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International Business

Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan

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Chapter 6

Governmental Influence on Trade

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Learning Objectives Explain why governments try to enhance and

restrict trade Compare the potential and actual effects of

government intervention on the free flow of trade Illustrate the major means by which trade is

restricted and regulated Demonstrate the business uncertainties and

opportunities created by governmental trade policies

Discern how businesses may respond to import competition

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Introduction Protectionism refers to those government

restrictions and incentives designed to help a county’s domestic firms compete with foreign competitors at home and abroad.

Protectionist policies…… negatively affect the ability of foreign

producers to compete in your home market enhance your company’s ability to sell abroad

or acquire needed foreign supplies are likely to lead to retaliation by affected

stakeholders

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Conflicting Results of Trade Policies

Governments intervene in trade to achieve economic, social, and political goals

Policymakers are challenged by conflicting objectives interest groups

Stakeholders include workers, owners, suppliers, local politicians etc.

Consumers usually don’t care… or, have very little say in the market

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Economic Rationales for Government Intervention

Why governments intervene in trade Economic rationales

Fighting unemployment Protecting infant industries Promoting industrialization Improving comparative position

Non-economic rationales Maintaining essential industries Promoting acceptable practices abroad Maintaining or extending spheres of influence Preserving national culture

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Instruments of Trade Control

Tariffs (also called duties) are taxes levied on (internationally) traded products. Exports tariffs, transit tariffs, import tariffs,

levied by the country 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.

Nontariff barriers (NTBs) represent administrative regulations, policies, and procedures, i.e., quantitative and qualitative barriers, that directly or indirectly impede international trade.

Trade barriers have often been the sources of conflict among nations and in WTO negotiations

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 “Buy Local” legislation Standards and Labels Specific permission requirements (license etc.) Administrative delays

Effect of Nontariff Barriers

Effect on Subsidies Aids and Loans

Quotas Buy Local

Price

Production

Market

Motivation

Trade

10

What measures firms can take to deal with governmental

intervention

Move operations to lower-cost countries Concentrate on market niches that attract less

international competition Opt for internal innovations leading to greater

efficiency and/or superior products Try to secure government protection

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Dynamics and Complexity Trade restriction changes bring about

winners and losers among countries, companies, and workers

Gains to consumers from freer trade may come at the expense of companies and workers

The international regulatory situation is becoming more complex

12

Chapter 6: Discussion Questions

1. What is protectionism? What are the arguments for and against protectionism? I may ask you to explain any specific rationale (e.g., infant industry argument)

2. How governments intervene trade with the help of non-tariff barriers? Explain.

3. What are the effects of subsidies (or quotas) on price, production, market, motivation and trade? Explain.

4. What measures firms can take to deal with governmental intervention? Explain.

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