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The Nature of Government Intervention
• An important dimension of country risk. • Governments intervene in trade and investment to achieve political, social, or economic objectives. • Intervention alters the competitive landscape by hindering or helping the ability of firms to compete internationally. • But, intervention is at odds with the theory of comparative advantage, which argues for more international trade, not less
g. • Government intervention arises in various forms: • Tariff -. intended to raise revenue or protect domestic industries from foreign competition..quantitative restriction on imports of a specific product (e.g. textiles) • Nontariff trade barrier -.government policy. Mexico’s restrictions in its oil industry) ...a tax on imports (e. regulation.g. imports of Japanese cars) • Investment barriers – rules or laws that hinder FDI (e.Key Concepts • Protectionism: national economic policies that restrict free trade. usu. or procedure that impedes trade • Quota -. citrus.
steel manufacturers from foreign competition. aiming to give the U.Example of Protectionism • Bush administration imposed tariffs on imports of foreign steel to protect U.S. steel industry time to restructure and revive itself. .S. • The steel tariffs were removed within two years.
• Result 1: Detroit automakers had less of an incentive to improve quality.S. and overall product appeal. • Result 2: Detroit’s ability to compete in the global auto industry was weakened. auto industry.S. government imposed ‘voluntary’ export restraints (quotas) on imports of cars from Japan. .Example • In 1980s. design. the U. to insulate U.
g. while the U. dithers. fewer choices available to buyers Reduced industrial competitiveness Various adverse unintended consequences (e.. other countries can race ahead) .Consequences of Protectionism • • • • • Reduced supply of goods to buyers Price inflation Reduced variety.S.
Tariffs and other barriers can generate government revenue. Safety. 2.g. security. 4. political. or social objectives (e. and welfare of citizens (e. 6. job creation) Reduce foreign competition Protect infant industries Preserve national culture and identity 3.. 5. barriers intended to protect national security) Broad-based economic..Rationale for Government Intervention 1.g. . FDA barriers on drug imports.
• United Nations estimates that trade barriers in general cost developing economies over $100 billion in lost trading opportunities with developed countries every year.Tariffs are Widespread • Developing economies -. the U.tariffs are common. recently collected more tariff revenue on shoes than on cars. . $1. and 17 percent on tennis shoes.g. $1. and agricultural products (e.63 billion vs.tariffs still a factor mainly in textiles. 180 percent on cereals. • Advanced economies -. • The European Union applies tariffs of up to 236 percent on meat.S.. clothing.60 billion in 2001).
• Countries as diverse as Chile. Turkey. and South Korea have liberalized their previously protected markets. the GATT became the World Trade Organization (WTO). . • Tariff reduction was the primary goal of the General Agreement on Tariffs and Trade (GATT) • In 1995. lowering trade barriers. Hungary.WTO: A Force for Reducing Tariffs • Governments have tended to reduce tariffs over time.
• Voluntary export/import restraints are voluntary quotas imposed by governments whereby firms agree to limit exports or imports of certain products.g. • Import license – a formal permission to import. • Administrative or bureaucratic procedures . labeling requirements identifying country of origin. etc. health regulations for hygienic food preparation. which restricts imports in a way that is similar to quotas.. bureaucratic process in some countries • Government regulations and technical standards – e.Nontariff Trade Barriers Government policies that restrict trade without imposing a direct tax or duty. • Quotas restrict the physical volume or value of products that firms can import into a country. safety regulations for motor vehicles.a complicated.
utilities. air transportation.Investment Barriers FDI and ownership restrictions are common in industries such as broadcasting. etc. military technology. and financial services. fisheries. oil. Examples• Canada – government restricts foreign ownership of local movie studios and TV shows to protect its indigenous film and TV industry from excessive foreign influence. • Mexico – government restricts FDI by foreign investors to protect its oil industry. • Services sector – FDI and ownership restrictions are burdensome because services usually cannot be exported. must establish physical presence in the market .
• For example. . • Examples: cash disbursements. material inputs. provision of infrastructure. or encouraging exports. in France the government provides large subsidies to Air France. services. tax breaks. government contracts at inflated prices. the national airline. intended to ensure their survival by facilitating production at reduced prices.Subsidies • Government grants (monetary or other resources) to firms or industries.
NY competed to have Samsung Electronics build a semiconductor plant in their regions. Examples • Hong Kong government put up most of the cash – $1.Investment Incentives • Similar to subsidies. . TX and Albany. Austin won. transfer payments or tax concessions made directly to individual foreign firms to entice them to invest in the country.74 billion – to build Hong Kong Disneyland. offering $225m in tax relief and other concessions to attract the $300m plant. • Austin.000 workers. employs 1.
state intervention in labor and financial markets. • Protectionism has declined. privatization of state enterprises. a large public sector. • Early 1990s – markets opened to foreign trade and investment. heavy regulation of business. but high tariffs (averaging 20%) and FDI limitations are still in place. free-trade reforms. • Poor economic performance due to high trade and investment barriers. • Adopted quasi-socialist model of isolationism and strict government control. .Market Liberalization in India • Independence from Britain in 1947. and central planning.
very limited international trade. inefficient state-run industries. and foreign trade exceeded $1 trillion. a free-trade organization. featuring centralized economic planning. • . • 2004 – China’s GDP was four times the level it was in 1978.Market Liberalization in China • 1949 – Mao Tse Tung established a communist regime. • 1980s – began to liberalize economy. • 2001 – joined the WTO. agricultural sector. committed to reducing trade barriers and protecting intellectual property. • 1992 – joined Asia-Pacific Economic Cooperation (APEC) group.