1. Business-Government Trade Relationships
6-1

2. No country permits unregulated flow of goods and services across its borders
Governments place restrictions on imports and occasionally on exports
Governments may provide direct and indirect subsidies to improve the competitive position of some industries
Protectionism
Government action intended to limit foreign producer’s ability to compete with domestic industry

3. Rationale for Government Intervention
Preserve national identity
Improve position compared to other countries
Maintain spheres of influence
Promote industrialization
Deal with unfriendly countries
Protect infant industries
Maintain essential industries
Prevent unemployment
Non-economic/Political Rationale
Economic Rationales
6-4

4. Infant-Industry Argument
Government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports
Initial output costs may make products noncompetitive in world markets
Over time costs will decrease due to:
greater economies of scale
greater worker efficiency

5. Problems with argument
Hard to identify industries with high probability of success
even when industries can be identified, not clear that government should provide protection
Protection may serve as disincentive for managers to adopt innovations needed to become competitive
Public funds poorly spent
Consumer prices rise

6. Industrialization Argument
Industrialization represents high per capita income
Most developing countries try to emulate strategy of developed countries
Surplus workers can more easily increase manufacturing output than agricultural output
Inflows of foreign investment can promote sustainable growth
Prices and sales of agricultural products and raw materials fluctuate
6-5

7. Industrialization Argument, con’t
Markets for industrial products grow faster than markets for agricultural products
Local industry reduces imports and promotes exports
Industrial activity helps the nation building process
6-6

8. Pursue strategic trade policy
Economic Motives
Potential results
Global industry created
Firms’ efficiency reduced
Domestic costs increase
Special interests benefit
Pursue strategic trade policy
Help companies achieve economies of scale and gain a first-mover advantage

9. 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 preserve national identity
6-8

10. Maintaining Essential Industries
Protecting domestic industries during peacetime so that country is not dependent on foreign sources of supply during war
Popular argument to support import restrictions
Countries must
determine which industries are essential
consider costs and alternatives
consider political consequences
Dealing with “Unfriendly” countries
Prevention of exports that might be acquired by potential enemies
May lead to retaliation that prevents securing other essential goods
Trade controls on nondefense goods also may be used as a weapon of foreign policy

11. Maintaining Spheres of Influence
Governments may:
Provide aid and credits to, and encourage imports from, countries that are political allies
Impose trade restrictions to coerce foreign countries to follow certain political actions
Preserving Cultures and National Identity
Countries have a common sense of identity that separates them from other nationalities
May limit foreign products and services to protect their separate identity

12. Trade Promotion and Restriction
methods
Trade restriction
Subsidies
Export financing
Foreign trade zones
Special government agencies
Tariffs
Quotas
Embargoes
Local content requirements
Administrative delays
Currency controls
Antidumping policy

13. Instruments of Trade Policy: Subsidies
Government payment to a domestic producer
Cash grants
Low-interest loans
Tax breaks
Government equity participation in the company
Subsidy revenues are generated from taxes
Subsidies encourage over-production, inefficiency and reduced trade

14. Subsidies Potential results Increased competitiveness
Encourage inefficient firms
Increased consumer prices
Overuse of resources

15. Export Financing Export-Import Bank
Financing such as low-interest loans and loan guarantees
Export-Import Bank
Working capital loan guarantees
Credit information on nation or firm abroad
Export credit insurance against loss
Loan guarantees to buyers of domestic co…

16. Foreign Trade Zones
Designated geographic region in which merchandise is allowed to pass through with lower or no customs duties (taxes) and/or fewer customs procedures
Purpose is to increase
employment and trade
within the nation

17. Special Government Agencies
Organize trade missions for officials and businesses
Operate export-promotion offices at locations abroad
Help import products the home nation does not produce

18. Instruments of Trade Policy: Tariffs
Tariffs are the oldest form of trade policy; they fall into two categories
Specific tariffs are levied as a fixed charge for each unit
Ad valorem tariffs are levied as a proportion of the value of the imported good
Tariffs are good for government because they generate revenue
Tariffs protect domestic producers but they reduce efficiency
Tariffs are bad for consumers because they increase the cost of goods

19. Tariffs Potential results Export tariff Transit tariff Import tariff
Protect domestic firms
from competitors
Generate income for the
government
Reduce competitiveness
of home-based firms
Raise consumer prices
Export tariff
Transit tariff
Import tariff

20. Import and Export Quotas
Restriction on the amount of a good that can enter or leave a country during a certain period of time
Import Quotas
Protect domestic producers of a good
Force outside firms to compete for market access
Export Quotas
Retain an adequate domestic supply of a product
Restrict world supply of a product to raise its price

21. Embargoes Complete ban on trade (imports and exports)
in one or more products with a particular country
Can be difficult for a nation to enforce
Often used to achieve political goals
Most restrictive nontariff trade barrier

22. Local Content Requirements
Laws that domestic producers must supply a specific amount of a good or service
Forces international companies to
employ local resources (usually labor)
in production process

23. Administrative Delays
Regulatory controls or bureaucratic rules to slow imports into a country
Inconvenient ports for imports
Product-damaging inspections
Understaffed customs offices
Lengthy licensing procedures

24. convertibility of a nation’s currency
Currency Controls
Restrictions on the
convertibility of a nation’s currency
Limit the amount of globally accepted currency available to pay for imports
1$=100 from 50 exporter gains
1$= 100 rs from 50 importer loses
1$=100 rs repatriater from india loses
1$= 100 rs repatriater from forg gains…
As curr weakens exp and people residing in india gain and
As curr strenthens importer and forg rep or residents outside india gain..
Set an unfavorable exchange rate when paying for imports

25. Instruments of Trade Policy: Antidumping Policies
Defined as
Selling goods in a foreign market below production costs
Selling goods in a foreign market below fair market value
Result of
Unloading excess production
Predatory behavior
Remedy: seek imposition of tariffs