Lecturer: Government Intervention in TradeIntroduction Governments in both developed and developing countries intervene in trade in order to attain certain objectives. These objectives can be motivated by political, economic or cultural circumstances and their impact can be short-term or long-term (Escaith & Gonguet, 2009). Governments often intervene in trade by offering subsidies or by imposing tariffs and other trade barriers. Subsidies can be offered in the form of affordable and long term interest loans, cash payments, tax breaks and product price support and are primarily used to enable domestic producers compete effectively with established foreign producers in the international markets.
Governments can also intervene in trade by imposing restrictions on the amount of goods and services that can be produced and sold in the international market during a particular period of time. Such restrictions are called quotas and play a crucial role in stabilizing supplies in the domestic and international market (Hamilton & Stiegert, 2002). Some governments offer export financing to domestic companies that are engaged in export business. Export financing makes domestic firms products cheap hence more competitive in the international markets.
Other governments have established foreign trade zones with their trading partners. These zones allow certain goods and services to pass through specified geographic zones under minimum or low custom procedures. Because of the high competitiveness of international markets, other countries have established trading agencies to promote domestic products and services. Such agencies help organize trips for domestic producers and local trade officials to foreign countries for the purpose of promoting export products (Kreinin, 1995). A government can also intervene in trade by directly discouraging the importation or exportation of certain goods.
This intervention can be in the form of strict bureaucratic rules and administrative delays. In some cases, a government can impose restrictions on importation of currency to restrict importation of certain commodities (Hamilton & Stiegert, 2002). Political Motives for Government Intervention in TradePolitical motives for government intervention in trade often relate to the need to protect the interests of some groups within a nation such as producers. The main political motives for government intervention in trade are: Protection of jobs (unemployment) Protection of jobs is the most common argument used by politicians to support government intervention in trade.
High unemployment rate can have political impacts on the government and it, therefore, becomes necessary for the government to protect jobs and industries from unfair foreign competition. As an example, the United States government placed a tariff on steel imports in 2002. The import tariff was designed to protect imminent dismissal of steel workers due to cheap steel imports and hence was a good initiative by the government to protect employment in the steel industry (Hamilton & Stiegert, 2002). National Security Certain industries are of central importance to a nation’s security that they require regular government supervision.
Defense related industries such as aerospace, advanced electronics and nuclear industries often get preferential attention from the government. As an example, semiconductors have become an essential component of defense products such that it could be extremely dangerous to rely fully on foreign production (Kreinin, 1995). This argument was used in 1986 to persuade the United States government to offer subsidies to Sematech, a semiconductor manufacturing company. The subsidies have helped the company to grow tremendously, and it is now a global leader in the industry.
Some countries have invested in exploration of oil within their territories for fear that in case of a war or some other conflicts they are not cut off from the supply of the commodities (Hamilton & Stiegert, 2002).