1. WEEK 4 GOVERNMENTAL INFLUENCE

3. Objectives
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

4. Why Governments Intervene in Trade?
Economic Rationales
Non-economic rationales
Prevent unemployment
Maintain essential industries
Protect infant industry
Deal with unfriendly countries
Promote industrialization
Maintain or extend spheres of influence
Improve position compared to other countries
Preserve national identity

5. Economic rationales for government interventions
Prevent unemployment
To maintain the existing jobs
Can be done through imports restrictions
By limiting import local jobs are retained as firms and consumers are forced to purchase domestic produced goods and services
but cause other problems
dropped the production in other countries.
Reduce some jobs that related to import-handling – transportation and shipping industry
High cost of certain product – limited choice

6. Economic rationales for government interventions Protecting “Infant-Industries”
New industry in its early stages of development
Need protection from competitors through tariff and non-tariff barrier until its established
governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production
Automotive industry in Brazil, Malaysia
Problems – fail to reduce costs, deter managers to provide high-quality products at a low price

7. Economic rationales for government interventions Promote industrialization
The development of national output should be supported, even though domestic price may not be competitive on the market
Countries seek protection to promote industrialization because that type of production:
Brings faster growth than agriculture.
Brings in investment funds.
Diversifies the economy.
Brings more income than primary products do.
Reduces imports and promotes exports.
Helps the nation-building process.

8. Support for industrialization argument claim that:
surplus workers can more easily increase manufacturing output than agricultural output
foreign investment inflows promote sustainable growth
fluctuating prices are a major detriment to those economies that depend on just a few commodities
demand for and prices of raw materials and agricultural commodities do not rise as fast as the demand for and prices of finished goods export promotion, and possibly import substitution, lead to sustainable economic development industrialization helps the nation-building process

9. Economic Relationships with Other Countries Improve position compared to other countries
Their objectives include improving the balance of:
payments
raising prices to foreign consumers
gaining fair access to foreign markets
preventing foreign monopoly prices
assuring that domestic consumers get low prices
lowering profit margins for foreign producers

10. Non Economic Rationale Maintaining essential industries
Not to depend on foreign sources of supply during war (for defense)
Example – rice industry in Malaysia & Japan
In protecting essential industries, countries must:
Determine which ones are essential.
Consider costs and alternatives.
Consider political consequences.

11. Preventing Shipments to Dealing with unfriendly Countries
Considerable governmental interference in international trade is motivated by:
political rather than economic concerns
maintaining domestic supplies of essential goods
preventing potential enemies from gaining goods that would help them achieve their objectives

12. Maintaining or extending 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.
A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not.

13. Preserving national identity
To sustain this collective identity that sets their citizens apart from those in other nations, countries limit foreign products and services in certain sectors.

14. Instruments of Trade Control
Tariff
Import tariff
Non-tariff
Subsidies
Aid and loans
Custom Valuation

15. TARIFF A tariff is also called a duty.
Commonly types of trade control and a tax that a governments levy on good entering, leaving or passing through a country
Serve as a source of government revenue (income)
Charge on per unit or a value basis
The tariff raises the domestic price above the world price. Consumers are losers because they pay a higher price and buy less of the product. Since the domestic price rises, domestic firms increase output and see their profits rise.

16. An import tariff
is levied by the government of a country that is importing a product.
the most common tariff used by government today
Raise the price of imported good by placing a tax on them that not placed on domestic good

17. There are numerous reasons for using tariff, such as to protect domestic industries or firm.
To prevent foreign companies from selling goods at lower price.
To raises up government revenue.
To reduce citizen’ foreign expenditures in order to improve the country’s balance of payment

18. Nontariff Barriers: Direct price influence
Nontariff barriers are the second category of government controls on international trade.
Any government regulation, policy, or procedure and other that a tariff that has the effect of impeding international trade may be labeled a nontariff barrier (NTB).
There are few types of nontariff barriers subsidies, aids and loans, customs valuation and other direct-price influence

19. Subsidies
government payment to a producer or distributor in an industry to prevent the decline of the industry and increasing prices of the products
as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports
Types of subsidies
Agriculture subsidies, housing subsidies, export subsidies and others

20. Export subsidies Definition
government policy to encourage export goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters, or government financed international advertising or R&D
export the domestic products in a lower price than the production cost

21. Export Subsidy Purpose encourage to export the specified products
Internal price supports as in a guaranteed minimum price for a commodity, create more product than can be consumed internally in the country

22. Example of Agriculture Subsidies
International
US production cost of wheat averaged at $125 per ton but US government sold the wheat to China at the price $75 per ton and to Algeria at price $65 per ton.
US government has made an annual outlay of over $1 billion in its agricultural Export Enhancement Program (EEP) and its Dairy Export Incentive Program

23. Malaysia
in 2000 to 2001, the average price of Crude palm oil (CPO) fell to a low of RM700 (US$ 185) per tonne, the government provided a subsidy of RM (US$ 260) per hectare as an incentive to encourage replanting in plantations having palms that were older than 25 years (New Straits Times, 8 April 2001).

24. Nontariff Barriers: Quantity Control
To affect directly to the quantity of import or export.
7 types:
Quotas – Voluntary Export Restriction (VER) and Embargoes
Buy local legislation
Standards and labels
Specific permission requirement
Administrative delay
Reciprocal requirement
Restrictions on services

25. Nontariff Barriers: Quantity Controls
Trade controls that directly affect quantity and indirectly affect price include:
Quotas
“buy local” legislation
standards and labels
licensing arrangements
specific permission requirements
administrative delays
reciprocal requirements
restrictions on services

26. Normally raise price of products because of:
Quotas
sets a physical limit on the quantity of a good that can be imported or exported into a country in a given period of time
Normally raise price of products because of:
They limit supply
Provide little incentive to use price competition to increase sales

27. Dealing With Governmental Trade Influences
When facing import competition, companies can:
Move abroad
Seek other market niches
Make domestic output competitive
Try to get protection

28. Implications/Conclusions
When governments choose to impede the flow of imports and encourage the flow of exports, they simultaneously provide direct and/or indirect subsidies for their domestic industries. It is difficult to determine the real effects of trade barriers due to the likelihood of retaliation and the fact the imports and exports can both have positive effects.
Much government interference in the international trade process is motivated by political rather than economic factors. A company’s particular international strategy will determine the extent to which it might benefit from protectionist measures