© 2001 prentice hall6-1 international business by daniels and radebaugh chapter 6 governmental...

© 2001 Prentice Hall 6-1

International Businessby

Daniels and Radebaugh

Chapter 6Governmental Influenceon Trade


ObjectivesTo evaluate the rationale for governmental policies that

enhance and restrict tradeTo examine the effects of pressure groups on trade policiesTo compare the protectionist arguments used in developed

countries with those used in developing onesTo study the potential and actual effects of governmental

intervention on the free flow of tradeTo give an overview of the major means by which trade is

restricted, regulated, and liberalizedTo examine the World Trade Organization

To show that governmental trade policies create business uncertainties


IntroductionNo country permits unregulated flow of goods and

services across its borders• Governments place restrictions on imports and

occasionally on exports• Governments may provide direct and indirect

subsidies to improve the competitive position of some industries

Protectionism• Government action intended to limit foreign

producer’s ability to compete with domestic industry


Physical and Societal Influences on Protectionism andCompanies’ Competitive Environment

• Political policies and legal practices•Cultural values, attitudes, and beliefs• Economic forces• Geographic influences

COUNTRY A

ENHANCEMENTS

TRADE

TRADE

RESTRICTIONS

COMPANIES’COMPETITIVEENVIRONMENT

• Political policies and legal practices•Cultural values, attitudes, and beliefs• Economic forces• Geographic influences

COUNTRY B


Conflicting Results of Trade PoliciesObjectives may conflict

• Economic, social, and political goals of a country often conflict

May be impossible to help some industries without hurting others

• Proposed reforms of trade regulations results in heated debates among pressure groups

Rationales for Governmental Intervention

Economic Rationales Noneconomic RationalesPrevent unemployment Maintain essential industriesProtect infant industries Deal with unfriendly countriesPromote industrialization Maintain spheres of influenceImprove position compared to Preserve national identity other countries


UnemploymentUnemployed can form effective pressure group for import

restrictionsProblems stemming from restricting imports to create jobs in

the domestic economy• Retaliation by other countries

– less tendency to retaliate against small countries– restricting country will gain jobs in one place and lose

them somewhere else• Pressure against protectionism among workers in

industries dependent on imports• Import restrictions indirectly cause loss of export income• Potential costs of import restrictions include both higher

prices and higher taxes– such costs should be compared with those of

unemployment


Infant-Industry ArgumentGovernment should guarantee an emerging industry a large

share of the domestic market until it becomes efficient enough to compete against imports

Initial output costs may make products noncompetitive in world markets

• Over time costs will decrease due to:– greater economies of scale– greater worker efficiency

Problems with argument• Hard to identify industries with high probability of

success – even when industries can be identified, not clear that

government should provide protection• Protection may serve as disincentive for managers to

adopt innovations needed to become competitive


Industrialization ArgumentUse of surplus workers—many workers can leave the

agricultural sector without affecting output• Influx of workers into industrial sector may result in

several problems– heavy demands on social and political services– agriculture may be a better means of effecting

additional output than industry– government must decide which industry to protect to

minimize consumer price and tax increases– development possibilities in the agricultural sector

may be overlookedPromoting investment flows—import restrictions may increase

foreign direct investment• Influx of foreign companies may hasten industrialization• Investment inflows may add to employment


Industrialization Argument (cont.)Diversification—price variations due to uncontrollable factors

can wreak havoc on economies dependent on exports• Change from agriculture to industry in emerging

economies may simply shift the dependence from a few agricultural products to a few industrial products

• Greater growth for manufactured products• Terms of trade—quantity of imports that a given quantity

of a country’s exports can buy– prices of raw material and agricultural commodities

do not rise as fast as prices of finished goods– deterioration in emerging economies

» demand for primary products grows more slowly» cost savings passed on to consumers


Industrialization Argument (cont.)Import substitution— restricting imports in order to produce for

local consumption goods that formerly were imported• Not the best way to develop new industries• An initial response to industrialization

Export-led development—creation of industries for which export markets should logically exist

• A later stage in the industrialization process


Economic Relationships with Other CountriesBalance-of-payments adjustments—governments attempt to

modify import or export movement in a free marketComparable access or “fairness”

• In industries in which increased production will greatly decrease cost, producers that lack equal access to a competitor’s market will have a disadvantage in becoming cost competitive

• Equal access discussed in terms of fairness – arguments against fairness doctrine

» there are advantages of freer trade, even if imposed unilaterally

» may escalate economic tensions among trading partners

» cumbersome and expensive to negotiate separate agreements for all products that could be traded internationally


Economic Relationships with Other Countries (cont.)Price-control objectives

• Export restrictions may:– raise costs of smuggling prevention– lead to substitution– keep domestic prices down by increasing domestic

supply– give producers less incentive to increase output– shift foreign production and sales

• Import restrictions may:– prevent dumping—exports priced below cost or

home-country price – get other countries to bargain away restrictions– get foreign producers to lower their prices


Maintaining Essential IndustriesProtecting domestic industries during peacetime so that

country is not dependent on foreign sources of supply during war

• Popular argument to support import restrictions• Countries must

– determine which industries are essential– consider costs and alternatives– consider political consequences

Dealing with “Unfriendly” countriesPrevention of exports that might be acquired by potential

enemies• May lead to retaliation that prevents securing other

essential goods• Trade controls on nondefense goods also may be used as

a weapon of foreign policy


Maintaining Spheres of InfluenceGovernments may:

• Provide aid and credits to, and encourage imports from, countries that are political allies

• Impose trade restrictions to coerce foreign countries to follow certain political actions

Preserving Cultures and National IdentityCountries have a common sense of identity that separates

them from other nationalities• May limit foreign products and services to protect their

separate identity


Instruments of Trade ControlTariffs—a tax governments levy on goods shipped

internationally• Most common type of trade control

– export tariff—collected by exporting country– transport tariff—collected by country through which

the goods have passed– import tariff—collected by importing country

» most common type of tariff• Used to protect domestically produced goods• Used as a source of governmental revenue

– specific duty—tariff assessed on per unit basis– ad valorem duty—assessment is a percentage of the

value of the item– compound duty—combination of specific duty and ad

valorem duty on the same product


Trade Restrictions Based on Tariffs

D S

P2 Tax

Q2

P1

Q10

QuantityHigher Sales

Price

Hig

her

Pri

ce As tax raisesprice, quantitysold decreases


Instruments of Trade Control (cont.)Nontariff Barriers: Direct Price Influences

• Subsidies—direct government payments to domestic companies to compensate them for losses incurred from selling abroad

– other types of government assistance makes it cheaper or more profitable to sell abroad

» potential exporters provided with an array of services

– subsidies to overcome market imperfections are least controversial

– there is little agreement on what a subsidy is– there has been a recent increase in export-credit

assistance• Aid and loans—given to other countries with the proviso

that the funds be spent in the donor country– repayment insurance for exporters


Instruments of Trade Control (cont.)Nontariff Barriers: Direct Price Influences (cont.)

• Customs valuation—procedures for assessing value when customs agents levy tariffs

– may be based on » invoice price» value of identical goods» similar goods coming in at the same time» final sales value or on reasonable cost

– valuation problems created by the large number of products that are traded

• Other direct price influences– special fees– customs deposits– minimum price levels


Instruments of Trade Control (cont.)Nontariff Barriers: Quantity Controls

• Quotas—limits the quantity of a product allowed to be imported in a given year

– Most-common restriction based on quantity– amount frequently reflects guarantee that domestic

producers will have access to a certain percentage of the domestic market

– problems with quotas» transshipping goods among countries» transforming product into one for which there is

no quota– export quotas

» assure domestic consumers a supply of goods at low price

» prevent depletion of natural resources» raise export prices

– Embargo—quota that prohibits all trade


Trade Restrictions Based on Available Supply

D

P2

Q2

P1

Q10

QuantityHigher Sales

Price

Hig

her

Pri

ce

SS1

Import restrictioncauses quantitysold to fall


Instruments of Trade Control (cont.)Nontariff Barriers: Quantity Controls

• “Buy local” legislation—governments favor purchasing goods produced domestically

– legislation that prescribes a minimum percentage of domestic value

• Standards—classification, labeling, and testing standards limit sales of foreign products

• Specific permission requirements– import license—potential importers or exporters

require governmental permission before conducting trade transactions

– foreign-exchange control—importer required to apply to a governmental agency to secure foreign currency to pay for a product

• Administrative delays—intentional delays that create uncertainty and raise the cost of carrying inventory


Instruments of Trade Control (cont.)Nontariff Barriers: Quantity Controls (cont.)

• Reciprocal requirements—governmental requirements that

– exporters take merchandise in lieu of money – exporters promise to buy merchandise or services in

the country to which they export– countertrade or offset—barter transaction

• Restriction on services—exist for three reasons– Essentiality—countries do not want to depend on

foreign companies for strategic services– Standards—ensure qualifications of providers

» little reciprocal recognition in licensing from one country to another

– Immigration—protect employment of country’s own citizens

» require local search for qualified personnel before hiring a foreigner


General Agreement on Tariffs and Trade (GATT)Created in 1947 by 23 countries

• Intended to negotiate reductions in trade restrictions and develop common procedures for handling imports and exports

• Efforts led to a number of multilateral reductions in tariffs and nontariff barriers for member countries

– across-the-board reductions– each country negotiated exceptions to its reductions

• Codes of conduct developed in each of five areasInherent weakness of GATT

• Cumbersome negotiations• Most-favored nation— trade concessions applied to all

trading partners• No mechanism to assure compliance with negotiated

agreements


World Trade Organization (WTO)Created in 1995 to replace GATTNegotiating process

• Ongoing negotiations about – restrictions on trade in services– nontariff barriers to trade– protection of intellectual-property rights– investment policies that affect trade

Granting of normal trade relations • Apply to WTO members• Eliminates the free-rider complaint raised during GATT

negotiations• Certain exceptions recognized

Settlement of disputes• Clearly defined settlement mechanism• Sanctions may be applied to countries that do not comply

with rulings


Dealing with Governmental Trade InfluencesWhen faced with import competition, companies may

• Move production to a lower-cost country• Concentrate on market niches in which there is less

international competition• Effect internal adjustments

Companies may require assistance of government to limit imports or open foreign markets

• Governments deny some requests for assistancecompanies attitudes differ toward protectionism

• Companies likely to lose from protectionism– those that depend heavily on trade– those that have integrated production in different

global locations• Companies likely to gain from protectionism have single

or multidomestic production facilities

© 2001 prentice hall6-1 international business by daniels and radebaugh chapter 6 governmental...

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