This document provides an overview of a chapter on governmental influence on trade. It discusses the rationales governments have for influencing trade, including economic reasons like fighting unemployment, protecting infant industries, developing an industrial base, and improving economic relations with other countries. It also discusses non-economic rationales like maintaining essential industries, dealing with unfriendly countries, and maintaining spheres of influence. The objectives of the chapter are explained and examples are given of different government trade policies and their potential effects.

1. IAF 605 - International Business Management
Government Influence on Trade
Week 6

2. Agenda
review Week 5
Chapter 7 –
Governmental
Influence on Trade

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. Physical and Social Factors Affecting the Flow of Goods and Services
(p257)

5. The Role of Stakeholders
direct
consumers
interest

6. Why Governments Intervene in Trade
4 Economic Rationales
• fighting unemployment
• protecting “infant industries”
• developing an industrial base
• economic relationships with
other countries

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. 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rescinded!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. 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. Restricting imports…
Video source: http://www.youtube.com/watch?v=n-dXS-Xkrh0

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. 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. 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. Developing an Industrial Base
Video source: http://www.youtube.com/watch?v=3JzoBTpM-bs

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. 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. 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. 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. 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. Developing an Industrial Base – nation building
industrialization helps build
infrastructure, advance rural
development and boost the
skills of the workforce

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. Why Governments Intervene in Trade
• maintaining essential industries
Noneconomic • dealing with unfriendly countries
• maintaining or extending spheres
Rationales of influence
• preserving national identity

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. 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. 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. Maintaining or extending spheres of influence
Video source: http://www.youtube.com/watch?v=xQ42xltm02M

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. Preserving national identity
Video source: http://www.youtube.com/watch?v=XKjicnkplDY

29. Instruments of Trade Control
directly affect price and
indirectly affect quantity
• tariffs (or duties)
• subsidies
• customs-valuation methods
• special fees

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. 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. 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. Reminder
Jun 23rd:
mid-term exam
 chapters 1-4
and 6-7
 cases
 class discussions