Module 3_Part 2

Business-Government
Trade Relations
DR. Ghada Mohamed AbdelFattah
ghada.abdelfattah@alexu.edu.eg
 Module Preview
• Describe the political, economic, and cultural
reasons nations intervene in trade
• Identify the methods that nations use to
promote trade
• Describe the methods that nations use to
restrict trade
• Discuss the main institutions of the global
trading system
Why do governments intervene in
trade?
 I. Political Motives

3-Respond
2- Preserve
1- Protect to 4- Gain
national
jobs “unfair” influence
security
trade
 II. Economic Motives

Potential results

1- Protect + National income increases

infant
industries – Wrong industries protected
Protect emerging – Firms grow complacent
industries during (feeling so satisfied with your own
development from abilities that you feel you don’t need to
global competition try any harder)

– Consumer prices rise

– Public funds poorly spent
 II. Economic Motives (cont.)
Expected Benefits:
+ Global industry created
+ Increased National Income
2- Pursue
strategic trade
Disadvantages:
policy – Firms’ efficiency reduced
Help companies
achieve economies of – Domestic costs increase
scale and gain a first- – Special interests groups benefit
mover advantage by capturing all the gains with
no benefits for the customer
– Customer pays more & get less
quality products
 III. Cultural Motives

Nations block imports Main Aim:

deemed harmful
for its culture
Protecting
National Identity
Usual suspects
are U.S. media and
consumer goods

Result of increased
globalization
 Trade Promotion and Restriction
Methods

 Tariffs
 Subsidies
 Quotas
 Export financing  Embargoes
 Foreign trade zones  Local content requirements
 Administrative delays
 Special government agencies
 Currency controls
Financial assistance in the form of cash, tax
breaks, price supports, etc.

Potential results
+ Increased competitiveness

– Encourage inefficient firms

– Increased consumer prices
– Overuse of national resources
Financing such as low-interest loans and loan guarantees

Export-Import Bank of the United States

 Working capital loan guarantees
 Credit information on nation or firm abroad
 Export credit insurance against loss
 Loan guarantees to buyers of U.S. goods
and much more…
 Designated geographic
region in which merchandise
is allowed to pass through
with lower customs duties
(taxes) and/or fewer
customs procedures

 Purpose is to increase
employment and trade
within the nation
Organize trade missions for officials
and businesses

Operate export-promotion offices at

locations abroad

Help import products the home

nation does not produce
Government tax levied on a product as it enters or leaves a nation

Potential results
 Export tariff + Protect domestic firms
from competitors
 Transit tariff + Generate income for the
government

 Import tariff – Reduce competitiveness

of home-based firms
– Raise consumer prices
Restriction on the amount of a good that can enter
or leave a country during a certain period of time

Import Quotas Export Quotas

1. Protect domestic 1. Retain an adequate

producers of a good domestic supply of a
product
2. Force outside firms to
compete for market 2. Restrict world supply of a
access product to raise its price
 Complete ban on trade (imports and exports)
in one or more products with a particular country

Most restrictive Often used to Can be difficult

nontariff trade achieve political for a nation to
barrier goals enforce
 Laws that domestic producers
must supply a specific amount
of a good or service

Forces international companies to

employ local resources (usually labor)
in production process
 Regulatory controls or
bureaucratic rules to slow
imports into a country

 Inconvenient ports for imports

 Product-damaging inspections

 Understaffed customs offices

 Lengthy licensing procedures

 Restrictions on the
convertibility of a nation’s Limit the amount of
currency globally accepted
currency available to
pay for imports

Set an unfavorable
exchange rate when
paying for imports
 Institutions of the global trading system

I. General Agreement on Tariffs and Trade (GATT)

Treaty designed to promote free trade by

reducing tariffs and nontariff barriers to trade

Uruguay Round

Extended coverage to services

Improved intellectual property rules

Reduced trade barriers in agriculture

Established the WTO
 Institutions of the global trading system
II. World Trade Organization (WTO)

International organization that regulates

trade between nations

Normal trade relations (“most-favored-nation status”)

Dispute Settlement Body

Dumping and antidumping duties

Doha Round of trade talks

International Business 5e Chapter 6 - 20