The reason for government intervention in international business NameUniversity nameCourse nameInstructorSubmission dateAbstractThe paper bases on how the intervention of trade by the government has contributed in reducing trade barriers. It further explains on how political, cultural, and economic motives are included in government’s interventions in trade (Baumol, 1976). Moreover, the paper accounts on the negative and positive impacts on the intervention. It explains how countries gain on this intervention, for instance, how developing nations are favored by the intervention from exploitation by developed countries. It concludes with the expansion of the ways the interventions plays a major role in the international trade.
IntroductionInternational tradeThe international trade is defined as the exchange of goods, capital and services across the international territories or boarders. Generally, in most countries, international trade represents a significant share of GDP (Gross Domestic Product). While the trade has existed throughout much of the history, its social, economic and political importance has been on rise in the recent centuries (Charny, 1989). Free tradeFree trade is described as the policy by which the administration does not distinguish against the imports or even intervenes with the exports with the application of tariffs (to imports) or the subsidies (to exports).
According to comparative advantage law, the policy allows the trading partners mutual trade gains of services and goods. The reason for government intervention in international businessThere are three reasons for why the governments compel restrictions on free trade: economic, political and cultural reasons are the three reasons as to why there are restrictions. On occasion, there is national intervention on trade especially when provision of support to their domestic or internal business exporting activities (Margolis, 1982).
Further, the government may intervene when the nation is facing tougher economic break down or when workers foyer the government to reduce imports, this happens when the workers feel threatened of losing their jobs or even being eliminated from their position. To add on that, the government intervention in the market through providing information and ensuring the information flows. It then combats the externalities. Thereafter, the government provides public goods and services and then controls a non-competitive behavior by changing the income distribution. The first four reasons are justified for they promote Pareto optimality (efficiently).
The 5th reason is justified also when the society desires to guide economy to a certain Pareto optimal resource allocation, the one which is more equitable (Sloan, 1995). Government intervention in markets and trade is aimed at achieving 2 goals which are social equity and efficiency. For this to be attained, the marginal benefits that the society gets for production or consumption should be equal to the production and consumption of marginal costs. It is not easy to judge issues of equity because fair resource distribution is assessed in a very subjective manner.
Externalities are classified as costs spill over or as benefits as well. Where there are external costs being incurred the production and consumption levels that the market brings about are always higher than those levels that are socially efficient. More so, the market tends not to provide public goods in an adequate manner. Problems are evident since the external benefits are large when compared to private benefits. With the government not intervening, people would not be stopped from free riding and therefore contributing to these people’s production costs would not be possible.