B416 The Evolution Of Global Economies Lecture 7 Governmental Influence on Trade

B416: Global Economic History

Lecture 7 : Governmental Influence on Trade

Learning Outcomes

By the end of this lecture, you should understand the following:• 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

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3

Introduction

• Protectionism - policies that – affect the ability of foreign producers to compete

in your home market– limit or enhance your company’s ability to sell

abroad or acquire needed foreign supplies

4

IntroductionPhysical and Social Factors Affecting the Flow of Goods and Services

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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

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The Role of Stakeholders

• Proposed policies on trade spark debate • Stakeholders include

– Workers– Owners– Suppliers– Local politicians

• Consumers usually don’t care

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Economic Rationales for Government Intervention

Why Governments Intervene in Trade?

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Fighting Unemployment

• The unemployed are the most effective pressure group• But, import restrictions

– can lead to retaliation by other countries– are less likely retaliated against effectively by small

economies– are less likely to be met with retaliation if implemented by

small economies– may decrease export jobs because of price increases for

components– may decrease export jobs because of lower incomes

abroad

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Protecting ‘Infant Industries’

• The infant industry argument – government protection of import competition is

necessary to help certain industries evolve from high-cost to low-cost production

• Used by developing countries

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Developing an Industrial Base

Countries promote industrialization because it– 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

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Developing an Industrial Base

• The industrialization argument – unregulated imports of lower priced products

prevents the development of a domestic industry• Assumptions

– Surplus Workers– Investment Inflows– Diversification– Growth in Manufactured Goods– Import Substitution and Export-Led Development– Nation Building

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Economic Relationships With Other Countries

• Trade controls can be used– to improve the balance of payments– to gain fair access to foreign markets

• comparable access argument

– as a bargaining tool• believability and importance

– to control prices• dumping• optimum-tariff theory

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Noneconomic Rationales for Government Intervention

• Noneconomic rationales include– Maintaining essential industries– Promoting acceptable practices abroad– Maintaining or extending spheres of influence– Preserving national culture

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Maintaining Essential Industries

• The essential industry argument– protect essential industries so the country is not

dependent on foreign supplies during war• Countries must

– determine which industries are essential– consider costs and alternatives– consider political consequences

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Promoting Acceptable Practices Abroad

• Import trade controls can be used– to promote changes in foreign countries’ political

policies or capabilities– as a foreign policy weapon– to pressure governments to alter their stances on

a variety of issues • human rights• environmental protection

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Maintaining or Extending Spheres of Influence

• Governments provide assistance and encourage imports from countries that join a political alliance or vote a preferred way within international bodies– Cotonou Agreement

• A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not

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Preserving National Culture

In order to preserve national culture, countries– limit foreign products and services in certain

sectors• Canada’s cultural sovereignty

– prohibit exports of art and historical items deemed important to national heritage

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Instruments of Trade Control

Two types of trade controls– those that indirectly affect the amount traded by

directly influencing prices of exports or imports– those that directly limit the amount of a good that

can be traded

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Tariffs

• Tariffs are also known as duties– refer to a government levied tax on goods shipped

internationally• Tariffs may be levied

– on goods entering, leaving, or passing through a country

– for protection or revenue– on a per unit basis or a value basis

• export tariffs• transit tariffs• import tariffs

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Nontariff Barriers: Direct Price Influencers

• Subsidies – direct assistance to companies to make them

more competitive• agricultural subsidies • overcoming market imperfections• valuation problems

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Nontariff Barriers: Direct Price Influencers

• Aid and loans– tied – untied

• Customs valuation• Other direct-price influences

– special fees and requirements

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Nontariff Barriers: Quantity Controls

• Quotas– limit the quantity of a product that can be

imported or exported in a given time frame • Voluntary export restraint (VER)• Embargoes

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Nontariff Barriers: Quantity Controls

• “Buy local” legislation• Standards and labels• Specific permission requirements

– import or export license • Administrative delays• Reciprocal requirements• Restrictions on services

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Dealing with Governmental Trade Influencers

• Companies facing import competition can– Move abroad– Seek other market niches– Make domestic output competitive– Try to get protection

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Tactics For Dealing With Import Competition

• Convince decision makers of the merits of particular policies

• Involve the industry and stakeholders• Prepare for changes in the competitive

environment

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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

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Some ways to restrict international trade• Impose a 100 Euro tax per imported computer (tariff)• Impose a 12% tax per imported computer (ad valorem tariff)• Restrict the number of imported computers (quota)• Subsidize the production of domestically produced computers• Require a “minimum content” before a computer may be labeled

“domestically produced”• Prohibit the sale of computers to certain countries for safety reasons• Non-tariff barriers: e.g. difficult procedure to export VCRs from Japan to

France• Etc.• These different measures will affect trade flows in different ways. For

simplicity we restrict attention mainly to tariffs.

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Tariffs, partial equilibrium, small country• Summary of welfare effects of tariffs for small country:

– Producers gain (producer surplus rises)– Government gains (government revenue rises)– Consumers loose (consumer surplus falls)

• The gains to producers and the government are completely paid for by the consumers: net welfare falls

• The distributional effects have political economy consequences: many consumers suffer a small individual loss, but a few producers benefit from a large individual gain

• Conclusion: it is attractive for producers to invest in lobby groups to impose trade restrictions, but not for the many consumers to do the same to try to avoid this

• Clearly, politicians should take this into consideration when making their decisions (but it is questionable if they do).

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Tariffs, partial equilibrium, large country• Summary of welfare effects of tariffs for large country:

– Producers gain (producer surplus rises)– Government gains (government revenue rises)– Consumers loose (consumer surplus falls)

• The net welfare is only negative if the Harberger triangles are larger than the part of government revenue paid for by foreigners; a welfare gain is thus possible

• In general, a ‘suitable’ choice of tariff will lead to a welfare gain for a large country: the ‘optimal’ tariff argument

• This argument ignores, inter alia, general equilibrium complications and retaliation. We now turn to these issues

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Concluding remarks Trade Policy• There are many different types of trade restrictions (our

analysis is not exhaustive)• Protection affects different agents in different ways, hence

conflicting interests in the same country (lobbying)• Imposing a tariff benefits protected producers and provides

government revenue at the expense of a welfare loss for the consumers

• Imposing a tariff always generates an overall welfare loss for a ‘small’ country (protected sector expands at the expense of a contraction in other sectors; double distortion)

• A ‘large’ country might benefit from an ‘optimal’ tariff• These benefits disappear with simultaneous moves and

retaliation; hence the need for international rules

And Now…Work Outside the Lecture

Preparation For

Padagogic Style

Preparation Time Budget

Individual Task

Group Task Output Week 7 Preparation Activity

Read Chapter 7 International Business - 14th Edition by Daniels, Radebaugh &

Sullivan, (available via DawsonEra)

Seminar 7 30 Minutes Read above Material + Seminar material

Workshop 7 1 HourOnline Collaboration Activities relating Final

Assignment

2 HourLecture 7

End of presentation

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