Government intervention, free trade, protectionism

1. Business and Economics
INTERNATIONAL
BUSINESS MGF2351

2. Objectives
 Group Presentation (20 Minutes, QnA 10 minutes)
 Tutorial Program Week 5

3. ASSIGNMENT: 16 SEPTEMBER
“Government intervention in international investment and trade often
results in protecting the interests of producers at the expense of
consumer interests.”
Through the use of relevant theory and real-life examples, write an
argumentative academic essay addressing the above statement
 POSSIBLE STRUCTURE
– Introduction
– Developing Your Argument
– Refuting Opponents’ Arguments
– Conclusion
3

4. 4

5. Some important points
 Academic Articles
 Minimum 10
 Use APA (Q Manual)
 Read evaluation criterion on Moodle
 Provide definitions.
 Online submission (doc and docx)
5

6. Group Presentation
“According to Michael Porter (1990) a nation’s competitive advantage is
dependent upon four core attributes, factor endowments, demand
conditions, relating and supporting industries, and firm strategy,
structure, and rivalry. In addition to these core attributes, Porter
believed that ‘chance’ and ‘government’ can also detract from or
improve a nation’s competitive advantage.”
1) How do factor endowments and demand conditions influence a nation’s
competitive advantage? Should firms consider these attributes in their
decision to internationalise? Why?
2) How do related and supporting industries, and firm strategy, structure,
and rivalry influence a nation’s competitive advantage? Should firms
consider these attributes in their decision to internationalise? Why?
3) What impact does chance and government have on a nation’s
competitive advantage? Should firms consider these factors in their
decision to internationalise? Why?

7. Key Terms
 Free trade: NO RESTRICTIONS
 Reality: Government Interventions through instruments such as
TARIFFS, SUBSIDIES, IMPORT QUOTAS, ADMINISTRATIVE
POLICIES etc.
 Political arguments: Protecting jobs and industries, national security,
protecting customers etc.
 Financial arguments: Infant industry, Strategic trade policy
 WTO: the global watchdog (159 members on 2 March 2013)
 WHY: “Attractiveness: costs, benefits, risks”

8. Some examples
 US sanctions on trade of oil from Iran, due to Nuclear
development. In 2012, oil exports generated as much as 60% of Iran's
government revenue, according to the U.S. Energy Information Administration.
However, U.S. sanctions have pinched Tehran. Iran's crude-oil exports are at a
26-year low because of pressure from the sanctions, according to the EIA. It
estimates Iran net oil-export revenue fell to $69 billion last year from $95 billion
in 2011.
 Saudization: targets labor force, limits the number of expatriates
 In India Gold imports: http://in.reuters.com/article/2013/08/19/india-gold-
timeline-idINDEE97I08O20130819
 Russia and EU

9. Q1. Should Governments consider HUMAN RIGHTS when granting
preferential trading rights to countries? What are the arguments against
such a position?
 China and MFN status:China is frequently cited as a violator of human
rights.
Trade with the U.S. is very important to China, as China views the U.S. as an
important market. The U.S. is also an important source of certain products.
Thus, the U.S. has some leverage with trade when trying to influence China’s
human rights policies.
 For this policy to have much effect, however, other nations important to China
must adopt similar policies. Otherwise China will simply choose to work with
other countries, and U.S. consumers and producers may be more negatively
impacted than the Chinese.
 Another concern with tying Most Favoured Nation (MFN) status to human
rights is that denying MFN may make the human rights situation worse rather
than better. By engaging in trade, the income levels in China will increase, and
with greater wealth the people will be able to demand and receive better
treatment.
 Revisiting Apple and Foxconn

10. Q2. Whose interests should be paramount concern for Government:
Customers or producers?
 The long term interests of consumers should be the primary concern of
governments, based on a utilitarian approach (the most good).
 Unfortunately consumers, each of whom may be negatively impacted by only
a few dollars, are less motivated and effective lobbyists than are a few
producers who may have a great deal at stake.
 While in some instances it may be argued that domestic consumers will be
better off if world-class domestic producers are nurtured and allowed to gain
first mover advantages in international markets, it is doubtful that the
government will be better than international capital markets at "picking
winners", and will more likely pick the firms with the greatest political clout.
 Some employees may well lose jobs if there are more efficient foreign
competitors.
 The role of government should be to help these employees get jobs where
they can be efficiently employed rather than to protect them from reality in
inefficient firms.

11. Q3. What kind of trade policy should business be pressuring the
Government to adopt?
 Businesses should urge governments to target technologies that may be
important in the future and use subsidies to support development work aimed at
commercializing those technologies.
 Government should provide export subsidies until the domestic firms have
established first mover advantages in the world market.
 Government support may also be justified if it can help domestic firms
overcome the first-mover advantages enjoyed by foreign competitors and
emerge as viable competitors in the world market. In this case, a combination of
home market protection and export-promoting subsidies may be called for.

12. Case: The GFC and Protectionism
Group Work
 Why do you think calls for protectionism are greater during sharp eco contractions
than boom periods?
 Despite the sharp eco contraction during 08-09, the increase in protectionist
measures was fairly modest. Why do you think this was the case?
 During 2008-2009 many developed nations gave subsidies to their automobile
producers. How might this have distorted international trade? Was this a reasonable
thing to do given the circumstances?
 What might occur if renewed economic slowdown triggered a wave of protectionist
measures around the world? Would protectionism protect jobs, or would it make
things worse?
 The volume of world trade rebounded sharply in 2010 on the back of a fairly modest
growth rate in the world economy. What does this tell you about the nature of
international production in today’s global economy? What does this tell you about
the vulnerability of the world economy to any future trade wars?

13. Q1. Why do you think calls for protectionism are greater during sharp eco
contractions than boom periods?
 Sharp economic contractions are linked to slowdowns in demand forcing
companies to adopt new strategies.
 One such strategy may be to lobby for protection from imports. Another
action may be to lay off workers.
 In an effort to protect their jobs, unionized workers may also lobby their
governments for protection from foreign competition.

14. Q2. Despite the sharp eco contraction during 08-09, the increase in
protectionist measures was fairly modest. Why do you think this was the
case?
 Thanks to the greater number of trade agreements in place today as well as
WTO rules, many countries found they had limited options when they tried to
respond to the recent global recession.
 In the past, countries had more freedom to implement protectionist policies
like tariffs designed to help domestic companies remain competitive and protect
domestic jobs.
 Now however, countries must be more creative with their efforts or risk
violating trade agreements.
During the recent economic slump, some countries focused on bureaucratic
changes that effectively limited imports while other countries provided subsidies
to give domestic companies a competitive edge over global competitors.

15. Short term stability vs long term
efficiency
Q3. During 2008-2009 many developed nations gave subsidies to their
automobile producers. How might this have distorted international trade?
Was this a reasonable thing to do given the circumstances?
 The 2008-2009 financial crisis prompted many countries including the
United States to provide subsidies to automakers.
 While the assistance helped companies remain in business and protected
jobs, it also created an artificial environment for them and may have prompted
some companies to shift production from more efficient locations to less
efficient plants in order to qualify for greater subsidies.
 Are subsidies are beneficial? The subsidies helped companies preserve
jobs and in doing so, introduced a level of stability during a very precarious
time. However what will happen when the subsidies end and whether in fact
the policies simply prolonged the hard decisions that must ultimately be
made.

16. Q4. What might occur if renewed economic slowdown triggered a wave
of protectionist measures around the world? Would protectionism
protect jobs, or would it make things worse?
 In mid-2011, the global economy was still unstable, and the threat of a
double-dip recession was very real.
 If the economy fails to fully recover, many companies will continue to face
low demand and because of the protection they received in the past, may
still be unprepared to deal with it and once again lobby for further
protection.
 Many governments are now facing their own financial challenges and may
be less willing to help. Governments may focus on bureaucratic policies as
a means of helping companies in the future rather than on subsidies. While
protectionist measures can protect jobs in the short-run, companies must
ultimately become more efficient, and countries must support industries
that will be sustainable in the long-run.

17. Q5. The volume of world trade rebounded sharply in 2010 on the back of a
fairly modest growth rate in the world economy. What does this tell you about
the nature of international production in today’s global economy? What does
this tell you about the vulnerability of the world economy to any future trade
wars?
 Today’s economy is truly global in nature.
 A modest increase in demand can result in a substantial increase in the
volume of world trade thanks to the global nature of production where parts for
products may come from a number of countries and assembly may take place
anywhere in the world.
 Because global production is now the norm in so many industries, the world
economy is far more vulnerable to future trade wars than it was in the past.

18.  Any Questions?
 See you next week.