other reason is also to protect the human rights in the countries that are partners with the governments (Goldstein, 2007). The motive has to be mutual between the two governments for this to smoothly work to completion. The cultural intentions of the governments when intervening trade, differs across the board (Bissa, 2009). Most governments value their traditions and culture to an extent that when the culture is being threatened, corrigible measures have to be taken. When culture is eroded there is direct influence on national identity as well as national symbols (Bissa, 2009). Some products and services if encouraged to flow freely would lead to the deterioration of a country’s own culture and are thus regulated (Goldstein, 2007). The governments also guard the content that flows across communication channels that are likely to convince the people otherwise. Western culture is on the verge of collapsing most cultures and governments are putting up measures and policies to ensure that it lacks space in their territories. Positives and Negatives for the Methods used in Government Interventions Some of the mostly used methods of intervention include embargoes, tariffs, import quotas, , local content requirements, antidumping policies, subsidies, administrative policies, and voluntary export restraints (VER) (Arndt, 2013). These methods have their plus and minus. Subsidies refer to the method used by governments to offer the domestic producers support in variety of ways (Steers & Nardon, 2014). The ways include tax breaks, low interest on loans, grants, product price supports and allowing the firms the freedom of participating in government equities (Trebilcock & Howse, 2007). The domestic producers are protected at the expense of their competitors (Arndt, 2013). The result of this is that the domestic producers are likely to compete favorably in the global market thus benefiting the countries’ economies. Steers & Nardon (2014) point that, the move encourages the domestic producers to produce excess goods than the consumers can consume reducing the competition within borders as well as the propagation of ill practices such as production of poor standard goods for the country and good standard goods for export. Governments also use tariffs in intervening international trade. Tariffs refer to the taxes levied on imports with the motive of increasing the cost of imports (Trebilcock & Howse, 2007). This aims at shielding the domestic products from competition (Poynter, 2010). Ad valorem tariffs are levied on a proportion of value of the goods per every unit of goods imported (Poynter, 2010). On the other hand specific tariffs are fixed and apply to every unit of goods imported. The producers benefit from tariffs at the expense of consumers since the higher quality imports are priced higher than the low quality goods in the domestic markets (Poynter, 2010). Most authors have noted that tariffs have a negative impact on the economy since it discourages the production of goods that can be produced in other countries that already have the resources thus low costs. Quotas refer to direct restrictions on the amount of specific goods that can be imported into a country without restrictions (Arndt, 2013). There are two variations of quotas. First, voluntary export restraints (VER) imposed by the exporting country upon the request of the importing country (Trebilcock & Howse, 2007). Second, tariff rate quotas that ensure low tariff rates are applied to imports within the quota (Trebilcock & Howse, 2007). Trebilcock & Howse (2007) further note that, quotas impact the cost of production of industries negatively since they eliminate the chances of getting assured markets. The VER imposing nations’ industries and firms will benefit from lower prices due to great supply (Steers & Nardon, 2014). VER secures jobs as the imports are threatened allowing domestic producers to benefit and expand their production and thus human and capital base (Trebilcock & Howse, 2007). The domestic producers are assured of markets for their products. The domestic producers thus achieve high market shares and prices through retaining of the competition within borders (Arndt, 2013). The minus of this is that, import dependent domestic producers will have high operation costs and thus high pricing (Cavusgil et al., 2015). This will not only impact the production but also the financial income and thus market share of such companies. Through local content requirements the governments institute regulations that stipulate the amount of goods the domestic producers must produce for the market (Cavusgil et al., 2015). This is advantageous for the developing nations as they are able to industrialize dynamically to higher levels (Taras & Gonzalez-Perez, 2014). Through ensuring that local resources and labor are sourced the local economic development is assured. The disadvantage of this is that when the cost of production in some countries is high, a shift in pricing will be the only option thus impeding international trade (Taras & Gonzalez-Perez, 2014). The businesses out of such countries or those that are foreign will incur higher costs especially if the nations are specialized producers. Administrative trade policies refer to a non-formal way of creating trade barriers through the use of bureaucratic rules that eliminate trade barriers. This move has the advantage of protecting the domestic markets while eliminating the threat of foreign competitors. On the other hand it increases the cost of production for the foreign exporters especially for perishable products. Embargoes have also been used successfully to curtail unsculprous trade. While this has the merit of protecting consumers, it reduces the supply of cheap and quality products as well as reduces trade between nations. This is disadvantageous as such governments that have embargoes stagnate in development. Anti-dumping policies protect domestic producers from unfair competition from the foreign based firms. This shields the countries of such governments from poor quality and underpriced products. WTO has anti-dumping policies that are meant for punitive measures on countries that engage unsculprous business practices that are aforementioned. Non-compliant governments are fined countervailing duties. While this move protects the national markets and security, it has the impact of worsening inter-country relations between the two governments especially if the method used in assessing the dumping claims is unfounded. Conclusion There are many ways that the governments intervene on international trade. The most common methods discussed in the paper are subsidies, tariffs, VERs, quotas, administrative policies, anti-dumping policies and embargoes. Each of the identified methods has advantages and disadvantages as shown in the paper. Additionally, there are formal and informal methods as also outlined in the paper. Based on the merits and demerits of each method the governments should carefully weigh the outcomes of each method prior to adopting it. There are political, economical and cultural reasons why governments intervene in trade. The main reasons identified are to protect national security, culture, infant industries, human rights, fluctuations in exchange rates, foreign trade policies and strategic policies among others. The government should continue to intervene as long as the advantages outweigh the disadvantages. References Arndt, H. W. (2013). Comparative advantage in trade in financial services. , 41(164). PSL Quarterly Review, 4(1), 164-178. Bissa, E. M. (2009). Governmental intervention in foreign trade in archaic and classical Greece. Leiden: Brill. Cavusgil, S. T., Knight, G. A., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2015). International business: The new realities (2nd ed.). Melbourne: Pearson. Goldstein, N. (2007). Globalization and free trade. New York: Facts On File. Kerr, W. A., Gaisford, J. D., & Estey Centre for Law and Economics in International Trade. (2007). Handbook on international trade policy. Cheltenham, UK: Edward Elgar. Krissoff, B., Bohman, M., Caswell, J. A., International Agricultural Trade Research Consortium, & Regional Research Project NE-165. (2010). Global food trade and consumer demand for quality. New York: Kluwer Academic. Poynter, T. A. (2010). Multinational enterprises & government intervention. New York: St. Martin's Press. Sam, R. (2014, April). Government Intervention in International Trade - InfoBarrel. Retrieved from http://www.infobarrel.com/Government_Intervention_in_International_Trade Steers, R. M., & Nardon, L. (2014). Managing in the global economy. Armonk, NY: M.E. Sharpe. Taras, V., & Gonzalez-Perez, M. A. (2014). The handbook of experiential learning in international business. Basingstoke: Palgrave Macmillan. Trebilcock, M. J., & Howse, R. (2007). The regulation of international trade. London: Routledge. Read More