Government intervention in trade is common and done for economic, political, or social objectives. Instruments of trade control used by governments include tariffs and non-tariff barriers. Tariffs are taxes on imported or exported goods while non-tariff barriers restrict trade through quotas, regulations, and other means. Rationales for government intervention include protecting infant industries, maintaining employment, diversifying the economy, and political goals around national identity and spheres of influence. Controversies exist around how the costs and benefits of these policies are distributed.

1. GOVERNMENTAL
INFLUENCE ON
TRADE
• Government intervention
• Rationales for intervention
• Instruments of trade control
• Tariff and non-tariff barriers

2. Government Influence on Trade
All countries seek to influence trade - none permits an
unregulated flow of goods and services across its
borders.
Government influence is exerted, in general, for
economic, political or social objectives. Often these
objectives are in conflict!
Concerned groups/ interest groups/ pressure groups.

3. Why
Government
Intervenes?

4. Unemployment
E.g. EU, Brazil and Japan
threatened to restrict purchases of
U.S. products, such as oranges, when
U.S. imposed import restrictions. If
U.S. were to limit clothing imports
further, China would have more
power to retaliate then Mauritius,
coz the latter does not affects U.S.
much.

5. Infant-
Industry
Argument

6. One Problem - How to identify industries that will profit from
government protection!
• On one hand, government protection for the auto industry in
Brazil, and South Korea has met with success.
• On the other hand, government protection for the auto industry
in Australia and Argentina has been a failure.
Other Problems - Should some segments of the economy absorb
the higher costs of local production during infancy? Or - Should
such costs be borne by entrepreneurs?
• For the infant-industry argument to be valid future benefits must
exceed early costs (to the society/economy)

7. Industrialization
Argument
e.g. Australia, New Zealand,
& Denmark maintains high
incomes along with
substantial agricultural
specialization.
e.g., Mexico’s automobile
import restrictions influenced
foreign automakers to invest
in the country.

8. Industrialization
Argument
Nigeria is heavily
dependent on oil.
Cote d’ Ivoire depends
on cocoa and coffee.
Diversification of
economic activities
should promote income
and price stability.

9. Industrialization
Argument

10. Economic Relationships with
Other Countries

11. Terms of Trade
The terms of trade is a measure of the quantity of imports that a given
quantity of a country export can buy or :
TOT = PX / PM
where PX = price of exports, PM = price of imports
In general, the prices of raw materials and agricultural commodities have
not risen as fast as the prices of finished products.
In addition, the demand for primary products has not grown as fast as
those of manufactured products (synthetic alternatives!)
Furthermore, cost savings from the production of agricultural products
tend to be passed on to consumers because of competition.
While, cost savings for manufactured products tend to go to higher wages
and profits.
• If terms of trade (TOT) for developing countries deteriorate, the standard
of living will fall.

12. Import Substitution Versus Export Promotion
• In Import Substitution, a country restricts imports and produces
for local consumption goods it formerly imported.
• In Export Promotion, a country focuses on achieving rapid
economic growth and favorable BOP by promoting export
industries in an approach known as export-led development.
For example, processing of raw materials before exporting
them.
• The two models may be compatible. Industrialization may result
in import substitution and export promotion at the same time!

13. Balance of Payment Adjustments
• Governments may exercise direct influence on trade by choosing the
types products or services to restrict for the purpose of improving
BOP positions e.g., medical supplies vs. importation of luxuries.
(essentials vs. nonessentials)
• Note that other means of BOP adjustment other than direct influence
on trade e.g., currency devaluation or deflation in the economy.
Effects of devaluation: Exports are cheaper to foreign customers. Imports more
expensive. In the short-term, a devaluation tends to cause inflation, higher growth
and increased demand for exports.
Effects of Currency appreciation usually reduces inflation because imports
become cheaper, and the lower prices lead to lower inflation. It makes imports
more attractive, causing the demand for local products to fall. Local companies
usually must cut costs and increase productivity so they can remain competitive.

14. Price Control Objectives
• Some countries hold monopoly or near monopoly control over certain
resources.
• To maintain control and the ability to charge high prices, they enforce
strict export regulations.
Examples:
South Africa ------ diamonds
Columbia --------- emeralds
Export restrictions may:
• Keep up world prices in a monopoly situation
• Make it extremely costly to prevent smuggling
• Lead to the development of substitutes
• Keep domestic prices down by increasing domestic supply.
• Give producers less incentive to increase output

15. • Shift foreign production and sales e.g.
Brazil lost its world monopoly in natural rubber when the product
was introduced into Malaysia.
The High Price of Chilean natural nitrate led to the development
of a synthetic substitute.
• The underpricing of exports is often referred to as DUMPING.
Many countries, including the US, have anti-dumping legislation.
It is sometime controversial to determine the threshold of the
difference between export price and domestic price to constitute
dumping.
Question: Is it desirable for home - country consumers or
taxpayers to subsidize foreign sales?

16. Import restrictions may:
• Prevent dumping from being used to put domestic
producers out of business
• Get other countries to bargain away restrictions
• Get foreign producers to lower their prices in their domestic
markets.
• The US passed the SUPER 301 clause in its 1988 Trade Act.
This clause permits a threat of trade retaliation to be used to
get other countries to reduce import barriers for US exports --
Beef, Rice, ...

17. Political Objectives (Non-Economic)
Political imperatives often dictate government
restrictions on trade:
• Maintenance of Essential Industries Dealing With
Unfriendly Countries
• Maintaining Spheres of Influence
• Preserving National Identity

18. US
subsidized
production
of silicon for
domestic
computer
chip
producers.

19. U.S. Put
sanction on 9
Chinese and 1
Indian
businessman
who sold
technology to
Iran.

20. Venezuela has
been
exporting oil
at low cost
and with long
term financing
to Latin
American
countries
(Brazil/Mexico
/Argentina
etc) to gain
influence in
the region.

21. Japan/ S. Korea/ China maintained ban on Rice imports for years.
Canada prohibits ownership on cable TV, publishing and book selling.

22. Rock, Paper, Scissors is
played to help make a
choice or put an end to
a disagreement.
The idea is that both
players have an equal
chance of winning,
making the game
random but fair.

23. •The rules require that competing
players use one hand to form one of
three shapes at an agreed-upon
time.
•Both players must throw at the
same time. If one player delays, the
result isn’t trustworthy, and you
should start the game over.
•Don’t play the same object every
time. Switch it up to fool your
opponent.
•Try to predict your opponent's next
move by paying attention to their
patterns.

24. Instruments of Trade Control

25. All nations impose some
restrictions in the form of
tariff (i.e., import tariff and
export tariff) and non-tariff
barriers (i.e., import quota,
dumping, international
cartels and export
subsidies) on the free flow
of international trade.
Since these restrictions and
regulations deal with the
nation’s trade or
commerce, they are
generally known as trade
or commercial policy.

27. A tariff is a tax or duty levied on the traded
commodity as it crosses a national boundary.
The United States, for example, protects domestic
makers of synthetic knitted shirts by imposing a stiff
tariff of 32.5 percent on imports.
Tariffs are also used to raise revenue for a government.
Shoe imports are worth $2 billion annually to the
federal government.

29. • A Retaliatory tariff is one placed against a country who already
charges tariffs against the country charging the retaliatory
tariff (e.g. If the United States were to charge tariffs on
Chinese goods, China would probably charge a tariff on
American goods, also). These are usually used to get other
tariffs rescinded.
• Countervailing duty is also known as anti-subsidy duty. It is
imposed to neutralize the negative effects of subsidies.
• Predatory dumping is the temporary sale of a commodity at
below cost or at lower price abroad in order to drive foreign
producers out of business, after which prices are raised to take
advantage of the newly acquired monopoly power abroad.

30. Tariff controversy concerns
• The treatment of manufactured exports from the developing
countries-
• Raw materials usually enter industrial markets free of duty.
However, if processed (or semi-processed) tariffs are assigned. If
tariff is based on total value of product, the effective tariff is
argued to be disproportionately higher on the manufactured
portion.
• Pressures by LDCs and the United Nations Conference on Trade and
Development (UNCTAD) led to the establishment of the Generalized
System of Preferences (GSP), a system of reduced tariff rates offered
on goods exported from developing countries.

31. Another controversy concerns who bears the burden of
paying tariff costs?
For example, in the US:
• Mink furs are duty free while polyester sweater carries a
high tariff.
• Lobster is duty free while infant food preparations carry a
high tariff.
• Orange juice carries a high tariff, but Perrier bottled water
is hardly assessed a tariff.

33. Non-tariff barriers
•Intellectual property laws e.g. patents and copyright protection
•Technical barriers to trade including labeling rules and stringent
sanitary standards. These increase product compliance costs
•Preferential state procurement policies – where government favour
local producers when finalizing contracts for state spending
•Domestic subsidies – aid for domestic businesses facing financial
problems e.g. subsidies for car manufacturers or loss-making airlines.
•Financial protectionism – e.g. when a government instructs banks to
give priority when making loans to domestic businesses
•Murky or hidden protectionism - e.g. state measures that indirectly
discriminate against foreign workers, investors and traders.
•Managed exchange rates – government intervention in currency
markets to affect relative prices of imports and exports

34. Some recent examples of non-tariff barriers:
•Until recently China ruled that all avocados coming from
countries such as Kenya had to be frozen to -30°C and peeled
before shipping!
•Trucks of fruit coming from North Macedonia to Serbia are
subject to customs and sanitary checks, and long wait times at
the border. Fresh fruit deteriorates the longer trucks must wait
at the border!
•Within the African Continental Free Trade Area, businesses
must contend with 55 separate national standards, 55 test
certificates and 55 national inspection procedures. This slows
the speed at which trade takes place.

35. Examples -
The US “subsidizes”
Boeing and McDonnell
Douglas indirectly
through payments for
development of military
aircrafts that have
commercial applications.
The EU subsidizes Airbus
Industry directly.

36. Example:
The US Custom
had to determine
whether sport
utility vehicles
such as Suzuki
Samurai and the
Land Rover are
cars or trucks.
There is a 25%
duty on trucks
and a 2.5% duty
on cars!
The custom
duty classified
them as trucks,
but the courts
later ruled them
cars!

38. The barter transactions
are referred to as counter-
trade, offsets, buyback, or
compensation
arrangements. e.g. Pepsi-
Cola for Vodka, Lamp for
oil, buses for coffee,
railroad engineering
services for coal.
Countries engage in
widespread discrimination
that favors their own
companies in domestic air
transportation, carrying
cargo by ships between
domestic ports, insurance
and banking services, etc.

39. “Buy Local” Legislation
Most governments give preferences to domestic producers in
government procurements through content restrictions or through price
mechanism.
Through “buy local” laws -- government purchases give preference to
domestic products.
Standards: Countries commonly have a set of classifications, labeling, and
testing standards designed to protect the safety and health of the
domestic population e.g. The EU disallows hormone fattened beef from
the US.
Specific Permission Requirements: e.g. licensing arrangements, foreign
exchange control etc.
Administrative Delays: Intentional administrative delays on entry create
uncertainty and raise the cost of carrying inventory.
Inspection delays or clearing delays.

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

43. Case 7-43
U.S.-Cuban Trade: When Does A
Cold War Strategy Become A
Cold War Relic?
Case

44. Able to weather a variety of political leaders, economic events, and historical eras, the
U.S. embargo of Cuba is the longest and harshest embargo by one state against another
in modern history. Following Castro’s overthrow of the Batista government in 1959 and
threats to incite revolutions elsewhere in Latin America, the United States canceled its
trade agreement to buy Cuban sugar. Then, following a series of increasingly hostile
events, the United States severed diplomatic relations and initiated a full trade embargo &
Trade between the United States and Cuba stopped. Spurred by the collapse of
communism more than thirty years later, Congress passed the Cuban Democracy Act
in1992 and the Helms-Burton Act in 1996, both of which tightened the noose for firms that
attempted to do business with a Castro government. It was not until 2000 that Congress
passed an act which allowed for limited exports of U.S. agricultural, food and medical
products; Cuba quickly became the twenty-first largest agricultural market for U.S.
exports. Over time, sympathy for the U.S. role in Cuba has dwindled. Although many
countries had initially supported the embargo, by 2001 some 150 nations had normal
trade relations with Cuba. Further, the U.S. public has become increasingly divided on the
usefulness of the embargo. While many people feel that repealing the embargo would
help many U.S. industries and firms, others maintain that Cuban market opportunities are
extremely limited. Others feel that the Cuban embargo is an unfortunate cold war relic and
question the politics of U.S. policy.

45. After the
Cuban
Revolution
• Over two-thirds of Cuban foreign trade took
place with the United States
• The United States cancelled its agreements to
buy Cuban sugar in 1959 when Castro
threatened to incite revolutions elsewhere in
Latin America, in turn, Cuba seized U.S. oil
refineries
• Because oil companies refused to supply Cuba
with crude oil, it turned to the Soviet Union
• All trade between the US and Cuba stopped
• U.S. Congress passed the Cuban Democracy
Act in 1992 and the Helms-Burton Act in 1996
Case
7-45

46. Shifting
Sympathies
• By 2001, 150 nations had normal trade
relations with Cuba due to :
• events that triggered the end of the
cold war
• U.S. public being divided on the value
of the embargo on Cuba
• many leaders in the U.S. publicly
favored normalization of U.S.-Cuban
trade
Case
7-46

47. Pros and
Cons of
Doing
Business
with Cuba
Case 7-47
• the end of the embargo would
help many U.S. industries and
companies
• U.S. groups noted the market
potential of Cuba
Pros:
• the potential for business with
Cuba is highly limited
• Cuba needs to export enough to
pay for imports
Cons:

48. Questions
Case 7-48
Should the U.S. seek to tighten the
economic grip on Cuba? If so, why?
Should the U.S. normalize business
relations with Cuba? If so, should the U.S.
stipulate any conditions?
Assume you are Cuba’s leader. What kind
of trade relationship with the U.S. would
be in your best interest? What type would
you be willing to accept?
How does the structure and relationships
of the U.S. political system influence the
existence and specification of the trade
embargo?

49. 1. Should the United States seek to tighten its economic grip on
Cuba? If so, why?
From a practical standpoint, most would argue that without the cooperation of
the rest of the world, there is little left that the United States can do. Further,
given that China is now a member of the World Trade Organization (WTO) and
nations like Vietnam are trading with the United States, the Cuban embargo
gives the appearance of cold war relic that is no longer relevant in today’s
world. However, given the consensus that Cuba consistently violates human
rights, the continuance of U.S. trade sanctions against Cuba is consistent with
U.S. policy. In addition, Cuba’s expropriation of American property without
compensation is internationally recognized as unacceptable behavior; thus,
retaliation can be seen as an appropriate response.
Finally, there is the continuing argument that if the Cuban economy can be
further weakened, Castro may at last be overthrown.

50. 2. Should the United States normalize business relations with Cuba? If so,
should the United States stipulate any conditions?
There are both political and economic reasons for normalizing relations with Cuba.
Cuba has long-since ceased to be a military threat, and there is hope that closer
political relations with the United States (and the rest of the free world) will lead to
greater democracy in Cuba.
Further, Cuban trade sanctions are far tougher than those levied by the United
States against Iran, Iraq, Libya, and North Korea. Economically, it is argued that
because of the posture of the U.S. government, U.S. firms are losing out on
opportunities to sell their products in Cuba to competitors from other countries.
However, it is not likely that Cuba would trade with the United States as aggressively
as in the past, even if it were possible.
While progress in the area of human rights may be slow, experience in other
countries suggests that imposing some human rights conditions may be effective in
the long-run. In addition, the U.S. government may wish to facilitate the return to
Cuba of U.S. companies whose properties were expropriated, even though any
remaining assets are likely in a state of serious disrepair.

51. 3. Assume you are Cuba’s leader. What kind of trade relationship
with the United States would be in your best interest? What type
would you be willing to accept?
Castro would logically want a trade relationship that would permit him to
save face politically while contributing to the economic development of
the economy.
Initial overtures from the U.S. government could help bolster his political
position and thus would possibly be welcomed to begin negotiations.
Economic development assistance could come in the form of direct aid
and, possibly, foreign direct investment, although there surely would be
substantial controls on either form.

52. 4. How does the structure and relationships of the U.S. political
system influence the existence and specification of the trade
embargo?
The structure and relationships of the American political system
serve to reinforce the existence and specification of the Cuban trade
embargo.
Pro-embargo supporters relentlessly lobby the U.S. Congress and
presidential administration to tighten the embargo in order to spur
the collapse of Cuban communism.
Although recently diminished, the pro-embargo viewpoint is
supported by key people in key positions throughout the
government.

53. Thank You