Does Strategic Trade Foster Competition - Coursework Example

Strategic trade Strategic trade describes policies that countries apply to control trade between itself and other countries in an imperfect competition. It is also known as the exports manage system because it aims at controlling the exports of a country. This policy deals with the policies in an oligopoly kind of market (Patel & Patel 2007). The government implements this policy so that they use incomes from foreign trade to their home industries with the aim of improving them. This policy is applicable in competitive markets where its evidence is the taxes and the subsidies by the government. The rate of taxes that the government imposes depends on the level of competition present among the industries. The subsidies are also dependant on the competition levels. The US is very famous for the use of strategic trade so that they reduce their trade deficits. Subsidies make the costs of carrying out business in the home country cheaper hence; they will export more products than they will import (Carbaugh 2010). The subsidies lead to lowering of prices and increase in goods because of the reduction in the cost of production. Due to this, incomes of the country increase as the profits of the foreign market reduce. This results in a shift of the rent to the country from the foreign industries. There are policies that are put in place by countries to improve domestic wellbeing through the foreign trade. The aims of this policy are to use incomes from foreign trade to improve their comparative advantage so as to increase on their exports. Its aims are to promote export of strategic commodities by helping the local industries to produce more goods and of good quality to meet the demands of the foreign market. Some of the strategic policies in use are like taxing exports and subsidizing imports or taxing them. The implementation of these policies can be through mechanism like adjustment assistance which helps the young industries in the country to grow while limiting the competition from foreign industries. It is applicable mostly by countries that deal with agricultural products. Many countries adopt this policy. For instance Malaysia the United States and many other countries. The government might decide to regulate foreign trade by using several methods like introduction of tariffs on imports. This is done with the aim of discouraging imports so that citizens use products from the local industries. This is also done with the aim of improving the economy of the country. They do that so that they are able to control completion between local industries and foreign trade. Does strategic trade foster competition? These policies adversely affect competition in trade between one country and other foreign countries (Trachtman 2006). They have negative effects on competition because these policies take away powers from the international markets instead of making these powers stronger. This is because they reduce the earnings of the foreign trade and divert them to the local industries. Another reason is that the profits of the local industries will increase hence; increasing the chances of monopoly powers. This calls for systematic planning by the government as they implement strategies trade policies in their countries. It promotes unfair completion of firms within the country leading the rise of monopolistic powers that hinder growth of the economy. The existence of unfair competition means that there is suppression of some firms. Some firms consider themselves superior than others because of the benefits they reap from being monopolies (Patel & Patel 2007). Monopoly powers ruin the economy of a country because they do not allow equal and fair competition with other firms. This is because they have more resources and sometimes have the control of all the resources in that sector. That means that they decide what to do with the resources without minding the market forces at that particular time. Monopolies tend to oppress other industries both in the country and outside the country. They receive subsidies from the government, which makes them to have more advantages than other industries. That means that the competition in such a case is unfair because they are not at the same level with other firms in the same sector. Due to this factor, they tend to dominate the economy in terms of wealth and customers because they will produce the best quality goods. This poses competition for the other firms because they cannot get customers due to their level of production and the quality that they produce. That shows that they will take over the market. Domination of the market by monopolies is also a disadvantage to the consumers because they do not have a wide variety of choices to choose from. This is because the other firms who face unfair competition quit the market. That leaves that firm as the only producer of such goods in the entire market (Carbaugh 2010). That leaves the consumers with no other option than to purchase products from that monopoly firm. This affects both consumers of that country and the outside countries that depend on it for their imports. This is all because of the unfair completion arising out of adoption of this policy by governments. After some time, the economy of that country reduces by a large percentage because of the reduction in the foreign trade as a result of the policy. The government does this in a bid to protect its industries whether infants of important ones from competition from other foreign countries (Trachtman 2006). However, this does not necessarily solve that problem because it creates unfair competition that hinders growth of the economy. Other countries do not invest in countries with such policies because they will not be in a position to compete with the local industries. This is because they receive subsidies and other incentives from the government which means they have an advantage over other firms. The strategic trade policy is also the protectionism policy where there is restriction of trade with other countries by imposing some strategies. The aims of this strategy are to discourage imports and encourage exports of the country’s exports (Carbaugh 2010). The government prevents take-overs by other industries in other foreign countries. They want to improve the economy of their countries by improving local industries and firms. It is a way of the government to give incentives to the industries to protect them from competition from foreign investors. The economy improves by a small percentage but in the long run it falls because it locks out other willing investors because of the unfair competition. They face unfair completion which means that there is a possibility of the reduction in the quality of products that such industries produce due to lack of competition from other firms. Reasons for the protectionist policy Governments impose this policy because they want to improve the quality of their products so that they win over other countries. This could be because they cannot withstand the current competition in the market due to poor quality of their products or services. Therefore, they use this policy to get time to improve on their products so that they can compete well with other markets (Rugman 2009). Elimination of these subsidies creates a situation where there is perfect and fair competition in trade. For instance, the Canadian government uses this policy to protect its industries from competition by foreign countries. Introduction of policies is also another strategy applicable in the strategic trade policies by the government. It helps in achieving monopoly of one country over the others by hindering foreign investment by other countries into the host country (Patel & Patel 2007). These two ways were brought by James and Barbara from Canada as a way of providing incentives for the local firms. Their point of argument was that the presence of imperfect competition increases costs so that tariffs come from the rent they pay after purchasing these imports from the host country. Impacts of strategic trade policy on competition Countries offer subsidies and other incentives to local firms that export their products to outside countries so that they encourage trade. They also put a limit to the quantity of products that they can export to other countries. All these are ways that countries use to impose the strategic trade policy upon industries within (Carbaugh 2010). They try to maximize profits for the local industries without competing with other foreign countries. Competition has advantages to the economy of a particular country because it keeps other firms to the toes by making them produce better quality goods and services to please consumers so that they become loyal to them. This means that the country is able to accumulate enough wealth unlike in the case of imposing such policies. The basis of this protectionist theory was the improvement of the country’s economy and welfare of the firms in the country by transferring rent from the international trade to the local industries hence; the shift of incomes (Trachtman 2006). This was seen as the best solution at the time when the circumstances in the market were not favorable enough. It does not have barriers for entry of firms within the country but for foreign ventures because they are given incentives. It is through these incentives that the chance of monopoly powers increases because of the subsidies that the government gives to these firms. For instance, Japan where seeks to protect its local industry against foreign competition by using this strategic trade policy. Japan is well known for technological developments, therefore, it puts these measures in place so that these firms that deal with technology can have protection against completion (Patel & Patel 2007). By doing this, they will continue being the leaders in technology issues because the government also provides incentives and subsidies for such firms to grow and beat the economy of other countries in the same line of production. This is a case of the government protecting strategic industries in the country against foreign competition. They discourage foreign ventures which are also important for the growth of the local industries through the revenue they get from selling their products to other countries. The US imports some products from Japan. Such products are like cars and other machinery needed in the country and they do not produce. The US uses the strategic trade policy to protect its industries that means that there are restrictions for the US to purchase machinery, cars and other products from Japan. It did this by setting a maximum amount of cars and machinery that local firms can sell to the US (Carbaugh 2010). Japan uses incomes from such exports to other countries to improve its local industries. This leads to creation of unfair competition that leads to monopoly powers in the end. Presence of unfair competition lags behind development of the economies of the country and the globe. There is the criticism of this theory because it aims at improving the economy of that particular country and forgoes improving the welfare of the other countries. There is the reduction of the global welfare even if the economy of a number of countries increases. Therefore, countries should agree to eliminate tariffs and other entry barriers so that they encourage trade amongst themselves, so as to improve the economy of all the countries. Some authors argue that these policies are put in place by governments under certain pressures or motivate other than just to protect the local industries. They say that there is some political influence behind such protectionist policies. The existence of imperfect competition within the foreign trade progresses performance of countries which brings about stiff competition, therefore reducing the prices of products by firms due to that competition (Rugman 2009). This is the reason for the introduction of this policy that aims at reducing such high competition between the local industries and the foreigners. The presence of incentives by the government to the local firms makes it easier for them to grow and win over the competition with the foreign countries. This will mean that competition will only exist within the country but not with other countries because it becomes unfair competition. This policy facilitates anti-competitive protectionism because it allows the country to have both the competition policy for local industries and still practice the anti-dumping regulations for external countries. The strategic policy allows for more competition within the local industries than with the external countries. This is unlike the anti-dumping policy which encourages competition amongst different countries. American countries don’t allow for this policy so that competition exists so that they avoid collision amongst firms. This is because there is realization of the negative effects of the strategic trade policy on trade with other countries which in the long run affects local industries negatively. In case countries want to fully utilize their potential in terms of trade, they should abolish such protectionist policies because they hinder fair competition with the outside countries. Studies show that existence of monopoly in the economy hinders growth of the country (Patel & Patel 2007). This will allow for competition with other foreign countries hence; gaining the benefits of foreign trade which will create fair competition and avoid monopoly powers. In the case where these policies hinder foreign trade, they will not benefit from it. This means that their economies will not grow to maximize their potentials because they are limiting to only the local industries. The strategic trade policy affects competition negatively because it enables firms to get super normal profits which means affecting competition. This creates monopoly of firms in the country because there is no competition (Carbaugh 2010). Lack of competition discourages foreign investors into the country so there will be no diversification and wide range of products in the country. There is also little growth of the economy in the country due to factors like unemployment. The firms and industries in the country may not be enough to create job opportunities for all citizens. The rigid trade policy limits competition in the foreign markets hence; the existence of monopoly powers within the local industries in the country. This means that some firms dominate over others in the country, therefore encouraging unfair competition of industries in the country. This protectionist policy could allow the government to subsidize exports and select the number of industries in the country. That means that it will select one firm and give it all the subsidies, which means unfair competition. Encouragement of fair competition is appropriate because the government does not have to select any number of industries to operate in the country. They create independence in the oligopoly market and income change to local industries. This strategy also negatively affects the competition in the foreign countries because it aims at increasing exports and reducing imports (Patel & Patel 2007). Discouraging imports means that citizens have to rely on the local goods and sometimes the industries that produce these products are few. That means that there will be creation of monopoly powers because very few foreign countries can invest in the country. With the existence of monopoly in an economy, competition does not exist because there is only one firm producing that particular product. Solutions A solution these competition issues is the adoption of completion laws by governments in different countries. These laws lay out the requirements in regards to competition with other foreign countries. The policies should favor trade of both within and outside the country to encourage interaction of trade with other countries. This will also encourage diversity of products and labor market in the country and openness for the entry of foreign ventures into the country. Governments should encourage free trade with other countries by getting rid of these protectionist policies. Free trade with other countries has benefits like widening the market of the products that a country produces and exposure to better opportunities. The benefits of free trade outdo those of the protectionism policy to both the host country and the trading country (Carbaugh 2010). The completion in free trade is more, so the chances of having monopolies are low. That gives countries the reason why they should embrace free trade and avoid these protectionist policies to avoid imperfect competition within the country. References Patel, J. C & Patel, J. (2007): Profit from prices: Profit from prices website. Carbaugh, R. (2010): International economics: Cengage learning. Trachtman, J. P. (2006): The international economic law revolution and the right to regulate: Cameron May. Rugman, A. M. (2009): The oxford handbook of international business: Oxford press. Read More