WEEK 4 GOVERNMENTAL INFLUENCE

Objectives To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies

Why Governments Intervene in Trade? Economic Rationales Non-economic rationales Prevent unemployment Maintain essential industries Protect infant industry Deal with unfriendly countries Promote industrialization Maintain or extend spheres of influence Improve position compared to other countries Preserve national identity

Economic rationales for government interventions Prevent unemployment To maintain the existing jobs Can be done through imports restrictions By limiting import local jobs are retained as firms and consumers are forced to purchase domestic produced goods and services but cause other problems dropped the production in other countries. Reduce some jobs that related to import-handling – transportation and shipping industry High cost of certain product – limited choice

Economic rationales for government interventions Protecting “Infant-Industries” New industry in its early stages of development Need protection from competitors through tariff and non-tariff barrier until its established governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production Automotive industry in Brazil, Malaysia Problems – fail to reduce costs, deter managers to provide high-quality products at a low price

Economic rationales for government interventions Promote industrialization The development of national output should be supported, even though domestic price may not be competitive on the market Countries seek protection to promote industrialization because that type of production: Brings faster growth than agriculture. Brings in investment funds. Diversifies the economy. Brings more income than primary products do. Reduces imports and promotes exports. Helps the nation-building process.

Support for industrialization argument claim that: surplus workers can more easily increase manufacturing output than agricultural output foreign investment inflows promote sustainable growth fluctuating prices are a major detriment to those economies that depend on just a few commodities demand for and prices of raw materials and agricultural commodities do not rise as fast as the demand for and prices of finished goods export promotion, and possibly import substitution, lead to sustainable economic development industrialization helps the nation-building process

Economic Relationships with Other Countries Improve position compared to other countries Their objectives include improving the balance of: payments raising prices to foreign consumers gaining fair access to foreign markets preventing foreign monopoly prices assuring that domestic consumers get low prices lowering profit margins for foreign producers

Non Economic Rationale Maintaining essential industries Not to depend on foreign sources of supply during war (for defense) Example – rice industry in Malaysia & Japan In protecting essential industries, countries must: Determine which ones are essential. Consider costs and alternatives. Consider political consequences.

Preventing Shipments to Dealing with unfriendly Countries Considerable governmental interference in international trade is motivated by: political rather than economic concerns maintaining domestic supplies of essential goods preventing potential enemies from gaining goods that would help them achieve their objectives

Maintaining or extending spheres of influence Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodies. A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not.

Preserving national identity To sustain this collective identity that sets their citizens apart from those in other nations, countries limit foreign products and services in certain sectors.

Instruments of Trade Control Tariff Import tariff Non-tariff Subsidies Aid and loans Custom Valuation

TARIFF A tariff is also called a duty. Commonly types of trade control and a tax that a governments levy on good entering, leaving or passing through a country Serve as a source of government revenue (income) Charge on per unit or a value basis The tariff raises the domestic price above the world price. Consumers are losers because they pay a higher price and buy less of the product. Since the domestic price rises, domestic firms increase output and see their profits rise.

An import tariff is levied by the government of a country that is importing a product. the most common tariff used by government today Raise the price of imported good by placing a tax on them that not placed on domestic good

There are numerous reasons for using tariff, such as to protect domestic industries or firm. To prevent foreign companies from selling goods at lower price. To raises up government revenue. To reduce citizen’ foreign expenditures in order to improve the country’s balance of payment

Nontariff Barriers: Direct price influence Nontariff barriers are the second category of government controls on international trade. Any government regulation, policy, or procedure and other that a tariff that has the effect of impeding international trade may be labeled a nontariff barrier (NTB). There are few types of nontariff barriers subsidies, aids and loans, customs valuation and other direct-price influence

Subsidies government payment to a producer or distributor in an industry to prevent the decline of the industry and increasing prices of the products as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports Types of subsidies Agriculture subsidies, housing subsidies, export subsidies and others

Export subsidies Definition government policy to encourage export goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters, or government financed international advertising or R&D export the domestic products in a lower price than the production cost

Export Subsidy Purpose encourage to export the specified products Internal price supports as in a guaranteed minimum price for a commodity, create more product than can be consumed internally in the country

Example of Agriculture Subsidies International US production cost of wheat averaged at $125 per ton but US government sold the wheat to China at the price $75 per ton and to Algeria at price $65 per ton. US government has made an annual outlay of over $1 billion in its agricultural Export Enhancement Program (EEP) and its Dairy Export Incentive Program

Malaysia in 2000 to 2001, the average price of Crude palm oil (CPO) fell to a low of RM700 (US$ 185) per tonne, the government provided a subsidy of RM 1 000 (US$ 260) per hectare as an incentive to encourage replanting in plantations having palms that were older than 25 years (New Straits Times, 8 April 2001).

Nontariff Barriers: Quantity Control To affect directly to the quantity of import or export. 7 types: Quotas – Voluntary Export Restriction (VER) and Embargoes Buy local legislation Standards and labels Specific permission requirement Administrative delay Reciprocal requirement Restrictions on services

Nontariff Barriers: Quantity Controls Trade controls that directly affect quantity and indirectly affect price include: Quotas “buy local” legislation standards and labels licensing arrangements specific permission requirements administrative delays reciprocal requirements restrictions on services

Normally raise price of products because of: Quotas sets a physical limit on the quantity of a good that can be imported or exported into a country in a given period of time Normally raise price of products because of: They limit supply Provide little incentive to use price competition to increase sales

Dealing With Governmental Trade Influences When facing import competition, companies can: Move abroad Seek other market niches Make domestic output competitive Try to get protection

Implications/Conclusions When governments choose to impede the flow of imports and encourage the flow of exports, they simultaneously provide direct and/or indirect subsidies for their domestic industries. It is difficult to determine the real effects of trade barriers due to the likelihood of retaliation and the fact the imports and exports can both have positive effects. Much government interference in the international trade process is motivated by political rather than economic factors. A company’s particular international strategy will determine the extent to which it might benefit from protectionist measures