Governmental Influence on

Trade
Mashiat Zahin
Lecturer, Department of Marketing
Cumilla University
Why Government Intervene?

• Governments intervene trade for the good of the citizens.

• Government policies are designed to regulate, direct, and protect
national activities. The exercise of these policies is the result of national
sovereignty, which provides a government with the right to shape the
environment of the country and its citizens.
• The domestic policy actions of most governments aim to increase the
standard of living of citizens and to improve the quality of life and to
achieve full employment.
• These policies affect international trade and investment directly.
 Refers to those government restrictions
and incentives specifically designed to help
a country’s domestic firms compete with
foreign competitors at home and abroad.

Protectionism - Affect the ability of foreign

producers to compete in home
market.
- Limit or enhance company’s ability
to sell abroad or acquire needed
foreign supplies.
Economic Rationales for Government
Intervention

1 2 3 4
Fighting Protecting Promoting Improving
Unemployment Infant Industries Industrialization Comparative
Position
Fighting Unemployment

• The unemployed are the most effective pressure groups, who has time and incentives to protest publicly.
• To employ these unemployed, imports must be restricted which may cause adverse impact. To fight with this
unemployment problem, government must consider two factors:
1. The Prospect of Retaliation: retaliation by other countries must be considered. Even if no country
retaliates, the restricting company may gain jobs in one sector only to loose jobs elsewhere.
- Fewer imports of a product mean fewer import handling jobs.
- Import restriction may cause lower sales in other industries because they must incur higher costs for
components.
- Import stimulate exports by increasing foreign income and foreign-exchange earnings.
2. Analyzing Trade-Offs: deciding whether to restrict imports to create jobs, government should compare
the costs (in terms of prices or tax subsidies) of limiting imports with the cost of unemployment (in
term of unemployment benefit or retraining).
Protecting Infant Industries

• Government should guarantee an emerging industry a large share of the domestic market until it becomes
efficient enough to compete against imports.
• Initial output costs may make products noncompetitive in world markets. Over time costs will decrease due to
- Greater economies of scale
- Greater work efficiency
Problem with Argument:
• Hard to identify industries with high probability of success. Even when industries can be identified, not clear
the government should provide protection.
• Protection may serve as disincentive for managers to adopt innovations needed to become competitive.
Promoting Industrialization

Countries promote industrialization because:

• Surplus workers can more easily increase manufacturing output than agricultural output.
• Inflows of foreign investment in the industrial sector promote sustainable growth.
• Prices and sales of commodities fluctuate very much, which is a detriment to economies
that depend on few to them.
• Markets for industrial products grow faster than markets for commodities.
• Industrial growth reduces imports and promotes exports.
• Industrial activity helps the nation-building process.
Improving Comparative Position

• Trade controls can be used

- To improve the balance of payments.
- To gain fair access to foreign markets

• Price-Control Objectives
❑Dumping: companies sometime export below cost or below their home-country price.
❑Optimum Tariff Theory: a foreign producer will lower its prices if the importing country
places a tax on its products. If this occurs, the benefit shifts to the importing country
because the foreign producer lower its profits on the export sales.
Noneconomic Rationales for Government
Intervention

1 2 3 4
Maintaining Preventing Maintaining or Preserving
essential shipments to extending national culture
industries unfriendly spheres of
countries influence
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
Dealing with Unfriendly Countries

• Prevention of exports that might be acquired by potential enemies.

- May lead to retaliation that prevents securing other essential goods.
- Trade controls on nondefense goods also may be used as a weapon of
foreign policy.
Maintaining or Extending Spheres of Influence

• Government may provide aid and credits to and encourage imports from
countries that are political allies.
• Government may impose trade restrictions to coerce foreign countries to
follow certain political action
Preserving National Culture

• In order to preserve national culture, countries

- Limit foreign products and services in certain sectors.
- Prohibit exports of art and historical items deemed important to
national heritage.
 • Also known as duties. Refer to a government
levied tax on goods shipped internationally.
Tariffs may be levied
- On goods entering, leaving or passing
Instruments of through a country
- For protection or revenue
Trade Control – - On a per unit basis (specific duty) or a
Tariffs value basis (ad valorem tariff)
❑Export tariffs
❑Transit tariffs
❑Import tariffs
 • Represent administrative regulations, policies
and procedures, i.e. quantitative and
qualitative barriers that directly or indirectly
Nontariff Barriers impede international trade.
• Trade barriers have often been the sources of
conflict among nations and in WTO
negotiations.
 • Subsidies: direct government payments to
domestic companies to compensate them for
losses incurred from selling abroad.
- Agricultural subsidies
- Overcoming market imperfections
- Valuation problems
Nontariff Barriers • Aids and Loans: given to other countries with the
provision that the funds be spent in the donor
(Direct Price country.

Influences) • Customs Valuation: procedure for assessing value

when customs agents levy tariffs. It may be based
on
- Invoice price
- Value of identical goods
- Similar goods coming in at the same time
- Final sales value
 • Quotas: limit the quantity of a product that can be
imported or exported in a given time. Most
common restriction based on quantity.
- Voluntary Export Restraint (VER)
- Embargo
Nontariff Barriers • “Buy Local” legislation

(Quantity Control) • Standards and labels

• Specific permission requirements
• Administrative delays
• Reciprocal requirements
• Restriction on service
 When facing import competitions,
companies should:
• Move operations to another
Dealing with country
Governmental • Concentrate on market niches
that attract less international
Trade competition
Influences • Adopt international innovations
• Try to get government protection
Thank You