International Business Environments & Operations Daniels ● Radebaugh ● Sullivan International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan Copyright © 2015 Pearson Education, Inc.

Governmental Influence on Trade Chapter 6 Governmental Influence on Trade Chapter 6: Governmental Influence on Trade Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objectives Explain why governments try to enhance and restrict trade Compare the potential and actual effects of government intervention on the free flow of trade Illustrate the major means by which trade is restricted and regulated Demonstrate the business uncertainties and opportunities created by governmental trade policies Discern how businesses may respond to import competition The Learning Objectives for this chapter are To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Introduction Protectionism refers to those government restrictions and incentives designed to help a county’s domestic firms compete with foreign competitors at home and abroad. Protectionist policies…… negatively affect the ability of foreign producers to compete in your home market enhance your company’s ability to sell abroad or acquire needed foreign supplies are likely to lead to retaliation by affected stakeholders While free trade is beneficial, in reality all countries regulate the flow of goods and services across their borders. Governments want to help companies that are struggling, but it’s difficult to do so without hurting those that are doing well. Copyright © 2015 Pearson Education, Inc.

Conflicting Results of Trade Policies Governments intervene in trade to achieve economic, social, and political goals Policymakers are challenged by conflicting objectives interest groups Stakeholders include workers, owners, suppliers, local politicians etc. Consumers usually don’t care… or, have very little say in the market Government officials use trade policy to try to achieve economic, social, and political goals. However, their efforts are hampered by uncertain and conflicting policy outcomes, as well as the goals of special interest groups. Copyright © 2015 Pearson Education, Inc.

Economic Rationales for Government Intervention Why governments intervene in trade Economic rationales Fighting unemployment Protecting infant industries Promoting industrialization Improving comparative position Non-economic rationales Maintaining essential industries Promoting acceptable practices abroad Maintaining or extending spheres of influence Preserving national culture This Table shows the reasons for government intervention in trade. Notice that there are both economic and noneconomic reasons for intervention. Copyright © 2015 Pearson Education, Inc.

Instruments of Trade Control Tariffs (also called duties) are taxes levied on (internationally) traded products. Exports tariffs, transit tariffs, import tariffs, levied by the country of destination on imported products A specific duty is a tariff that is assessed on a per unit basis. An ad valorem tariff is assessed as a percentage of the value of an item. Nontariff barriers (NTBs) represent administrative regulations, policies, and procedures, i.e., quantitative and qualitative barriers, that directly or indirectly impede international trade. Trade barriers have often been the sources of conflict among nations and in WTO negotiations

Instruments of Trade Control: Nontariff barriers (NTB) Nontariff barriers (NTB): Direct Price Influences Subsidies Aids and Loans Customs valuation Nontariff barriers (NTB): Quantity Controls Quotas: VER, Embargoes “Buy Local” legislation Standards and Labels Specific permission requirements (license etc.) Administrative delays

Effect of Nontariff Barriers Effect on Subsidies Aids and Loans Quotas Buy Local Price Production Market Motivation Trade

What measures firms can take to deal with governmental intervention Move operations to lower-cost countries Concentrate on market niches that attract less international competition Opt for internal innovations leading to greater efficiency and/or superior products Try to secure government protection

Dynamics and Complexity Trade restriction changes bring about winners and losers among countries, companies, and workers Gains to consumers from freer trade may come at the expense of companies and workers The international regulatory situation is becoming more complex Looking forward, there is likely to be both support for freer trade, and also support for more protectionism. Copyright © 2015 Pearson Education, Inc.

Chapter 6: Discussion Questions What is protectionism? What are the arguments for and against protectionism? I may ask you to explain any specific rationale (e.g., infant industry argument) How governments intervene trade with the help of non-tariff barriers? Explain. What are the effects of subsidies (or quotas) on price, production, market, motivation and trade? Explain. What measures firms can take to deal with governmental intervention? Explain.

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