Chapter 6

Governmental
Influence on Trade

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 Learning Objectives
 Explain why governments try to enhance and
restrict trade
 Show the effects of pressure groups on trade
policies
 Compare the potential and actual effects of
government intervention on the free flow of trade
 Illustrate the major means by which trade is
restricted and regulated

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 Learning Objectives
 Demonstrate the business uncertainties
and opportunities created by
governmental trade policies
 Discern how businesses may respond to
import competition
 Fathom how the growing complexity of
products and trade regulations may affect
the future

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 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

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 Introduction
Physical 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
 Ex: U.S. import restrictions on Chinese Textile Ind

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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
Governmental Intervention
Learning Objective:
Explain why governments try to enhance
and restrict trade

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 Economic Rationales for Government
Intervention
 Why governments intervene in trade
 Economic rationales
 Fighting unemployment
 Protecting infant industries
 Promoting industrialization
 Improving comparative position
 Non-economic rationales
 Maintaining essential industries
 Promoting acceptable practices abroad
 Maintaining or extending spheres of influence
 Preserving national culture

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A. Economic Rationales

Copyright © 2015 Pearson Education, Inc. 7-10

Fighting Unemployment
Learning Objective:
Show the effects of pressure groups on
trade policies

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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

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Protecting ‘Infant Industries’
Learning Objective:
Compare the potential and actual effects
of government intervention on the free
flow of trade

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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
 creates growth in manufactured goods
 reduces imports and promotes exports
 helps the nation-building process

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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

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 B. 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
 A country’s trade restrictions may coerce
governments to follow certain political
actions or punish companies

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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
Learning Objective:
Illustrate the major means by which trade
is restricted and regulated

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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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Copyright © 2015 Pearson Education, Inc. 7-25
Copyright © 2015 Pearson Education, Inc. 7-26
Copyright © 2015 Pearson Education, Inc. 7-27
Copyright © 2015 Pearson Education, Inc. 7-28
Copyright © 2015 Pearson Education, Inc. 7-29
Copyright © 2015 Pearson Education, Inc. 7-30
 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
 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)

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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
 Countertrade or offsets
 Restrictions on services

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