This lecture focuses on Governmental Influence on Trade

1. B416: Global Economic History
Lecture 7 : Governmental Influence on
Trade

2. Learning Outcomes
By the end of this lecture, you should understand the
following:
• 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
2

3. 3
Introduction
• Protectionism - policies that
– affect the ability of foreign producers to compete
in your home market
– limit or enhance your company’s ability to sell
abroad or acquire needed foreign supplies

4. 4
Introduction
Physical and Social Factors Affecting the Flow of Goods and Services

5. 5
Conflicting Results of Trade Policies
• Governments intervene in trade to achieve
economic, social, and political goals
• Policymakers are challenged by
– conflicting objectives
– interest groups

6. 6
The Role of Stakeholders
• Proposed policies on trade spark debate
• Stakeholders include
– Workers
– Owners
– Suppliers
– Local politicians
• Consumers usually don’t care

7. 7
Economic Rationales for Government
Intervention
Why Governments Intervene in Trade?

8. 8
Fighting Unemployment
• The unemployed are the most effective pressure group
• But, import restrictions
– can lead to retaliation by other countries
– are less likely retaliated against effectively by small
economies
– are less likely to be met with retaliation if implemented by
small economies
– may decrease export jobs because of price increases for
components
– may decrease export jobs because of lower incomes
abroad

9. 9
Protecting ‘Infant Industries’
• The infant industry argument
– government protection of import competition is
necessary to help certain industries evolve from
high-cost to low-cost production
• Used by developing countries

10. 10
Developing an Industrial Base
Countries promote industrialization because it
– 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

11. 11
Developing an Industrial Base
• The industrialization argument
– unregulated imports of lower priced products
prevents the development of a domestic industry
• Assumptions
– Surplus Workers
– Investment Inflows
– Diversification
– Growth in Manufactured Goods
– Import Substitution and Export-Led Development
– Nation Building

12. 12
Economic Relationships
With Other Countries
• Trade controls can be used
– to improve the balance of payments
– to gain fair access to foreign markets
• comparable access argument
– as a bargaining tool
• believability and importance
– to control prices
• dumping
• optimum-tariff theory

13. 13
Noneconomic Rationales for
Government Intervention
• Noneconomic rationales include
– Maintaining essential industries
– Promoting acceptable practices abroad
– Maintaining or extending spheres of influence
– Preserving national culture

14. 14
Maintaining Essential Industries
• The essential industry argument
– protect essential industries so the country is not
dependent on foreign supplies during war
• Countries must
– determine which industries are essential
– consider costs and alternatives
– consider political consequences

15. 15
Promoting Acceptable
Practices Abroad
• Import trade controls can be used
– to promote changes in foreign countries’ political
policies or capabilities
– as a foreign policy weapon
– to pressure governments to alter their stances on
a variety of issues
• human rights
• environmental protection

16. 16
Maintaining or Extending Spheres of
Influence
• Governments provide assistance and
encourage imports from countries that join a
political alliance or vote a preferred way
within international bodies
– Cotonou Agreement
• A country’s trade restrictions may coerce
governments to follow certain political actions
or punish companies whose governments do
not

17. 17
Preserving National Culture
In order to preserve national culture, countries
– limit foreign products and services in certain
sectors
• Canada’s cultural sovereignty
– prohibit exports of art and historical items
deemed important to national heritage

18. 18
Instruments of Trade Control
Two types of trade controls
– those that indirectly affect the amount traded by
directly influencing prices of exports or imports
– those that directly limit the amount of a good that
can be traded

19. 19
Tariffs
• Tariffs are also known as duties
– refer to a government levied tax on goods shipped
internationally
• Tariffs may be levied
– on goods entering, leaving, or passing through a
country
– for protection or revenue
– on a per unit basis or a value basis
• export tariffs
• transit tariffs
• import tariffs

20. 20
Nontariff Barriers:
Direct Price Influencers
• Subsidies
– direct assistance to companies to make them
more competitive
• agricultural subsidies
• overcoming market imperfections
• valuation problems

21. 21
Nontariff Barriers:
Direct Price Influencers
• Aid and loans
– tied
– untied
• Customs valuation
• Other direct-price influences
– special fees and requirements

22. 22
Nontariff Barriers:
Quantity Controls
• Quotas
– limit the quantity of a product that can be
imported or exported in a given time frame
• Voluntary export restraint (VER)
• Embargoes

23. 23
Nontariff Barriers:
Quantity Controls
• “Buy local” legislation
• Standards and labels
• Specific permission requirements
– import or export license
• Administrative delays
• Reciprocal requirements
• Restrictions on services

24. 24
Dealing with Governmental Trade
Influencers
• Companies facing import competition can
– Move abroad
– Seek other market niches
– Make domestic output competitive
– Try to get protection

25. 25
Tactics For Dealing
With Import Competition
• Convince decision makers of the merits of
particular policies
• Involve the industry and stakeholders
• Prepare for changes in the competitive
environment

26. 26
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

27. Page 27
Some ways to restrict international trade
• Impose a 100 Euro tax per imported computer (tariff)
• Impose a 12% tax per imported computer (ad valorem tariff)
• Restrict the number of imported computers (quota)
• Subsidize the production of domestically produced computers
• Require a “minimum content” before a computer may be
labeled “domestically produced”
• Prohibit the sale of computers to certain countries for safety
reasons
• Non-tariff barriers: e.g. difficult procedure to export VCRs
from Japan to France
• Etc.
• These different measures will affect trade flows in different
ways. For simplicity we restrict attention mainly to tariffs.

28. Page 28
Tariffs, partial equilibrium, small country
• Summary of welfare effects of tariffs for small country:
– Producers gain (producer surplus rises)
– Government gains (government revenue rises)
– Consumers loose (consumer surplus falls)
• The gains to producers and the government are completely
paid for by the consumers: net welfare falls
• The distributional effects have political economy
consequences: many consumers suffer a small individual
loss, but a few producers benefit from a large individual
gain
• Conclusion: it is attractive for producers to invest in lobby
groups to impose trade restrictions, but not for the many
consumers to do the same to try to avoid this
• Clearly, politicians should take this into consideration when
making their decisions (but it is questionable if they do).

29. Page 29
Tariffs, partial equilibrium, large country
• Summary of welfare effects of tariffs for large country:
– Producers gain (producer surplus rises)
– Government gains (government revenue rises)
– Consumers loose (consumer surplus falls)
• The net welfare is only negative if the Harberger triangles
are larger than the part of government revenue paid for
by foreigners; a welfare gain is thus possible
• In general, a ‘suitable’ choice of tariff will lead to a
welfare gain for a large country: the ‘optimal’ tariff
argument
• This argument ignores, inter alia, general equilibrium
complications and retaliation. We now turn to these
issues

30. Page 30
Concluding remarks Trade Policy
• There are many different types of trade restrictions (our
analysis is not exhaustive)
• Protection affects different agents in different ways,
hence conflicting interests in the same country (lobbying)
• Imposing a tariff benefits protected producers and
provides government revenue at the expense of a
welfare loss for the consumers
• Imposing a tariff always generates an overall welfare loss
for a ‘small’ country (protected sector expands at the
expense of a contraction in other sectors; double
distortion)
• A ‘large’ country might benefit from an ‘optimal’ tariff
• These benefits disappear with simultaneous moves and
retaliation; hence the need for international rules

31. And Now…Work Outside the Lecture
Preparation
For
Padagogic
Style
Preparation
Time Budget
Individual
Task
Group Task Output Week 7 Preparation Activity
Read Chapter 7 International Business - 14th
Edition by Daniels, Radebaugh &
Sullivan, (available via DawsonEra)
Seminar 7 30 Minutes Read above Material + Seminar material
Workshop 7 1 Hour
Online Collaboration Activities relating Final
Assignment
2 HourLecture 7

32. End of presentation
© Pearson College 2013