IAF605 week 6 government influence on trade

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Government Influence on Trade

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IAF605 week 6 government influence on trade

  1. 1. IAF 605 - International Business Management Government Influence on Trade Week 6
  2. 2. Agenda review Week 5 Chapter 7 – Governmental Influence on Trade
  3. 3. Chapter 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. 4. Physical and Social Factors Affecting the Flow of Goods and Services (p257)
  5. 5. The Role of Stakeholders direct consumers interest
  6. 6. Why Governments Intervene in Trade 4 Economic Rationales • fighting unemployment • protecting “infant industries” • developing an industrial base • economic relationships with other countries
  7. 7. Fighting Unemployment Steel workers demonstrate during a protest march in Marseille. France’s trade unions called public and private sector workers out on strike to demand more action from government and companies to protect jobs and salaries. (Jean-Paul Pelissier/Reuters) Image source: http://flickr.com/photos/7320687@N02/
  8. 8. Fighting Unemployment one problem is other countries might retaliate with their own restrictions (i.e. USA protected steel and EU, Brazil and Japan threatened to restrict US products like oranges – US rescinded! Image source: http://flickr.com/photos/7320687@N02/
  9. 9. Restricting imports may lead to retaliation by other countries. Even if no country retaliates…restricting country may gain jobs in one sector only to lose jobs elsewhere fewer imports mean fewer import-handling jobs may decrease export jobs because of price increases for components. restricting earnings abroad will have a negative effect on domestic earnings and employment
  10. 10. Restricting imports… Video source: http://www.youtube.com/watch?v=n-dXS-Xkrh0
  11. 11. Protecting “Infant-Industries” The infant-industry argument for protection holds that governmental should protect an emerging industry until it is able to compete on its own
  12. 12. Protecting “Infant-Industries” – Assumptions and Risks initial output costs for a small-scale industry in a given country may be so high as to make its output non-competitive in world markets…protection required until companies gain economies of scale and higher productivity through experience over time, gov’t gets higher domestic employment, lower social costs and higher tax revenues BUT risk that costs never fall enough to be competitive – gov’t needs to identify industries with high probability of success; also, taxpayer $ could be spent elsewhere like education and infrastructure
  13. 13. Developing an Industrial Base - assumptions 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.
  14. 14. Developing an Industrial Base Video source: http://www.youtube.com/watch?v=3JzoBTpM-bs
  15. 15. Developing an Industrial Base – surplus workers growth occurs because underemployed resources become employed Problem with shifting workers out of agriculture… Image source: http://apimages.ap.org
  16. 16. Developing an Industrial Base – investment inflows import restrictions may increase FDI (giving capital, technology and jobs) Maruti Suzuki – 1 million cars in India Image source: http://apimages.ap.org
  17. 17. Developing an Industrial Base – diversification uncontrollable factors can affect supply/demand but..depending on manufacturing does not guarantee diversification of export earnings Image source: http://www.flickr.com/photos/john_lustig/
  18. 18. Developing an Industrial Base – growth in manufactured goods terms of trade (quantity of imports that a given quantity of a country’s exports can buy) raw materials/ commodities prices do not rise as fast as finished goods quantity of primary products demanded does not rise as fast as mfg’d goods
  19. 19. Developing an Industrial Base – import substitution and export-led development developing countries may restrict imports to boost local production / consumption BUT if companies are not efficient, local customers support via higher prices or higher taxes export-led development: promoting development of industries that export their output
  20. 20. Developing an Industrial Base – nation building industrialization helps build infrastructure, advance rural development and boost the skills of the workforce
  21. 21. Using Trade Controls to Improve Economic Relations with Other Countries balance-of-trade adjustments comparable access or “fairness” restrictions as a bargaining tool – 2 criteria: believability and importance price-control objectives prevent dumping optimum-tariff theory
  22. 22. Why Governments Intervene in Trade • maintaining essential industries Noneconomic • dealing with unfriendly countries • maintaining or extending spheres Rationales of influence • preserving national identity
  23. 23. Maintaining essential industries - protect essential domestic industries during peacetime so a country is not dependent on foreign sources of supply during war Determine which ones are essential. Consider costs and alternatives. Consider political consequences.
  24. 24. Preventing Shipments to “Unfriendly” Countries 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
  25. 25. 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. China delayed permission for Allianz, a German insurance group, to operate in China after Germany gave a reception for the Dalai Lama
  26. 26. Maintaining or extending spheres of influence Video source: http://www.youtube.com/watch?v=xQ42xltm02M
  27. 27. Preserving national identity Canada has a ban on foreign ownership or control of publishing, cable TV and bookselling… China controls film distribution and can prevent movies from being shown (like Avatar 3D)
  28. 28. Preserving national identity Video source: http://www.youtube.com/watch?v=XKjicnkplDY
  29. 29. Instruments of Trade Control directly affect price and indirectly affect quantity • tariffs (or duties) • subsidies • customs-valuation methods • special fees
  30. 30. Nontariff Barriers: Direct Price Influences directly affect price • subsidies • overcoming marketing imperfections • aids and loans • customs valuations • consular fees; customs clearance/documentation • deposits in advance of shipment • minimum price levels
  31. 31. Nontariff Barriers: Quantity Controls directly affect quantity • quotas (including embargoes) • voluntary export restraint (VERs) • “buy local” legislation • standards and labels • licensing arrangements/forex control • specific permission requirements • administrative delays • reciprocal requirements • restrictions on services • immigration
  32. 32. Options when facing Import Competition Seek other Move abroad market niches Make domestic Try to get output protection competitive may not be realistic if you don’t have the expertise, resources or management to shift production abroad finding profitably niches is difficult being innovative might help but others can rip you off/copy the innovation can ask the gov’t to restrict imports or open export markets
  33. 33. Reminder Jun 23rd: mid-term exam  chapters 1-4 and 6-7  cases  class discussions

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