Govt.

influence on trade
Protectionism
• Governmental trade policies may affect the ability of foreign
producers to compete in home market. They may limit or enhance a
company’s ability to sell abroad or acquire needed foreign supplies.
Collectively, governmental restrictions and support to influence
international trade competitiveness are known as protectionism.
• Despite free-trade benefits, governments intervene in trade to attain
economic, social, or political objectives
Terms of trade
• The quantity of imports that a given quantity of a country’s exports
can buy—say, how many bananas Country A must sell to Country B to
purchase one refrigerator from Country B—is referred to as terms of
trade.
 Reasons for governmental intervention
Economic rationales Non-economic rationales

Fighting unemployment Maintaining essential industries

Protecting infant industries Promoting acceptable practices abroad

Promoting industrialization Maintaining or extending spheres of influence

Improving comparative position Preserving national culture

Economic Rationales for Governmental
Intervention
• Fighting Unemployment: unemployed have more time and incentive
to protest publicly and contact government representatives. Workers
because of imports are often the least able to find alternative work.
• Full employment with free trade policy is problematic but gaining jobs
by limiting imports may not fully work as expected. Even if
successful, the potentially high costs must be borne by someone.
following results can be seen in restricted trade:
The Prospect of Retaliation: In restricted trade jobs, cost and exports
in other industries got affected negatively
Analyzing Trade-Offs
Protecting infant-industries
• Infant-industry argument, holds that a government should shield an
emerging industry from foreign competition by guaranteeing it a large
share of the domestic market until it can compete on its own
• Initial operating costs for an industry
• Risks in Designating Industries:
Determining Probability of Success
Who Should Bear the Cost?
Developing An Industrial Base
• Countries with a large manufacturing base generally have higher per
capita GDPs than those that do not and largely restrict imports.
Developing countries try to achieve same position by manufacturing
under following assumption
Surplus workers can increase manufacturing output
Prices and sales of agricultural products fluctuate widely
Markets for industrial products grow faster
Industrial growth reduces imports and/or promotes exports.
Industrial activity helps the nation-building process
Economic Relationships With Other
Countries
• Every nation monitors its absolute economic welfare, compares its
performance to that of other countries, and enacts practices aimed at
improving its relative position. Among these many practices, four
stand out:
Making balance-of-trade adjustments
Gaining comparable access to foreign markets
Using restrictions as a bargaining tool
Controlling prices
Non economic rationales to restrict
international trade
• Although noneconomic arguments are used to influence trade, many of
these also have economic undertones and consequences.
• Non economic rationales are:
Maintaining essential industries
Promoting acceptable practices abroad
Maintaining or extending spheres of influence
Preserving national culture
Maintaining Essential Industries
• Maintaining Essential Industries which means to protect essential
domestic industries during peacetime so the country is not dependent
on foreign supplies during war
• Protect essential domestic industries
• Financial inclusion of necessities
• Rural penetration at affordable prices
• Maintaining competitive advantages in essential industries.
• Water, electricity, banking, railways, etc.
Promoting acceptable practices abroad
• Governments use national defense arguments to prevent the export,
even to friendly countries, of strategic goods that might fall into the
hands of potential enemies.
• to promote changes in a foreign country’s policies or capabilities
Maintaining or extending spheres of
influence
• Governments give aid to and encourage imports from countries that
join a political alliance or vote in a preferred way within international
bodies.
• Political motives
• For e.g china delayed permission for Allianz after Germany gave a
reception to an exiled Tibetan spiritual leader.
Preserving national culture
• Unifying sense of identity to be sustained
• National culture to be protected
• Defining boundaries for trade
• For e.g France protects its cinema industry out of fear that if
unregulated the resulting invasion of English culture will weaken its
cultural identity.
Instruments of Trade Control
• Import tariffs
Tariff • Export Tariffs
Barriers • Transit Tariffs

Non – •
•
•
Subsidies
Tied Aids
Minimum Sale Price
Tariff •
•
Quotas
Embargoes

Barriers •
•
Buy – Local Legislation
Specific Permissions Required
Tariff Barriers
• A tariff (also called a duty), the most common type of trade control, is
a tax levied on a good shipped internationally.
• Directly affect the prices of goods traded
• Most common type of trade control
• Specific duty; Ad – Valorem duty; Compound duty.
Types of tariffs
• Import tariffs: Collected by importing country
• Export tariffs: Collected by exporting country
• Transit tariffs: Collected by the country through which the goods
have passed.
tariffs
• Tariffs as Sources of Revenue
• Import tariffs raise the price of imported goods by placing a tax on
them, thereby giving domestically produced goods a relative price
advantage
• some countries charge export tariffs on raw materials also
• Criteria for Assessing Tariffs: A government may assess a tariff on a
per unit basis (a specific duty), as a percentage of the item’s value (an
ad valorem duty), or on both (a compound duty)
Non Tariff Barriers
• May directly affect either direct price or quantity of goods traded
internationally.
Types of Non – Tariff Barriers(direct price
influences
• Subsidies: Direct assistance to companies, making them more competitive. All
types of government loans or grants are not subsidies
• For e.g. Boeing and the U.S. government claim that the EU subsidizes Airbus
Industry through low-interest government loans
• Subsidies is governmental support to shore up struggling companies and
industries during the global recession
• Agricultural Subsidies
• Effect: Developing countries are disadvantaged in serving the developed
markets with competitive agricultural products
• Much of the surplus production from developed countries is exported at very
low prices
• Overcoming Market Imperfections: market survey, trade exposition etc.
• Tied Aids: Loans to other countries, a part of which is spend in donor
country. E.g. Infrastructure, telecommunication is called tied loan
• China is using tied aid for nearly all its foreign projects
• Customs Valuation: Tariffs for imported merchandise depend on the
product, price, and origin—which tempts exporters and importers to
declare these wrongly on invoices to pay less duty
• Customs officers clear the invoice’s authenticity
• Agents sometimes use their discretionary power to assess the value too
high, thereby preventing the importation of foreign-made products
Non tariff barriers( quantity control)
• Quotas: Limiting the quantity of goods imported or exported at a given
time frame
• Import quotas normally raise prices for two reasons:
 to limit supply and
 to provide little incentive to use price competition to increase sales
• companies sometimes convert the product into one for which there is no
quota
• A country may establish export quotas to assure domestic consumers a
sufficient supply of goods at a low price, to prevent depletion of natural
resources, or to attempt to raise export prices by restricting supply in
foreign markets
• Voluntary Export Restraint: Country A asks Country B to voluntarily
reduce its companies’ exports to Country A
• Embargoes: A specific type of quota that prohibits all trade is an
embargo
• “Buy Local” Legislation: Government purchases are a large part of
total expenditures in many countries; typically, governments favor
domestic producers
• Sometimes they specify a domestic content restriction—that is, a
certain percentage of the product must be of local origin
• Standards and Labels: Countries can devise classification, labeling,
and testing standards to allow the sale of domestic products but
obstruct foreign-made ones.
• Specific Permissions: Some countries require that potential importers
or exporters secure governmental permission (an import or export
license) before transacting trade.
• Administrative Delays:
Dealing with Governmental Trade
Influences
• When companies face possible losses because of import competition,
they have several options, four of which stand out:
• Move operations to another country.
• Concentrate on market niches that attract less international
competition.
• Adopt internal innovations, such as greater efficiency or superior
products.
• Try to get governmental protection.