6 Business-

Government
Trade Relations
 Chapter Objectives

• Describe the political, economic, and cultural

motives behind governmental intervention in trade
• List and explain the methods governments use to
promote international trade
• List and explain the methods governments use to
restrict international trade
• Discuss the importance of the World Trade
Organization in promoting free trade

6-2
 Political Motives

Preserve Respond to
Protect Gain
national “unfair”
jobs influence
security trade

6-3
 Political Motives

To protect jobs:
Practically every government becomes involved in
international trade when jobs in the domestic economy are
threatened.

6-4
 Political Motives

To protect jobs:
E.g.: + Ohio lost around 215,000 manufacturing jobs over
recent 14 years. Those jobs went to China, Central and
East Europe;
+ GE sent many jobs from US to Mexico over years
(GE employs 30,000 Mexican at 35 factories producing
appliances in Texas, 100 of its locomotives made in
Pennsylvania & dozens of US-made aircraft engines).
+ The EU established CAP (Common Agricultural
Policy) to protect jobs of EU’s farmers by restricting
imports and guaranteeing prices.
6-5
 Political Motives

To Preserve National Security:

Restricting certain imports is supported by the
argument that a government must have access
to a domestic supply of certain items (such as
weapons, fuel, and air, land, and sea
transportation) in the event that war could
restrict their availability.

6-6
 Political Motives

To Preserve National Security:

E.g.:The US semiconductor industry is protected

against foreign competition. Semiconductor is
important component of defense products that
would be dangerous to rely primarily on foreign
producers.

6-7
 Political Motives
To Respond to “Unfair” Trade
Governments often threaten to restrict imports
coming from a nation that is seen as not
following the international rules of trade.

6-8
 Political Motives
To Respond to “Unfair” Trade
E.g.: The ITC (International Trade
Commission) determined that frozen basa and
tra fillet from VN are sold in US at less than fair
market value => anti-dumping investgation

6-9
 Political Motives
To Gain Influence
The world’s largest nations may become
involved in trade to gain influence over smaller
nations.

6 - 10
 Political Motives
To Gain Influence
E.g.: + Japan has a certain amount of influence
in Asia by providing non-refundable aid and
ODA in renovation process, esp. Infrastructure
building, eliminating poverty and rural
development.
+ US banned all trade & investment in
Cuba since 1962 in hope of exerting political
influence against its communist leaders.

6 - 11
 Economic Motives I

Potential results

+ National income increases

Protect infant
industries – Wrong industries protected
Protect emerging – Firms grow complacent
industries during
development from – Consumer prices rise
global competition – Public funds poorly spent
E.g.: Steel industry and
Automobile industries
in VN
6 - 12
 Economic Motives II

Potential results

+ Global industry created

Pursue strategic
trade policy – Firms’ efficiency reduced
Help companies to – Domestic costs increase
achieve economies of
scale and gain a first-
– Special interests benefit
mover advantage

. 6 - 13
 Cultural Motives

Nations block imports Protect national

deemed harmful identity

Usual suspects
are U.S. media and
consumer goods

Result of increased
globalization

6 - 14
 Cultural Motives

E.g.: French laws bans foreign Protect national

language words from virtually
business & Gvern. Communications,
identity
radio, TV broadcasts, public
announcements, advert. messages.

E.g.: Canada tries to mitigate

cultural influence of entertainment
products imported from US,
requiring at least 35%
music played over Canadian radio
by Canadian artists.
6 - 15
 Discussion Question

What are some of

the political,
economic, and
cultural reasons
why countries
intervene in
trade?
6 - 16
Answer to Discussion Question
Political motives include to protect
domestic jobs, preserve national
security, respond to “unfair” trade,
and gain influence over other
nations. Economic motives include
to protect infant industries from
competition and to pursue strategic
trade policy. Cultural motives
include to protect national identity,
block imports thought culturally
harmful, and protect budding artists.

6 - 17
 Trade Promotion and Restriction

Trade promotion Trade restriction

methods methods

 Tariffs
 Subsidies
 Quotas
 Export financing  Embargoes
 Foreign trade zones  Local content requirements
 Administrative delays
 Special government agencies
 Currency controls

6 - 18
 Subsidies

Financial assistance in the form of cash, tax

breaks, price supports, etc.

=> To assist domestic companies in competing

more effectively against foreign imports in the
home market, or against other international
competitors in export markets.

6 - 19
Subsidies

Potential results
+ Increased competitiveness

– Encourage inefficient firms

– Increased consumer prices

6 - 20
 Export Financing

Financing such as low-interest loans and

loan guarantees

=> EF is financial help for exclusively for an

exporting company. A subsidy is financial
assistance given to a wider range of domestic
companies including those only serving the
domestic market (not involved in exporting).

6 - 21
 Export Financing

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…

6 - 22
Foreign Trade Zones

 Designated region in which

merchandise is allowed to pass
through with lower customs
duties (taxes) and/or fewer
customs procedures
 E.g.: Nomura IZ, Tan Thuan
EPZ, ...

 Purpose is to increase
employment and trade
within the nation

6 - 23
Special Government Agencies

- Organize trade missions for officials and

businesses visit other countries, meet potential
business partners and generate contacts for new
business;
- Operate export-promotion offices at locations
abroad to promote the home country’s exports
and introduce businesses to potential business
partners in host nation;
- Help import products the home nation does not
produce

6 - 24
Special Government Agencies

E.g.:
Jetro (Japan External Trade Organization) – a
trade – promotion agency for Japanese
companies.
Jetro opens trade offices in US to:
+ promote Japan’s exports into US;
+ introduce Japanese businesses to potential
business partners in US;
+ encourage Japan businesses to import US
products that Japan does not or cannot produce.
6 - 25
 Discussion Question
A geographic region within
a nation and in which
merchandise passes
through with lower
customs duties or fewer
customs procedures is
called a __________.
a. No subsidy zone
b. Special quota zone
c. Foreign trade zone
6 - 26
Answer to Discussion Question
A geographic region within
a nation and in which
merchandise passes
through with lower
customs duties or fewer
customs procedures is
called a __________.
a. No subsidy zone
b. Special quota zone
c. Foreign trade zone
6 - 27
 Tariffs
Government tax levied as a product 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
6 - 28
 Import and Export Quotas

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 producers 1. Retain adequate domestic

of a good supply of a product
2. Force outside firms to 2. Restrict world supply of a
compete for market access product to raise its price

6 - 29
How a Tariff-Quota Works

6 - 30
 Embargoes

Complete ban on trade (imports and exports)

in one or more products with a particular country

Most restrictive Often used to Can be difficult

non-tariff trade achieve political for a nation to
barrier goals enforce
6 - 31
Local Content Requirements

Laws that domestic market must supply

a specific amount of a product

Forces international companies to

employ local resources in production process
6 - 32
Administrative Delays

Regulatory controls or
bureaucratic rules to slow
imports into a country

 Inconvenient ports for imports

 Product-damaging inspections

 Understaffed customs offices

 Lengthy licensing procedures

6 - 33
 Currency Controls
Restrictions on the
convertibility of a currency
Limit the amount of
globally accepted
currency available to
pay for imports
Set an unfavorable
exchange rate when
paying for imports
6 - 34
 Discussion Question

What are some of

the methods that
governments use
to restrict
international
trade?

Copyright © 2014 Pearson Education, Inc. 6 - 35

 Answer Discussion Question

To restrict trade,
governments can use
methods such as
tariffs, quotas,
embargoes, local
content requirements,
administrative delays,
and currency controls.

6 - 36
 General Agreement on
Tariffs and Trade (GATT)
Early Success:
• Tariffs down globally by
35%
• World trade grew up by
2,000%

Then Problems:
• Non-tariff barriers grew
rapidly in 1980s
• Agreement failed to
address services.

6 - 37
Completed Rounds of GATT

6 - 38
Uruguay Negotiations: Revised
Original GATT in 4 ways
Improved intellectual property rules
Extended coverage to services
Reduced agriculture barriers
Created World Trade Organization

6 - 39
World Trade Organization (WTO)

Normal trade relations status

Dumping and antidumping duty

Dispute settlement body

Doha trade talks

6 - 40
 Discussion Question

The World Trade

Organization principle that
calls for nondiscrimination
among trading partners is
called __________.
a. Least favored status
b. Normal trade relations
c. Countervailing relations

6 - 41
Answer to Discussion Question

The World Trade

Organization principle that
calls for nondiscrimination
among trading partners is
called __________.
a. Least favored status
b. Normal trade relations
c. Countervailing relations

6 - 42