PPTON

GOVERNMENT INTERVENTION

BY

SHREYA BANSAL

ROLL NO:43

SEM: 6TH

Rationales For Governmental Intervention

Economic Rationales Noneconomic Rationales

Preventing unemployment Maintaining essential industries

Protecting infant industries Dealing with unfriendly countries

Promoting industrialization Maintaining or extending spheres of influence

Improving comparative position Preserving national identity

Prevent UnemploymentBy limiting imports, local jobs are retained as firms and consumers are forced to purchase domestically produced

goods and services. Unless the protectionist country is relatively small, such measures are usually ineffective. • Such measures are likely to lead to retaliation unless either the protectionist or the affected country is relatively small. • Such measures may decrease export-related jobs because of (i) price increases for components or (ii) lower incomes abroad.

Governments must carefully balance the costs of higher prices with the costs of unemployment and the displaced

production that would result from free trade.

Example:

One problem is other contrives might retaliate with their own restrictions (i.e. USA protected steel and EU ,Brazil, and japan threatened to restricts us products like oranges- us rescinded.

PROTECTING “INFANT INDUSTRIES”

The infant- industries argument for protection holds that a government should protect an emerging industry until it is able to compete on its own .

• Balance-of-trade adjustmentsA trade deficit creates problems for nations with low foreign exchange reserves-the funds that help a nation finance the purchase of priority foreign goods and maintain the trustworthiness of its currency.• Comparable access or “ Fairness” Promotes the idea that a country’s firms are entitled to the same access to foreign markets as foreign firms have to its market. • Restrictions as a bargaining toolThe imposition of import restrictions may be used as a means to persuade other countries to lower their import barriers. The danger in this is that each country escalates its restrictions so, in effect, we have a trade war that impacts all the countries economies negatively.criteria:1. Believability: either you have to access to alternative sources for the product or

your consumers are willing to do without it.2. Importance : exports of the product you’re restricting are significant to certain

parties in the producer country-parties who are sufficiently influential to prompt changes in their own country’s trade policy.

• Price-control objectivesCountries sometimes withhold goods from international markets in an effort to raise prices abroad. This action is most feasible when a few countries hold a monopoly or a near monopoly control of certain resources. They can then limit supply so consumers must pay a higher price. However, this policy often encourages smuggling, such as of diamonds.This policy may also encourage other countries to develop technology that will provide either substitute products, such as synthetic rubber in place of natural rubber, or different ways of producing the same product.• DumpingIt refers to the practice of pricing exports below cost, or below their home-country prices, i.e., below their “fair market value.”• Optimum-tariff theoryclaims that a foreign producer will lower its prices if the destination country places a tariff on its products. So long as the price is reduced by any amount, some shift in revenue goes to the importing country, and the tariff is deemed an optimum one.

TARIFFS

Tariffs (also called a duty), i.e., taxes to impose or collect on (internationally) traded products, include: • exports tariffs, collected by the country of origin on exported products• transit tariffs, collected by a country through

which goods pass en route to their final destination• import tariffs , collected by the country of destination on imported products

A tariff increases the delivered price of a product, and, at the higher price, the quantity demanded will be less.

• A specific duty is a tariff that is assessed on a per unit basis.

• An ad valorem tariff is assessed as a percentage of the value of an item.

If both a specific duty and an ad valorem tariff are assessed on the same product, it is known as a compound duty.

While raw materials frequently enter industrial countries tariff free, an ad valorem tariff is often applied to the total value of manufactured goods. Critics argue that the effective tariff on the manufactured portion, i.e., the value-added portion, is higher than the published tariff.

• Subsidies: direct or indirect financial assistance from governments to their domestic firms to help them overcome market imperfections and thus make them more competitive in the marketplace.

• Aid and loans: tied aid and loans require that the recipient spend the funds in the donor country

• Customs valuation: determining the true value and/or origin of traded products

• Other direct price influences: special fees( such as for consular and customs clearance and documentation), minimum price levels at which goods can be sold after they have customs clearance.

• Quota: a numerical limit on the quantity of a product that may be imported or exported in a given period of time– Voluntary export restraints (VERs): negotiated

limitations of exports from one country to another

– Embargo: an outright ban on imports from or exports to a particular country

Because of the increase in the equilibrium price, a quota may increase per unit revenues for participants within the protected market.

• “Buy local”Legislation

1. Government purchases give preference to domestically made goods 2. Governments sometimes legislate a percentage of domestic content. • Specific permission

– Import and export licenses– Foreign exchange controls

• Reciprocal requirements– Barter – Offset

• Restrictions on services– Essentiality– Professional standards– Immigration

Implications/Conclusions

• When governments choose to impede/ prevent the flow of imports and encourage the flow of exports, they simultaneously provide direct and/or indirect subsidies for their domestic industries.

• It is difficult to determine the real effects of trade barriers due to the likelihood of retaliation and the fact the imports and exports can both have positive effects.

• Much government interference in the international trade process is motivated by political rather than economic factors.

• A company’s particular international strategy will determine the extent to which it might benefit from protectionist measures.