1. Governmental Influence on Trade
Chapter seven
Members
K.A.S. Navarathne PGIA
W.A.Wasantha PGIA
R.G.M.S.Perera PGIA
J.R. Nanayakkara PGIA
P.K.T.K. Wimalarathne PGIA

2. OBJECTIVES
To realize the rationales of governmental policies that enhance and restrict trade
To interpret the effect of pressure groups on trade policies
To understand the comparison of protectionist rationales used in high-income countries with those used in low –income countries’ economies
To comprehend the potential and actual effect of governmental intervention on the free flow of trade

3. To understand the major means by which trade is restricted and regulated
To grasp the business uncertainties and business opportunities created by governmental trade policies

4. INTRODUCTION
This chapter begins by reviewing the economic and the non economic rationales for trade protectionism ,followed by an explanation of the major forms of trade controls and their effects on companies’ operating decisions.
Protectionism –
Government restrictions on imports and occasionally on exports that frequently give direct or indirect subsidies to industries to enable them to compete with foreign production either at home or abroad.

5. PHYSICAL AND SOCIETAL INFLUENCES ON PROTECTIONISM AND COMPANIES’ COMPETITIVE ENVIRONMENT

6. CONFLICTING RESULTS OF TRADE POLICIES
Governments intervention in trade to attain
Economic,
Social or
Political objectives.
Governmental officials apply trade policies
To benefit the nation and its citizens
Their political longevity

7. Conflicting objectives
Determining the best way to influence trade is complicated
Reason - frequent conflicts in the effects of policies.
Government would also like to help struggling companies and industries without penalizing those who doing well
This goal is often impossible –especially if other countries retaliate against their protectionist actions
Eg :-
U.S. gave tax breaks to aid its exporters, but the 25-nation EU related with import taxes that hurt such U.S. companies’ export sales as Al-Edmonds for shoes and Northland Forest Products for specialty lumber

8. Proposals for trade regulation reform often spark fierce debate among people and groups that believe they will be affected
Stakeholders/Interest groups –
Those that are most directly affected
(Workers, Owners, Suppliers, and Local politicians)
Eg :-
U.S. stakeholders whose livelihood depends on a U.S. base of clothing production are fighting the elimination of import-restricting quotas
Individual consumers often misinterpret how much retail prices rise because of import restrictions
EU restrictions on banana imports cost EU consumers about $2 billion a year because of higher banana costs, a significant amount in total but trivial for each banana or for each consumer

9. RATIONALES FOR GOVERNENT INTERVENTION IN TRADE
EONOMIC RATIONALES
- Prevent unemployment
- Protect infant industries
- Promote industrialization
- Improved position compared to other countries
NONECONOMIC RATIONALS
- Maintain essential industries
- Deal with unfriendly countries
- Maintain or extend spheres of influence
- Preserve national identity

10. ECONOMIC RATIONALES FOR GOVERNMENTAL INTERVENTION
Unemployment
Infant-Industry Argument
Industrialization Argument
Economic Relationships with other Countries 10

11. 1. UNEMPLOYMENT
The most effective pressure group for import restrictions
- Time and incentive to picket companies
- Contact governmental representatives and confront organizations
Eg:- Unemployed U.S. steelworkers pressured U.S. lawmakers to apply tariffs and quotas to restrict steel imports in order to preserve their jobs and pensions 11

12. Two factors can ease the effects of retaliation
Small trading countries are less important in the retaliation process
Retaliation that decreases employment in a capital-incentive industry may not affect employment as much as the value of the trade loss would imply
Even if no country retaliates, the restricting country may gain jobs in one sector only to lose jobs elsewhere.
Eg. Lower imports – Lower import handling jobs 12

13. Possible Costs of Import Restrictions
If import restrictions do increase domestic employment, fellow citizens will have to bear the cost of
Higher prices
Higher taxes
Government officials should compare the,
- Costs of higher prices with the cost of unemployment and displaced production that would result from free trade
&
- Costs of policies to ease the plight of displaced employees, such as for unemployment benefits or retraining
Efforts to reduce unemployment through import restrictions are usually ineffective. 13

14. 2. INFANT-INDUSTRY ARGUMENT
Alexander Hamilton in 1972
Infant-Industry Argument
The government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it is able to compete on its own.
The infant-industry argument says that production becomes more competitive over time due to,
- Increased economies of scale
- Greater worker efficiency 14

15. The government can recoup the costs of trade protection through,
The economies of scale and employees’ higher productivity will enable a company to manufacture efficiently, thereby positioning it to compete internationally
The government can recoup the costs of trade protection through,
- Higher domestic employment
- Lower social costs
- Higher tax revenue 15

16. Which creates 2 problems,
Risk - Although it is reasonable to expect production cost to decrease overtime, they may never fall enough to create internationally competitive products.
Which creates 2 problems,
Some industries grow to be competitive because of governmental protection
There are companies, which are early losses & lately gained benefits without any public help. 16

17. Subsidized companies to keep price levels– Tax payers
Infant-industry protection requires government to make subsidies to lower the product prices of protected companies.
Subsidized companies to keep price levels– Tax payers
2. Production subsidies – Reduce the amount that that government can spend elsewhere. 17

18. 3. INDUTRIALIZATION ARGUMENT
Countries seek protection to promote industrialization because that type of production
Brings faster growth than agriculture
- Surplus workers can more easily increase manufacturing out put than agriculture
Brings in investment funds
- If import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted area
Diversifies the economy
- Export prices of agricultural products fluctuate very much, which is detriment to economies that depend on few of them 18

19. - Import substitution and export promotion
Brings more income than primary products
- The terms of trade for emerging economies may deteriorate because,
Demand for primary products grow slowly & Production cost savings for primary products will be passed on to consumers
Reduces imports and promotes exports
- Import substitution and export promotion
- Import substitution is not the best approach to develop new industries due to higher prices and taxes
Helps the nation-building process
- Build infrastructure
- Advance rural development & enhance rural social life
- Boost the skills of the workforce 19

20. When a country shifts from agriculture to industry,
Demands on social and political services in cities may increase
Output increases if the marginal productivity of agriculture worker is very low – Need to adopt improved agricultural practices
Development possibilities in the agriculture sector may be overlooked 20

21. 4. ECONOMIC RELATIONSHIPS WITH OTHER COUNTRIES
There are four main motivations to promote domestic producers
Balance of Payments Adjustments
- A trade deficit creates problems for nations with low foreign exchange rates
- Governments improve their balance of payments by improving their balance of trade
Eg. Devaluation of currency & import restriction
Comparable Access or “Fairness”
- Domestic producers may be disadvantaged if their access to foreign market is less than foreign producers’ access to their market 21

22. Restrictions as a Bargaining Tool
- The imposition of import restrictions may be used as a means to persuade other countries to lower their import barriers
Price-Control Objectives
- Keep up word prices
- Lead to substitute
- Keep domestic prices down by increasing domestic supply
- Give purchasers less incentive to increase output
- Shift foreign production and sales
- To penetrate foreign market, Eg. Dumping 22

23. Rationales for government intervention
Economic Rationales for government intervention
Non-economic Rationales for government intervention

24. Non-economic rationales for government intervention
Maintenance of essential industries
Prevention of shipments to unfriendly countries
Maintenance or extension of spheres of influence
Protecting activities that help preserve the national identity

25. Maintenance of essential industries
The essential-industry argument – (Governments apply trade restrictions to protect essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war.)
e.g.: U.S. government subsidize the domestic silicon production.
Determine which ones are essential
Consider cost & alternatives
Once an industry receives protection, it is difficult to remove it because the protected companies, their employees, trade unions and politicians demand for continue protection even though the rational is not exists.
e.g.: U.S continues to subsidize its mohair producers more than 20 years since mohair was no longer essential for military uniforms.

26. Prevention of shipments to unfriendly countries
Prevent the export of strategic goods that might fall in to the hands of potential enemies (even to friendly countries) or that might be in short supply domestically.
e.g.: U.S. government prevented export of data-encryption.
e.g.: Nine Chinese companies and an Indian businessman sold technology to Iran regarding the chemical and conventional weapons programmes. Then, US forbade to export goods in to US and prevented US companies from exporting to them.

27. Prevention of shipments to unfriendly countries cont..
Use of trade sanctions has been controversial (pp 233)
Facts not in favor of sanctions
Trade sanctions against Cuba were supposed to topple the Castro
regime but four decades later he was still in power
Who really suffers? Political leaders still get whatever they need, so that the costs of sanctions are borne by innocent people. eg: sanctions against Iraq

28. Prevention of shipments to unfriendly countries cont…
Facts not in favor of sanctions cont..
Sometimes impose trade sanctions based on one issue rather than countries overall record. eg: suggested sanctions against brazil to restrict the cutting of Amazon forest.

29. Prevention of shipments to unfriendly countries cont…
Facts in favor of sanctions
It can refuse products used child slaves eg: Cocoa production in ivory cost
Sanction succeeded
US & UK sanctions against Zimbabwe
Indian sanction against Nepal

30. Maintenance or extension of spheres of influence
Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodies
Eg: The UE has given preferential treatment of bananas from certain former colonies.
Eg; China delayed permission for Allianz, a German Insurance Group, to operate in china after Germany gave a reception for Dalai Lama.

31. Protecting activities that help preserve the national identity
To protect the collective identity, countries limit foreign products and services in certain sectors.
Eg: For many years Japan, South Korea and
China maintained an almost total ban on rice
imports, largely because rice farming has been
a historically cohesive force in each nation.
Eg: Canada relies on a ‘cultural sovereignty’ argument to prohibit foreign ownership or control of publishing, cable TV and book selling.
Eg: France protects its cinema industry out of fear
that invasion of English language and Anglo Saxon
culture will weaken its cultural identity.
Eg: Korea requires theaters to show Korean films at least 146 days per year

32. Instruments of Trade Control Tariffs (Direct price influence)
Import tariffs
Transit tariffs
Export tariffs
Non-tariff barriers (Direct price & quantity influence)
Direct price influence
Subsidies
Aid & loans
Customs valuation
Others
Direct quantity influence

33. “Buy local” legislations Standards & Labels
Quantity controls
Quotas
“Buy local” legislations
Standards & Labels
Specific permission requirements
Administrative delays
Reciprocal Requirements
Restrictions on service

34. Price D S
Tax – Increased the price & decrease the quantity sold P2 P1 Q2 Q1
Quantity
Direct price influence

35. Tariffs
Governments charges tariffs when on a good when it crosses the an official boundaries of a country
Source of Government income
Export tariffs
Tariffs collected by the exporting country
Use by the countries which are exporting raw materials
Transit tariff
Collected by the country through which the goods have passed the border
Eg: Singapore

36. Import tariffs
Tariffs collected by the importing country
Increase the price of the imported goods
Make the price advantage for domestically produced goods
Protective even though there is no domestic production in direct competition
(Curtail demand on imported goods – Political)

37. Tariffication methods
Specific duty
Charge per unit basis
Ad Valorem duty
Charge as a % of value of the item
Compound duty
Charge both the specific duty & Ad valorem duty on the same good

38. Tax controversy – Industrial countries
No tariffs on importation of raw materials but tax on processed materials
Ad valorem tax on based on total value (raw materials + processing cost)
Emerging economies argue that the Effective tax rate on manufactured goods more than the published rate.
Eg: Assume; Duty on coffee beans = 0
Duty on instant coffee = 10%;
If price of coffee jar $5 (Beans – $ Process - $ 2.50). The effective duty on manufacturing portion is 20% - ( ($0.5/$5)*100)

39. Import restriction causes quantity sold to fall
Price S1 D S P2 P1 Q2 Q2
Quantity
Direct quantity influences

40. Subsidies
Direct payments to domestic companies to compensate them for losses incurred from selling abroad
Eg: US subsidies to cotton exporters
Sri Lanka – Subsidies to tea exporter
Provide business developments such as market information, trade expositions & foreign contacts
Overcomes market imperfections rather than creating

41. Aid & Loans
Governments grants loans & aids to other countries
Tied aid – Recipient required to spend the funds in donor country
Common with large contracts in emerging economies such as infrastructure developments, Telecommunication, railway & electric power projects

42. Customs Valuation
Importers/exporters declare a low price on invoice in order to enjoy low ad valorem tariffs
Use declared invoice value
If no invoice value/ doubt
Value based on identical goods /
Similar goods
If not possible
Value based on final sales value
Reasonable cost

43. Sometimes use the discretionary power to assess the value too high – prevent importation of foreign products
Sometimes misclassify a product & its corresponding tariff
Eg: IC Vs “Chemical Silicon”
Other price influences
Special fee
Eg: Consuler, custom clearance, documentation
Minimum price levels

44. Quotas
Quantitative restrictions on imports or exports
Import quotas
Prohibits or limit the quantity of products that can be imported in a given year
Increase the price of the imported good
Generate revenue to the companies which are in importing limited supply
Sometimes based on political or market conditions
Protect domestic producers; But not allways
Eg: Japan

45. Voluntary export restrictions – Type of import quota
Country A ask country B to limit exports to country A voluntarily
Not damage the political relations between those countries as much as import quotas does
Export quotas
Restrictions on exports to assure the availability of goods for domestic consumers at lower price
Prevent depletion of natural resources
Attempt to raise export price by restraining supply in foreign markets
Embargo – Prohibit all forms of trade
(To achieve political goals)

46. “Buy Local” Legislations
In Government purchases prefer domestic producers
Some times use the price mechanisms
Eg: Purchase from foreign companies if price is at some predetermined margin below that of domestic competitor

47. Standards & Labels
Device classification, labeling & testing standards to allow the sale of domestic products but obstruct that of foreign – made ones
Eg: GMO,GMF
Specific permission requirements
Require that potential importers or exporters secure permission from government authorities before conduct trade transactions
Eg: Import license

48. Foreign –Exchange control
Require importer of a given product to supply to a government agency to secure the foreign currency to pay for the product.
Administrative delays
Specific permission requirements are international administrative delays
Create uncertainty & raise the cost of caring inventory

49. Reciprocal requirements
Government sometimes require that exporters to merchandise in lieu of money or that they promise to buy merchandise or service, in place of cash payments, in the country to which they export
Eg: McDonnell Douglas sold helicopters to British Government but had to be equip them with Rolls-Royse engines as well as transfer much of the technology & production work to the UK

50. Restrictions on service
Restrictions on foreign sale of services such as Transportation, Insurance, Consulting & Banking. These service industries restricted due to ;
Essentiality
Consider certain service industries to be essential because they strategic purposes or provide social assistance to their citizens
Sometimes prohibit some sectors for private companies (Foreign or Domestic)
Eg: Health, Transportation

51. Standards
Limits service professions to ensure practice by qualified personnel via licensing
Eg: Accountants, Architects, Lawyers, etc…
Immigration
Government regulation to organizations to hire employees locally, have to search qualified personnel extensively in domestic market before recruit from foreign country

52. DEALING WITH GOVERNMENTAL TRADE INFLUENCES
Governments’ intervention in trade affects the flow of imports and exports of goods between countries.
When companies face possible losses because of the import competition, they have several options to deal with this situation
Move operations to a lower-cost country.
Concentrate on market niches that attract less international competition.
Adopt international innovations-greater efficiency or superior products
Try to get governmental protection.

53. If they have the given options, there are costs and risks with each option.
Companies may lack the managerial, capital or technological resources to shift production abroad.
They may not be able to identify more profitable product niches.
Even if they try to improve their efficiency, their innovation may be quickly copied by foreign competitors.
In such situations, companies often ask some protection from their government ( to restrict imports or open export markets)
Example : When the Japanese automobiles compete in U.S. market, the U.S. industry sought and received protection from Japanese imports in the form of quotas.

54. Can the government help every company that faces tough international competition ?
No, its impossible and helping one industry may hurt another.
Therefore the company should propose or oppose a particular protectionist measures that can convince government officials.
And the companies must identify the key decision makers, whether they are an official of the executive branch, a member of parliament, a career civil servant.
Example : Trade policies in the U.S. are often championed by members of Congress who are specially sensitive to employment and company conditions in their districts.
Its important to identify and get together the other companies and groups that have a common objective to convince the officials that a particular company’s problems are not due to its specific inefficiencies but the general challenge of imports. 54

55. Companies can take different approaches to deal with changes with the international competitive environment. And the company’s attitudes toward protectionism are a function of investments they have made to develop their international strategy. Generally the companies that depend on free trade and those that have integrated their production and supply chains among countries tend to oppose protectionism and companies with single or multi domestic production facilities (ex: plant in Japan to serve the Japanese market) tend to support protectionism.

56. THANK YOU…