Political, Economic and Cultural Reasons for Government Intervention in Free Trade - Assignment Example

Running header: Political, Economic and Cultural reasons for government intervention in free trade. Student’s name: Instructor’s name: Subject code: Date of submission: Government intervention in trade Even though the world since the Second World War has witnessed great reductions in trade barriers, government everywhere continue to restrict free trade. The main motive behind state intervention in trade is protection of a country’s domestic market. In fact, many countries often encourage free trade at the domestic level but when the issue of protection of domestic markets comes into play, free trade is retired. According to Kelvin (2008), there are three major reasons why governments restrict free trade. These reasons may be political, cultural and economic or a combination of all the above factors. One of the ways in which the government intervenes in trade is when they provide support to domestic businesses that want to export. In addition, governments intervene in trade during harsh economic times, when employees call upon the government to reduce imports in a bid to protect their jobs or in a bid to protect local production. This paper examines the reasons why governments find it necessary to intervene in trade. In so doing, the political, economic and cultural reasons for government intervention in trade are analysed in detail. Political reasons for government intervention in trade Government’s world over make promises to citizens who propel them to power through votes. As such, government officials have to make trade oriented decisions based on the ruling government’s political motives/manifestos. The main political reasons why governments intervene in free trade include; a) Protection of jobs Of late, the world has witnessed a rapid rise in the rate of unemployment. As such, most government nowadays are elected on a platform of job creation and have to put in deliberate measures to create jobs for the citizens if they have to gain the confidence of the electorate. As such, a government that is unable to protect the already existing jobs will most likely be unpopular. Governments will therefore do anything possible to protect the already existing jobs so as to keep its citizens gainfully employed. Such actions will include intervention in free trade where this does not help in protection of jobs. For instance, James (2010), states that governments will ban imports where imports are cheaper than locally produced goods with an aim of protecting a local industry thus preserving the jobs that the industry offers to locals. Such an action was witnessed when China’s Lucky film faced intense competition from the more dominant Kodak for China’s photographic film market. The government intervened to shield Lucky film from annihilation by offering it $240 million cash in addition to low interest loans (Alan, 2000). In addition, the government banned joint ventures in the China film manufacturing industry. b) Preservation of national security Governments world over will protect some industries in a bid to guard their national security. This includes industries involved in weapon manufacture, aerospace, strategic minerals, semiconductors, advanced electronics etc. such industries that are vital to national security often attract government financing either in exporting or importing (John, 2003). Furthermore, governments may restrict trading in some items in a bid to ensure goods that are detrimental to public security do not find their way in unsafe hands. For instance, governments world over strictly regulate trade in fire arms and certain conditions have to be met before someone can be allowed to buy a gun for instance. All these interventions in free trade are aimed at safeguarding public security. c) Responding to unfair trade According to Grant (2005), where a government feels that a trading partner is not engaging in fair trade practices, it may intervene by threatening to also play unfairly in a bid to enforce agreement to certain concessions. In addition, governments deem free trade as being unfair when they actively want to protect the domestic industries. Governments usually do this by putting in place reasonably big quotas and tariffs. d) Gain influence In most cases, governments of economically powerful and more dominant countries such as the G8 or the Bricks establish economic/trade relations with smaller nations in a bid to gain influence on the smaller countries. In other worlds, trade is seen as a vital tool in achieving a government’s foreign policy goals (Schmitz, 2010). As such, a government will give a preferential treatment in trade to a country / countries with which it wants to build strong relations. For instance, the US government rewarded Pakistan for providing its airbase for use by US during its war with Afghanistan. When Iraq invaded Kuwait, the US punished it by imposing trade sanctions. The US has also been known to maintain long running trade sanctions against Cuba, Iran, North Korea and Libya (Monica, 2012). The US government at times also imposes trade sanctions against other countries for trading with the above unfriendly countries. This shows how governments use trade to gain influence on lesser powerful countries thus interfering with free trade practices. Economic reasons for government intervention in free trade While it is generally accepted that free operation of competitive markets is ideal, this is not always the case in practice (Robert, 2007). Government may intervene in free trade where there exists an inequality in income distribution, where there are missing markets or where incomplete or imperfect markets exist. The main economic reasons for government’s intervention in free trade include; a) Protection of infant industries All governments find it necessary to intervene in free trade in a bid to protect infant industries especially from international competition. This is especially so during their developmental phase in a bid to ensure their survival and become sufficiently competitive in the global market. This is seen as important due to the fact that every business require reasonable time to grow, mature and gain the necessary knowledge to enable them become more efficient and innovative and hence increase their likelihood of being more competitive in the market (Jadish, 2002). However, protecting local industries from international competition could make them complacent and hence less innovative. In addition, this protection could also be more detrimental where customers are forced to pay more for goods and services or where the infant companies have financial difficulties and hence have to obtain government funding at the expense of the tax payer. b) Pursuing strategic trade policy Economists argue that government intervention in free trade could help companies benefit from economies of scale and become the first movers in their respective industries. The first movers’ advantages will arise from the fact that economies of scale in production limit the number of companies that a given industry can sustain. This in turn results in increased national income while also enabling companies that obtain first movers advantage to earn good profits. However, lavish government assistance to domestic companies should be avoided as it could lead to inefficiency and high costs (Douglas, 2002). Furthermore, this form of assistance is criticized on the basis of often being subject to political lobbying by the groups that seek assistance by government. c) To address inequalities in income distribution When an inequality in the distribution of income which is considered unacceptable by the society exists, the government may find it necessary to intervene in free trade. This inequality is concerned with the ability to access goods and services broadly rather than a specific good or service. The inability by a society to access all goods and services will mainly be caused by will result from inequalities in income distribution (World Trade Organisation). As such government intervention in this case should be geared towards addressing the inequalities in income distribution that the society considers unacceptable as opposed to directly interfering with free trade. Economics argue that government interventions aimed at addressing income distribution will enhance social welfare owing to the fact that the welfare of the society as a whole will depend on the utility all of its constituent’s experience. Therefore, individuals may experience loss in income but still experience enhanced level of access to products and services necessary to meeting his/her basic needs (Brown, 2003). This implies that government decisions about the nature of interventions to address inequalities in income distribution should result in interventions that directly address the economic condition of concern. Otherwise, such intervention may fail to address production, consumption and resource allocation hence reducing social welfare. This calls for governments to transfer income directly to individuals and the society in need as opposed to direct intervention in free market operations (Busch, 2001). Desirable intervention measures that could directly transfer income to such households include regulations for minimum wages and government provision for welfare payment. d) Market failure An example of market failure that may warrant government intervention in free trade is where there are circumstances which prevent a market for a good or service from being established. Properties of a product or a service that may prevent a market form being established in the good or service include rivalry and exclusivity (Harrison, 2010). Exclusivity exists where all costs and benefits arising from an individual’s production or consumption of the good or service are wholly dependent on market transactions. This makes it possible to exclude others from enjoying the benefits of an individual’s production or consumption of the good or service or to compel others to pay for enjoying the benefits. Exclusivity also exists where it’s possible to prevent consumption or production by an individual from imposing costs on others or to compel the individual to compensate others for the costs imposed (Hann, 2008). On the other hand, rivalry exists when consumption or production of a product or service by an individual affects the utility others can enjoy from the product or service (Fliess, 2006). When the conditions of rivalry and exclusivity exist in a product or service exists, the government may find it necessary to remove the market failure. Cultural reasons for government intervention in free trade Often, governments will interfere in free trade for cultural reasons. These reasons include; a) Safety Governments often intervene in free trade in a bid to protect consumers from unsafe products. Countries often prohibit importation of Marijuana and similar harmful products. Recently, countries have been reluctant to order apparel from China due to SARS scare. Many other countries do not allow production of genetically modified organism (GMOs) for fear of the health effects this could have on the citizens (Singh, 2008). In the medic al fields, governments ensure that medical practitioners and pharmacists meet certain qualifications in a bid to ensure public safety. b) Emotional argument Countries attach a lot of value to their cultural identity and heritage which governments seek to protect at all costs. As such, governments at times restrict importation of products or services that may undermine their countries’ cultural identity and heritage. For instance, the French government limits foreign films on the country’s televisions in a bid to protect French cultural values/heritage (Harriet, 2010). Democratic countries also intervene in free trade by limiting participation in trade with countries that have poor human rights record. For instance, many countries failed to trade with China for a long time citing its poor human rights record. Governments have also restricted trading with countries that promote child labor. In addition, governments impose trade restrictions for environmental issues (Virginia, 2005). Nationalists in favor of trade restrictions encourage governments to restrict trade on the grounds that international trade could lead to outflow of wealth from local people to foreigners while giving no value in return to locals. Conclusion As observed above, there are various reasons for government intervention in free trade. The reasons identified above are genuine and justified. This can be shown by the effects that past government intervention has had in making trade better especially as far as workers conditions are concerned. For instance, through government intervention, child labor has been abolished while working conditions have improved (Patrick, 2011). Countries have also been able to protect themselves from exploitation by powerful countries while assuring citizens of their security. However, it would be prudent that governments only intervene in free trade if only the intervention is geared towards improving and facilitating trade. This is to mean that government intervention actions should be as minimized as possible and market forces should be left to determine the direction that free market is to take. This is because interventions by government only result in increased regulations which only complicate business environment. References: Alan, V2000, The economics of government market intervention and its international dimension, Michigan, Kluwer Publishers. Brown, C2003, Government interventions in trade, Journal of International Economics, Vol. 60, pp.249-273. Busch, M2001, the political economy of non tariff barriers, International organisation, vol.49, pp25-31. Douglas, I2002, Free trade under fire, Princeton, Princeton University Press. Fliess, B2006, The role of trade barriers in SME internalization, OECD trade policy working papers. 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