Main Motives for Government Trade Intervention - Coursework Example

Assignment 2 Name: Institute: Main Motives for Government Trade Intervention Introduction The key motive for government intervention in the trading system is to defend makers in local markets. According to Anginer and Warburton (2014), scores of nations these days practice free trade, however, when it comes to defending their individual markets, free trade becomes sluggish. Basically, there are sets of tools governments can employ to build barriers for International Corporation to penetrate their markets. Further than this, Xiangyang (2013) posits that governments usually intervene either for economic or political reasons. The system for global trading has an extensive history, and it is imperative to comprehend the institutions policing this system, from General Agreement on Tariffs and Trade (GATT) to the World Trade Organization (WTO) as well as what these institutions support. Doha Round of Trade Talks is set for WTO member states to talk about issues relating to reducing agricultural grants, anti-dumping actions, safeguarding intellectual property rights as well as additional reduction of trade barriers. The outcome of these talks according to Saylor (2014) will have philosophical impact on global trade, through firm strategy as well as trade barriers to policy significances with regard to government intervention. For this reason, the essay seeks to identify the main motives for government trade intervention, and highlight positives and negatives of each method of intervention. Main Motives for Government Trade Intervention National Security Argument: All countries look after a number of industries to safeguard its national security. The plainest cases are artillery, highly developed electronics, aerospace, as well as strategic minerals. Government intervention for the benefit of making certain resources or minerals available does not seem to be a most favourable policy. According to Lash and Batavia (2013) the better option is to store these wherewithals during peacetime when they are low-priced. Champions of national security argument maintain that a country must be autonomous and be prepared to compensate for inadequacy when the case associates with national security. Of late, Pentagon has pushed for creation of flat-panel industry albeit the fact that the same could be gotten at a lower price from China. US must keep in mind that in modern’s world no country can be completely autonomous. International Policy objectives Argument: Trade has turn out to be a crucial instrument to realize international policy objectives. As confirmed by Reshef (2007) special treatment could be offered to a government or several countries with which firm associations are to be developed. For instance, Pakistan was heavily paid back when its government decided to offer its airbase to the United States at the time of Afghanistan War, but Iraq on the other hand was severely punished by means of infliction of trade sanctions subsequent to it invasion in Kuwait. Sometimes trade sanctions are imposed to countries that do trade with blacklisted countries like North Korea and Iran were. Strategic Trade Policy Argument: Paul Krugman according to Saylor (2014) recommended a novel trade theory, which states that in an industry with economies of scale, the foreign market can beneficially support just a handful companies. Governments could outweigh in export of particular goods just for the reason that they have companies that can seize first-mover benefits; for instance, the supremacy of Microsoft in the business-related computing industry is characterised to these factors. In line with this argument, a government must employ subsidies to financially back these companies; the subsequent argument holds the view the government may be paid to get involved in a business if it assists its local companies triumph over the barriers to penetrate created by international companies that have by now drew the first-mover benefits. . Safety Argument: Countries are all aspiring to defend consumers from products that are not safe; for instance, nearly all countries disallow importation or exportation of marijuana as well as products produced from animal species in danger of extinction such as Rhinos and elephants. Besides, the government of US in its aspiration to heighten public safety enduringly expelled the imports of some of military-style attack artillery in 1979, whereas Chile banned Salmon eggs imports on accounts that they could have been diseased. In another example, the European Union prohibited hormone-treated beef imports to defend its citizens from the likely harmful health outcomes (Kim, 2003). Lately, scores of governments changed orders for apparel from China to other Asian countries like Pakistan and India, given that China had been staggering under severely acute respiratory syndrome. Scores of the member states of European nations, like Luxembourg and Germany are not in favour of genetically modified organisms, while also developed economies are extremely tough pertaining to quality of agricultural products from third world countries. Emotional Argument: Scores of arguments could lack economic underlying principle, but Kim (2003) thinks they are extremely firm that no sense works. For instance, rice is an extremely emotional subject in the midst of the Japanese, and for decades it has been recounted that rice from other countries are not apposite for Japanese tastes and as well not hale and hearty. China on the other hand restricts import of rice in view of the fact that rice farming has always been interconnected and historical force in bringing Chinese families together. According to Khan and Batteau (2012) maintaining cultural heritage as well as identity has been an extremely firm argument to why governments get involved in trade. Governments, sometimes, ban import of goods that could demoralize this heritage or identity; for instance, the French movie industry is protected by its government who limit films from other countries in French television as well offers subsidies to the film makers in France to produce movies. Methods of Intervention Basically, there are several tools used by governments to defend and keep out alien products out of their countries. The foremost method is the use of tariffs, which Khan and Batteau (2012) define as is any levy taxed on imported products or from time to time on export. Notably, tariffs appear in two forms; ad valorem tariffs which can be described as a tax or other form of charges levied on a product on account of its value rather than on account of its weight size, or size; and specific tariffs, is a tax levied on imports, defined with regard to a specific quantity per unit. Reshef (2007) affirms that the impact of high tariffs is always a gain for the local manufacturers, whereas customers lose for the reason that imports are costly as compared to locally produced products. What’s more, tariffs harm the economic efficiency of the world since it supports manufacturing of goods that might be manufactured somewhere else at a lesser price. An additional tool employed by government is subsidies, wherein a government local manufacturer is paid by the government to produce a certain product or start a company in certain location. Subsidies usually come in form of low interest loans, cash grants, government equity contribution, and tax breaks, especially for local companies. Importantly, subsidies assist companies expand their export markets as well as compete in opposition to foreign imports. Recently, agriculture has been the most subsidized industry, which according to Anginer and Warburton (2014) reveals the actuality that nations desire to safeguard their domestic farmers, and it as well proves that farmers have well-built political influence. When the local government is lobbied by the farmers, they are taken seriously by the government, in particular when voting periods are approaching. Chan et al. (2004) believe this is not a good thing for the buyers; since the government can give money to incompetent manufacturers and support surplus production, which the consumer will end up paying for. Reshef (2007) hold the view that subsidies are excellent for economies of scale, especially where it is hard to penetrate the market because the market can just hold a handful companies; however, for other manufactures where surplus can be generated it is completely meaningless and destructive to the normal buyer. Whereas farmers from developed countries face ferocious competition from those in developing world where costs of production as well as remuneration are extremely inferior in the short term, but in the long run in case the subsidies are reduced or not present the buyer’s would almost certainly have part of the bill they get these days at the store, whilst heightening their choices of agricultural goods. In general, subsidies may be an excellent method to financially back companies with economies of scale, but not for companies that are more occupied (Lash & Batavia, 2013). Governments also employ import quotas to protect local companies, which according to Khan and Batteau (2012) is a direct limit in the quantity of several products imported. According to Khan and Batteau (2012), there are two types of government quotas; the primary is tariff rate quotas wherein an inferior tariff rate is enforced to imports in the quota as compared to those above the quota. Fundamentally this indicates that the government will enforce a lower tariff for a certain number of units, immediately that quota is achieved, the tariff can increase tremendously. A different amalgam version is voluntary export restraint (VER), which Kim (2003) defines as a quota enforced by the exporting government, at the request of the importing government. Firms fulfil this to evade reprisal in the form of increased tariff rates that may considerably influence the production cost (negatively). One impediment brought about by import quotas, however, is that the WTO cannot do anything in relation to it, given that it is not a formal agreement. Local content requirements is an additional method used by government to intervene trade, and can be described as condition that certain percentage of a good be manufactured locally either in value or physical terms. Kim (2003) indicate that this is utilised by third world countries to further stimulate development in their production of goods. Kim (2003) further notes that content requirements encompass an inherent impact on global business since it compels companies to source a high manufacturing in one nation, increasing business overheads, as compared if they could have based their manufacturing to several countries which focus in that form of manufacturing. Government also intervene trade by creating trade barriers through organizational trade strategies, wherein, overbearing rules are formulated to make it hard for imports to penetrate the country. The government can come up with several methods to breach on success of imported goods within its borders. The final way governments employ to defend a local company from inequitable foreign and local competition is by means of filing actions when the government dumps its surplus products into a far-off market. MacDonald (2013) defines dumping as trading products in a foreign market at a price that is lower than their production costs or trading products in foreign markets below their fair market value. In case a company has surplus production it could strive to trade it at an inevitably stumpy price in an international market, wherein, local companies have no power to compete with. Adusei and Frimpong (2014) view this as a greedy conduct wherein manufacturers make use of returns from their domestic markets to subsidize foreign market prices, by and large attempting to force local manufactures of that market insolvent. To prevent this WTO has espoused anti-dumping policies intended to penalize international companies that take part in dumping. In case the government establishes that a different country has dumped its surplus product into its market, lowering the local prices to inequitable rates, the victim country can file WTO case against that country. Conclusion In conclusion, it has been argued that government intervention in trade embarks to achieve two objectives: equity as well as social efficiency. In this regard, social efficiency is realized when the society marginal gains for either consumption or production are equivalent to the marginal overheads of either consumption or production. Concerns of equity are hard to measure owing to the one-sided evaluation of what is, as well as what is not, a reasonable allocation of resources. In addition, it has been observe that government interventions as well as policies have to attend to the goal of trade rationalisation, which time and again leads to endeavours to make practices in the market comply automatically with a contemporary paradigm. Besides that, government interventions must consider the verified ability of the marketing system. References Adusei, M., & Frimpong, J. M. (2014). Predictors of Financial Development in Ghana. Journal of Applied Finance and Banking, 4(2), 59-71. Anginer, D., & Warburton, A. J. (2014). The Chrysler Effect: The Impact of Government Intervention on Borrowing Costs. Journal of Banking and Finance, 40, 62-79. Chan, K., Chan, Y.-C., & Fong, W.-M. (2004). Free Float and Market Liquidity: A Study of Hong Kong Government Intervention. Journal of Financial Research, 27(2), 179-197. Khan, S., & Batteau, P. (2012). Government intervention in Russian bourse: a case of financial contagion. Journal of Financial Economic, 4(4), 320-339. Kim, Y.-H. (2003). The Optimal Trade Intervention Timing under Informational Barriers and Imperfect Competition. Journal of Economic Theory and Econometrics, 8(1), 15-34. Lash, N. A., & Batavia, B. (2013). Government Economic Intervention and Corruption. Journal of Developing Areas, 47(2), 1-15. MacDonald, D. (2013). Review of Cruel harvest: US intervention in the Afghan drug trade. Addiction, 108(10), 1863-1864. Reshef, Y. (2007). Government Intervention in Public Sector Industrial Relations: Lessons from the Alberta Teachers' Association. Journal of Labor Research, 28(4), 677-696. Saylor, R. (2014). Commodity booms, coalitional politics and government intervention in credit markets. Review of International Political Economy : RIPE, 21(3), 640-669. Xiangyang, C. (2013). Measurements and Legislation Suggestions for Coping With Trade Protectionism Under the WTO Mechanism: From the Aspect of Government Procurement. Canadian Social Science, 9(5), 98-104. Read More