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PRESENTED BY:

PAWAN KUMAR (118914)P.VENKAT KRISHNA (118915)

GOVERNMENTAL INFLUENCE ON

TRADE

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Free Trade or Fair Trade

Free trade minimal influence from government

Fair trade active intervention from government(managed trade)

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Government Influence on Trade

Political reality of free trade is that nations:

are nominally committed to it

intervene and take actions to protect the interests of politically important groups

free trade is not the reality

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Cont

All countries seek to influence trade to satisfy:economic goals

social goalspolitical goals

foreign policy goals

Goals can be in conflict

Goals are dynamic (homeostasis)

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Tariffs

Tax levied on imports (or exports)Specific tariffs (fixed charge)

Ad valorem tariffs (proportion of value)

Good for government by producing revenue

Protects domestic producersreduces efficiency

Bad for consumers

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Non-Tariff Barriers

Growing in number and sophistication as tariff ratescontinue to decline

Major FormsSubsidies

Import Quotas

Voluntary Export Restraints

Local Content Requirements

Administrative Rules

Consumer Safety

Antidumping Policies

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Subsidies

Government payment from tax revenue to adomestic producer

cash grantslow-interest loanstax breaksgovernment equity participation in the company

Helps domestic producerscompete against foreign importsgain export markets

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Case for Government Intervention

Two Paths

Political ArgumentsConcerned with protecting the interest of certain groups(producers) within a nation often at the expense of othergroups (consumers)

Economic ArgumentsConcerned with boosting the overall wealth of a nation to benefit both producers and consumers

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Political Arguments for Intervention

Protect jobs and industries from unfair competitionCAP (Europe) and steel tariffs (USA)

National Security Protect defense-related industries

Aerospace, semiconductors, etc

RetaliationThreat of punitive sanctions for negotiations

Risky strategy might result in counter retaliation

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Cont

Protect consumers from unsafe productsgenetically engineered seeds and crops

hormone-treated beef

Furthering foreign policy objectivesHelms-Burton Act (Expropriated land in Cuba)

DAmato Act (Libya and Iran)

Protecting human rights

most-favored nation status that allows a country to imports

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Economic Arguments for Intervention

Infant Industry

Oldest argument for government intervention

Proposed in 1792 and now in strategic trade policies

Considered legitimate by GATT

Limitations:only good if infant industry becomes more efficient

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Cont

Strategic Trade Policy

Government should use subsidies to support promising firms

in newly emerging industries that require substantial scaleeconomies

Governments can raise national income if it ensures first-mover advantage for domestic firms

Helps domestic firms overcome barriers to entry created by

foreign firms with first-mover advantage

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Revised Case for Free Trade

Strategic trade policy (STP) arguments:suggest an economic justification for government interventionin international trade

challenge the rationale for free trade

Some economists question the viability of STPrisk of provoking retaliation and trade war

governments may not act in the national interest due to theinfluence of special interest groups

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Conflicting Results of Trade Policies

Governments intervene trade for the good of thecitizens

Protectionism refers to those governmentrestrictions and incentives specifically designed tohelp a countrys domestic firms compete withforeign competitors at home and abroad.Protectionist measures are likely to lead toretaliation by affected stakeholders.

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Governments Intervene in Trade

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ECONOMIC RATIONALES NONECONOMIC RATIONALES

Fighting unemployment Maintaining essentialindustries

Protecting infant industries Dealing with unfriendlycountries

Promoting industrialization Maintaining or extending

spheres of influenceImproving comparativeposition

Preserving national identity

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Instruments of Trade Control

n Tariffs (also called duties) are taxes levied on(internationally) traded products.

Exports tariffs, transit tariffs, import tariffs, levied by thecountry of destination on imported products A specific duty is a tariff that is assessed on a per unit basis. An ad valorem tariff is assessed as a percentage of the value of an item.

n Nontariff barriers (NTBs) represent administrativeregulations, policies, and procedures, i.e., quantitative andqualitative barriers, that directly or indirectly impedeinternational trade.

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Instruments of Trade Control: Nontariff barriers (NTB)

Nontariff barriers (NTB): Direct Price Influences

Subsidies

Aids and Loans

Customs valuation

Nontariff barriers (NTB): Quantity Controls

Quotas: VER, Embargoes

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Measures that firms can take to deal withgovernmental intervention

Move operations to lower-cost countries

Concentrate on market niches that attract lessinternational competition

Opt for internal innovations leading to greaterefficiency and/or superior products

Try to secure government protection

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References

Book: International Business

Author: John D. Daniels & Lee H. Radebough

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THANK YOU