Governmental Influence on TradeChapter seven
Members
K.A.S. Navarathne PGIA 07-6906
W.A.Wasantha PGIA 07-6970
R.G.M.S.Perera PGIA 07-6931
J.R. Nanayakkara PGIA 07-6949
P.K.T.K. Wimalarathne PGIA 07-6902
OBJECTIVES
To realize the rationales of governmental policies that enhance and restrict trade
To interpret the effect of pressure groups on trade policies
To understand the comparison of protectionist rationales used in high-income countries with those used in low –income countries’ economies
To comprehend the potential and actual effect of governmental intervention on the free flow of trade
To understand the major means by which trade is restricted and regulated
To grasp the business uncertainties and business opportunities created by governmental trade policies
INTRODUCTION
• This chapter begins by reviewing the economic and the non economic rationales for trade protectionism ,followed by an explanation of the major forms of trade controls and their effects on companies’ operating decisions.
Protectionism –
Government restrictions on imports and occasionally on exports that frequently give direct or indirect subsidies to industries to enable them to compete with foreign production either at home or abroad.
PHYSICAL AND SOCIETAL INFLUENCES ON PROTECTIONISM
AND COMPANIES’ COMPETITIVE ENVIRONMENT
CONFLICTING RESULTS OF TRADE POLICIES
Governments intervention in trade to attain
• Economic, • Social or• Political objectives.
Governmental officials apply trade policies
• To benefit the nation and its citizens• Their political longevity
Conflicting objectives
Determining the best way to influence trade is complicated Reason - frequent conflicts in the effects of policies.
Government would also like to help struggling companies and industries without penalizing those who doing well
This goal is often impossible –especially if other countries retaliate against their protectionist actions
Eg :- U.S. gave tax breaks to aid its exporters, but the 25-nation EU
related with import taxes that hurt such U.S. companies’ export sales as Al-Edmonds for shoes and Northland Forest Products for specialty lumber
Proposals for trade regulation reform often spark fierce debate among people and groups that believe they will be affected
Stakeholders/Interest groups – Those that are most directly affected (Workers, Owners, Suppliers, and Local politicians) Eg :- U.S. stakeholders whose livelihood depends on a U.S. base of
clothing production are fighting the elimination of import-restricting quotas
Individual consumers often misinterpret how much retail prices rise because of import restrictions
Eg :- EU restrictions on banana imports cost EU consumers about $2
billion a year because of higher banana costs, a significant amount in total but trivial for each banana or for each consumer
RATIONALES FOR GOVERNENT INTERVENTION IN TRADE
EONOMIC RATIONALES
- Prevent unemployment
- Protect infant industries
- Promote industrialization
- Improved position compared to other countries
NONECONOMIC RATIONALS
- Maintain essential industries
- Deal with unfriendly countries
- Maintain or extend spheres of influence
- Preserve national identity
ECONOMIC RATIONALES FOR GOVERNMENTAL INTERVENTION
1. Unemployment
2. Infant-Industry Argument
3. Industrialization Argument
4. Economic Relationships with other Countries
1. UNEMPLOYMENT
• The most effective pressure group for import restrictions
- Time and incentive to picket companies - Contact governmental representatives and confront
organizations
• Eg:- Unemployed U.S. steelworkers pressured U.S. lawmakers to apply tariffs and quotas to restrict steel imports in order to preserve their jobs and pensions
Retaliation -
Two factors can ease the effects of retaliation• Small trading countries are less important in the retaliation
process• Retaliation that decreases employment in a capital-incentive
industry may not affect employment as much as the value of the trade loss would imply
Even if no country retaliates, the restricting country may gain jobs in one sector only to lose jobs elsewhere.
Eg. Lower imports – Lower import handling jobs
Possible Costs of Import Restrictions If import restrictions do increase domestic employment, fellow
citizens will have to bear the cost of• Higher prices• Higher taxes
Government officials should compare the,- Costs of higher prices with the cost of unemployment and displaced production that would result from free trade
& - Costs of policies to ease the plight of displaced employees,
such as for unemployment benefits or retraining
Efforts to reduce unemployment through import restrictions are usually ineffective.
2. INFANT-INDUSTRY ARGUMENT- Alexander Hamilton in 1972
Infant-Industry Argument The government should shield an emerging industry from
foreign competition by guaranteeing it a large share of the domestic market until it is able to compete on its own.
The infant-industry argument says that production becomes more competitive over time due to,- Increased economies of scale - Greater worker efficiency
• The economies of scale and employees’ higher productivity will enable a company to manufacture efficiently, thereby positioning it to compete internationally
• The government can recoup the costs of trade protection through,
- Higher domestic employment
- Lower social costs
- Higher tax revenue
Risk - Although it is reasonable to expect production cost to decrease overtime, they may never fall enough to create internationally competitive products.
Which creates 2 problems,1. Some industries grow to be competitive because of
governmental protection
2. There are companies, which are early losses & lately gained benefits without any public help.
• Infant-industry protection requires government to make subsidies to lower the product prices of protected companies.
1. Subsidized companies to keep price levels– Tax payers
2. Production subsidies – Reduce the amount that that government can spend elsewhere.
3. INDUTRIALIZATION ARGUMENTCountries seek protection to promote industrialization because that type of production
• Brings faster growth than agriculture - Surplus workers can more easily increase manufacturing out put than agriculture
• Brings in investment funds- If import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted area
• Diversifies the economy- Export prices of agricultural products fluctuate very much, which is detriment to economies that depend on few of them
• Brings more income than primary products- The terms of trade for emerging economies may deteriorate because,
Demand for primary products grow slowly & Production cost savings for primary products will be passed on to consumers
• Reduces imports and promotes exports
- Import substitution and export promotion
- Import substitution is not the best approach to develop new industries due to higher prices and taxes
• Helps the nation-building process
- Build infrastructure
- Advance rural development & enhance rural social life
- Boost the skills of the workforce
When a country shifts from agriculture to industry,
• Demands on social and political services in cities may increase
• Output increases if the marginal productivity of agriculture worker is very low – Need to adopt improved agricultural practices
• Development possibilities in the agriculture sector may be overlooked
4. ECONOMIC RELATIONSHIPS WITH OTHER COUNTRIES
There are four main motivations to promote domestic producers
• Balance of Payments Adjustments
- A trade deficit creates problems for nations with low foreign exchange rates
- Governments improve their balance of payments by improving their balance of trade
Eg. Devaluation of currency & import restriction
• Comparable Access or “Fairness”- Domestic producers may be disadvantaged if their access to foreign market is less than foreign producers’ access to their market
• Restrictions as a Bargaining Tool
- The imposition of import restrictions may be used as a means to persuade other countries to lower their import barriers
• Price-Control Objectives- Keep up word prices
- Lead to substitute
- Keep domestic prices down by increasing domestic supply
- Give purchasers less incentive to increase output
- Shift foreign production and sales
- To penetrate foreign market, Eg. Dumping
Rationales for government intervention
• Economic Rationales for government intervention
• Non-economic Rationales for government intervention
Non-economic rationales for government intervention
• Maintenance of essential industries
• Prevention of shipments to unfriendly countries
• Maintenance or extension of spheres of influence
• Protecting activities that help preserve the national identity
Maintenance of essential industries
• The essential-industry argument – (Governments apply trade restrictions to protect essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war.)
e.g.: U.S. government subsidize the domestic silicon production.
• Determine which ones are essential
• Consider cost & alternatives
• Once an industry receives protection, it is difficult to remove it because the protected companies, their employees, trade unions and politicians demand for continue protection even though the rational is not exists.
e.g.: U.S continues to subsidize its mohair producers more than 20 years since mohair was no longer essential for military uniforms.
Prevention of shipments to unfriendly countries
• Prevent the export of strategic goods that might fall in to the hands of potential enemies (even to friendly countries) or that might be in short supply domestically.
e.g.: U.S. government prevented export of data-encryption.
e.g.: Nine Chinese companies and an Indian businessman sold technology to Iran regarding the chemical and conventional weapons programmes. Then, US forbade to export goods in to US and prevented US companies from exporting to them.
Prevention of shipments to unfriendly countries cont..
Facts not in favor of sanctions
•Trade sanctions against Cuba were supposed to topple the Castro
regime but four decades later he was still in power
•Who really suffers? Political leaders still get whatever they need, so that the costs of sanctions are borne by innocent people. eg: sanctions against Iraq
•Use of trade sanctions has been controversial (pp 233)
Facts not in favor of sanctions cont..
• Sometimes impose trade sanctions based on one issue rather than countries overall record. eg: suggested sanctions against brazil to restrict the cutting of Amazon forest.
Prevention of shipments to unfriendly countries cont…
Facts in favor of sanctions
• It can refuse products used child slaves eg: Cocoa production in ivory cost
• Sanction succeeded• US & UK sanctions against Zimbabwe•Indian sanction against Nepal
Prevention of shipments to unfriendly countries cont…
Maintenance or extension of 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
• Eg: The UE has given preferential treatment of bananas from certain former colonies.
• Eg; China delayed permission for Allianz, a German Insurance Group, to operate in china after Germany gave a reception for Dalai Lama.
Protecting activities that help preserve the national identity
• To protect the collective identity, countries limit foreign products and services in certain sectors.
• Eg: For many years Japan, South Korea and
China maintained an almost total ban on rice
imports, largely because rice farming has been
a historically cohesive force in each nation.
• Eg: Canada relies on a ‘cultural sovereignty’ argument to prohibit foreign ownership or control of publishing, cable TV and book selling.
• Eg: France protects its cinema industry out of fear
that invasion of English language and Anglo Saxon
culture will weaken its cultural identity.
• Eg: Korea requires theaters to show Korean films at least 146 days per year
P1
Quantity
Price
DS
Q1
P2
Q2
Direct price influence
Tax – Increased the price & decrease the quantity sold
Tariffs
Governments charges tariffs when on a good when it crosses the an official boundaries of a country
Source of Government income
Export tariffs Tariffs collected by the exporting country Use by the countries which are exporting raw
materials
Transit tariffCollected by the country through which the goods have passed the border
Eg: Singapore
Import tariffsTariffs collected by the importing country
Increase the price of the imported goods
Make the price advantage for domestically produced goods
Protective even though there is no domestic production in direct competition (Curtail demand on imported goods – Political)
Tariffication methods Specific duty
Charge per unit basis
Ad Valorem duty
Charge as a % of value of the item
Compound duty
Charge both the specific duty & Ad valorem duty on the same good
Tax controversy – Industrial countries No tariffs on importation of raw materials but
tax on processed materials Ad valorem tax on based on total value (raw
materials + processing cost)
Emerging economies argue that the Effective tax rate on manufactured goods more than the published rate.Eg: Assume; Duty on coffee beans = 0
Duty on instant coffee = 10%; If price of coffee jar $5 (Beans – $2.50 + Process - $ 2.50). The effective duty on manufacturing portion is 20% - ( ($0.5/$5)*100)
Price
Quantity
P2
P1
Q2 Q2
DS1
S
Direct quantity influences
Import restriction causes quantity sold to fall
SubsidiesDirect payments to domestic companies to
compensate them for losses incurred from selling abroad
Eg: US subsidies to cotton exporters Sri Lanka – Subsidies to tea exporter
Provide business developments such as market information, trade expositions & foreign contacts
Overcomes market imperfections rather than creating
Aid & LoansGovernments grants loans & aids to other
countriesTied aid – Recipient required to spend the
funds in donor country
Common with large contracts in emerging economies such as infrastructure developments, Telecommunication, railway & electric power projects
Customs Valuation Importers/exporters declare a low price on
invoice in order to enjoy low ad valorem tariffs
Use declared invoice value
Value based on identical goods / Similar goods
Value based on final sales value Reasonable cost
If no invoice value/ doubt
If not possible
Sometimes use the discretionary power to assess the value too high – prevent importation of foreign products
Sometimes misclassify a product & its corresponding tariff
Eg: IC Vs “Chemical Silicon”
Other price influencesSpecial fee
Eg: Consuler, custom clearance, documentation
Minimum price levels
Quotas
Quantitative restrictions on imports or exports
Import quotasProhibits or limit the quantity of products that
can be imported in a given yearIncrease the price of the imported goodGenerate revenue to the companies which
are in importing limited supplySometimes based on political or market
conditionsProtect domestic producers; But not allways
Eg: Japan
Voluntary export restrictions – Type of import quota Country A ask country B to limit exports to country A
voluntarily Not damage the political relations between those
countries as much as import quotas does
Export quotas Restrictions on exports to assure the availability of
goods for domestic consumers at lower price Prevent depletion of natural resources Attempt to raise export price by restraining supply in
foreign markets
Embargo – Prohibit all forms of trade (To achieve political goals)
“Buy Local” Legislations In Government purchases prefer domestic
producersSome times use the price mechanisms
Eg: Purchase from foreign companies if price is at some predetermined margin below that of domestic competitor
Standards & LabelsDevice classification, labeling & testing
standards to allow the sale of domestic products but obstruct that of foreign – made ones
Eg: GMO,GMF
Specific permission requirementsRequire that potential importers or exporters
secure permission from government authorities before conduct trade transactions
Eg: Import license
Foreign –Exchange control Require importer of a given product to
supply to a government agency to secure the foreign currency to pay for the product.
Administrative delaysSpecific permission requirements are
international administrative delaysCreate uncertainty & raise the cost of caring
inventory
Reciprocal requirementsGovernment sometimes require that
exporters to merchandise in lieu of money or that they promise to buy merchandise or service, in place of cash payments, in the country to which they export
Eg: McDonnell Douglas sold helicopters to British Government but had to be equip them with Rolls-Royse engines as well as transfer much of the technology & production work to the UK
Restrictions on serviceRestrictions on foreign sale of services such as Transportation, Insurance, Consulting & Banking. These service industries restricted due to ;
EssentialityConsider certain service industries to be
essential because they strategic purposes or provide social assistance to their citizens
Sometimes prohibit some sectors for private companies (Foreign or Domestic)
Eg: Health, Transportation
StandardsLimits service professions to ensure practice
by qualified personnel via licensing
Eg: Accountants, Architects, Lawyers, etc…
ImmigrationGovernment regulation to organizations to
hire employees locally, have to search qualified personnel extensively in domestic market before recruit from foreign country
DEALING WITH GOVERNMENTAL TRADE INFLUENCES
Governments’ intervention in trade affects the flow of imports and exports of goods between countries.
When companies face possible losses because of the import competition, they have several options to deal with this situation
1.Move operations to a lower-cost country.
2.Concentrate on market niches that attract less international competition.
3.Adopt international innovations-greater efficiency or superior products
4.Try to get governmental protection.
If they have the given options, there are costs and risks with each option.
• Companies may lack the managerial, capital or technological resources to shift production abroad.
• They may not be able to identify more profitable product niches.• Even if they try to improve their efficiency, their innovation may
be quickly copied by foreign competitors.
• In such situations, companies often ask some protection from their government ( to restrict imports or open export markets)
Example : When the Japanese automobiles compete in U.S. market, the U.S. industry sought and received protection from Japanese imports in the form of quotas.
Can the government help every company that faces tough international competition ?
• No, its impossible and helping one industry may hurt another.
Therefore the company should propose or oppose a particular protectionist measures that can convince government officials.
And the companies must identify the key decision makers, whether they are an official of the executive branch, a member of parliament, a career civil servant.
Example : Trade policies in the U.S. are often championed by members of Congress who are specially sensitive to employment and company conditions in their districts.
Its important to identify and get together the other companies and groups that have a common objective to convince the officials that a particular company’s problems are not due to its specific inefficiencies but the general challenge of imports.
Companies can take different approaches to deal with changes with the international competitive environment.
And the company’s attitudes toward protectionism are a function of investments they have made to develop their international strategy.
Generally the companies that depend on free trade and those that have integrated their production and supply chains among countries tend to oppose protectionism and companies with single or multi domestic production facilities (ex: plant in Japan to serve the Japanese market) tend to support protectionism.
THANK YOU…
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