Lecturer: Reasons for Government Intervention in TradeIntroductionEconomic systems in many countries have been shaped y government attempts to enhance profitability through a variety of programs and policies. Depending on the specific commodities involved in trade, the history of government intervention in trade can be traced through trade protection, regulation, promotion and price and income support programs. Essentially, government intervention in trade has been in existence for decades since the era of Industrial Revolution. The intervention has not only affected the commodities that can be produced but also the volume of commodities that can be imported and exported.
Essentially, the need to intervene in international trade practices has become part of standard economic practices. This has in turn impacted on the manner in which countries interact with each other and has led to formation of trade agreements and regulatory bodies such as the World Trade Organization. The pattern of exports and imports that occur in the absence of trade barriers is called free trade. Despite the numerous advantages and benefits associated with free trade, governments often find it necessary to intervene in free trade (Helpman & Krugman, 2001).
Governments intervene in trade and impose restriction on trade for various reasons. These reasons can be classified as political, economic and cultural. Countries often intervene in trade practices by supporting their domestic industries’ exporting activities. However, the most emotionally charged government intervention in trade occurs when a country’s economy seems to be underperforming. During tough economic ties, workers and firms alike lobby their governments to protect them from imports that may reduce work and eliminate jobs in the domestic market place. Political Motives for Government Intervention in TradePolitical arguments for government intervention in trade are concerned with the need to protect interests groups within a country (often producers of certain commodities and workers). Some of the political motives that can lead to government intervention in trade include: Protection of Jobs Government restriction of trade helps domestic firms compete effectively with large and well established foreign firms.
This helps domestic firms create employment for the local people. For instance, China’s state owned photographic film company, China Lucky Film found it difficulty to compete with the dominant Kodak Company for photographic film market in China.
China Lucky Film’s market share had deteriorated to less than seven percent and the company was at the verge of closure. Fearing the likely annihilation of Lucky Film, the government of China offered Lucky Film millions of dollars in cash and access to low interest loans and initiated total ban on joint ventures in the film industry. This initiative led to rapid growth of China Luck Film and today, it is the dominant photographic film company in China and a leading employer in the industry.
Reimer and Stiegert (2006) have noted in his book that high unemployment rate can easily oust a government regardless of whether it is legitimately elected or not. For this reason, governments become involved when trade practices threaten jobs for the citizens. Similarly, governments intervene when foreign firms threaten to flood local markets.