The Main Reasons for Government Intervention on the International Trade - Case Study Example

International trade Contents Contents 2 Reason for government intervention on international trade 3 Different ways of government intervention on international trade 5 Arguments in favour of government intervention on international trade 7 Arguments against government intervention on international trade 8 Conclusion 9 References 10 Introduction International trade contributes significantly towards the growth and development of the economy. The international trade generally influences the economy by increasing the production level and reducing the price. But in spite of the significant contribution by the international trade on the economy, the government intervenes in the trade process. The government levies taxes on the import and export of the goods. The main purpose of government intervention on the international trade is influenced by political, social and economical factors. The rationale for the government intervention on the international trade is that it provides international security for protecting and safeguarding the industries. In case of the new firms or the industry it benefits the firms in entering into the industry where the foreign firms has an added advantage of entering into the market. The main instruments through which the international trade is affected by government interventions are the tariff, subsidies, administrative policies, voluntary export restraints, local context requirements, anti dumping duties and import quotas. The role of government intervention increases in the area where several provinces have adopted different but successful approaches for the conducting international trade. The economy of a country flourishes when the government supports the firm or the industry by providing appropriate degree of intervention and regulation. The assistance that is provided by the government in the form of subsidies and incentives helps to reduce the impact or the influence of protectionism. Government intervention assists the failing companies to resume and recover their businesses. Reason for government intervention on international trade The main reasons for government intervention on the international trade are for providing national security, for implementation of the strategic trade policy, for providing safety, determining the foreign policy goals and for dealing with emotions. The government mainly intervenes in the international trade for providing national security. The government of each country is responsible for protecting and safeguarding certain specific industries or firms which includes the aerospace, semi conductors, advanced electronics, weapon, and also strategic minerals. The government also intervenes in the international trade for implementation of the strategic policy of the government. Since the theory supports and justifies that the firm has the economies of scale and the world will prefer only few firms or industries. There are countries which attempt to dominate the export of certain specified products because there are some firms or industry under their control who are able to capture the market and take the advantage of entering first in the market. The government mainly applies the subsidies for favouring such firms and it benefits the domestic firms in overcoming such barriers for entering into the market that has been created or developed by the foreign firms or the industry (Milner, 1999). The government also intervenes in determining the goals related to foreign policy since the international trade is being considered as an important instrument for achieving the goals related to foreign policy. The government sometimes restricts the export of goods to the friendly nations for ensuring that the goods are not transferred in the hands of the enemies and the restrictions are also imposed on the non defence goods as well. The government intervenes in the international trade for protecting and safeguarding the consumers from the use of various unsafe goods or products. In case of the medical services the needs and requirements of the patients are safeguarded by the implementation of the standards for the doctor’s qualification and others. The government mainly intervenes for protecting the emotions that is related to preservation of the culture, heritage and identity of the economy. The environmental issues are also regarded as one of the important cause or the reason for government intervention. Different ways of government intervention on international trade The different ways through which the government intervenes on the international trade mainly includes tariff, subsidies, import quota, voluntary export restraints, requirements of local requirements, anti dumping policies and administrative policies. The tariff and taxes are levied and imposed on the import and export of the goods. The government generally determines or fixes a certain percentage of tariffs on the value of the imported goods or products. The section or the group that are benefitted from the intervention of the government mainly includes the domestic players, the employees of the safe and protected industries for maintaining of their jobs and the government themselves. The section or the group who losses from such government interventions are the economy which is inefficient or ineffective in nature, the consumers pay very high prices for their products and the employees of the industries are protected and they do not have potential skills (Sun and Heshmati, 2010). Subsidies are also considered as another way or technique of intervention of the government on the international trade. The government is engaged in payment of subsidies to its domestic players or producers. The various forms of subsidies that is provided or offered by the government mainly includes the payment of low interest on loans, granting of cash, equity participation, the government purchases and tax breaks. The main aim of government intervention is achieving of lower cost for benefitting in the export markets, assisting the domestic producers in taking the advantages of the emerging market, competing with the exports that are cheaper, increasing the domestic employment etc The import quotas is another way through which the government intervenes in the international trade by imposing restriction on the quantity of the goods or the products that are imported in the country. The government mainly intervenes in case of the tariff rate and the quota rate by restricting the extra profit that is made by the producers through the supply of the import quota. The government also intervenes in case of the voluntary export restraints in which the quotas on trade are mainly imposed by the exporting countries at the request of the government of the importing countries. This intervention of the government provides benefit for the domestic producers and it increases the price of the goods that are imported. The government intervenes through the requirement of local content in which the government levies that some specific goods are required to be produced domestically. The main benefit of this intervention is that it will offer benefit to the producers and the consumers. The administrative policy is considered as other form of tool through which the government intervenes in the international trade. The bureaucratic rules are introduced by the government for the purpose of creating constraint for the imports in entering into the country (Geiersbach, 2010). The other way or technique that is adopted by the government in intervening the international trade market is through the implementation of the anti dumping policies in which the government is engaged in protecting and safeguarding the local and the domestic industry by punishing the foreign firms that are associated with dumping and protecting the domestic producers from the unfair competition. Arguments in favour of government intervention on international trade The main importance or the reason for the government intervention in the international trade can be categorized as for providing political, social and economic benefit. The political arguments supporting the importance of the government intervention on the international trade is that it is associated with the protection of the interest of certain specified group of producers within the nation or the economy at the cost of some other groups particularly the consumers. The political arguments in favour of the government intervention includes protection of job that has emerged from the various political pressure by the industries or the union and are threatened by the foreign producers, reducing the unfair trade competition by the foreign companies when the government adopts strict actions in removing or eliminating the trade barriers, protecting or safeguarding the industries for national security such as the electronics and the aerospace is required to be protected for providing of national security and protection. The government intervention is also required for protecting the consumers from the use of unsafe products and safeguarding the rights of the individuals in the exporting countries (Deardorff, 2001). The economic arguments favouring or supporting the government intervention on the international trade is that it protects the infant industry. It provides an opportunity to enter into the market and facilitates the government in adopting necessary actions and measures for safeguarding the industries till it is developed and becomes viable in the competitive market internationally. The government assists the domestic firms or the industries in overcoming the barriers or the constraint for entering into the industry where the foreign firms or the industry has the initial advantage or the benefit of entering into the industry. In case of the social perspective the intervention of the government is required since many firms or industry may restrict themselves from carrying out international trade in the foreign market if they feel that there national identities are hampered or threatened and therefore the government intervention is required which will restrict or prohibit the relative countries. The arguments in favour of the government intervention in case of the international trade can also be explained as it leads to the improvement in equality by overcoming the market failure which includes the regulation of the monopoly power and reducing the negative externalities. Arguments against government intervention on international trade The main limitations or constraint of intervention by the government in the international trade are that the government intervention sometimes increases the trade barriers by increasing the cost of the products that are required to be exported to another country. In order to determine the requirement of the local content, the firm or the industry is required to focus on various production activities in the market, the voluntary export restraints generally create a barrier or constraint in the ability of the firm in serving the country that is located or situated outside the country . The governments are sometimes responsible for taking wrong decisions that is influenced or affected by the political pressure from various groups or parties and therefore the government tends to make investment and spend on the ineffective or inefficient areas which results in inefficient consequences or outcome. The government intervention creates a barrier or constraint on the decision of the individual in determining the spending structure or pattern. Thus the government is responsible for snatching the freedom of the individuals. The market is more capable of determining the price or the other elements that is required for conducting the international trade as compared to the government. When the government decides to spend on the public goods the government may create excess inefficiency and bureaucracy (Bedi, 2014). Conclusion The above discussion signifies that government intervention is both favourable as well as unfavourable for influencing positively and negatively the international trade. The main issue that arises in case of the influence of government intervention on the international trade is that to which extent or degree the government is required to intervene in the international trade. The government intervention is required to be limited to certain extent as this may result in inefficient outcome or consequences. The benefit of government intervention is that it offers equality in distributing the wealth and income for improving the quality of outcome and opportunity, the macroeconomic intervention by the government helps to reduce the unemployment and recession. The government prevents the market failure that is required to provide the goods with favourable externalities. The limitations of the government intervention are that the government may not utilize the resources effectively and it may lead to the situation of bureaucracy and inefficiency. The motives or the purpose of the government intervention in the international trade are interdependent and they affect or influence each other. Therefore it can be concluded that the society or the nation cannot operate smoothly without the intervention of the government and therefore the government is required to intervene in the market but to a certain limit or extent. References Bedi, J., 2014. How Vital is government intervention to international trade growth. [Online]. Available at: < http://www.tradeready.ca/2014/trade-takeaways/vital-governments-role-international-trade-growth/ >. [Accessed on 17 April 2015]. Deardorff, A.V., 2001. The economics of government market intervention, and its international dimension. Available at: < http://fordschool.umich.edu/research/papers/PDFfiles/00-018.pdf>. [Accessed on 17 April 2015]. Geiersbach, N., 2010. The impact of international business on the global economy. Available at: < http://www.saycocorporativo.com/saycoUK/BIJ/journal/Vol3No2/Article_8.pdf.>. [Accessed on 17 April 2015]. Milner, H. V., 1999. The political economy of international trade. [Pdf]. Available at: < http://web.stanford.edu/class/polisci243c/readings/v0002017.pdf>. [Accessed on 17 April 2015]. Sun, P. and Heshmati, A., 2010. International trade and its effects on economic growth in china. Available at: < http://ftp.iza.org/dp5151.pdf>. [Accessed on 17 April 2015]. Read More