Chapter 7 Flashcards
Governmental Influence on Trade
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
Economic Rationales for government intervention
- fighting unemployment
- protecting infant industries
- promoting industrialization
- improving comparative position
Non-economic Rationales for government intervention
- maintaining essential industries
- promoting acceptable practices abroad
- maintaining or extending spheres of influence
- preserving national culture
Infant industry argument
government protection of import competition is necessary to help certain industries evolve from high-cost to low-cost production
Countries promote industrialization because:
- brings faster growth than agriculture
- brings in investment funds
- diversifies the economy
- creates growth in manufactured goods
- reduces imports and promotes exports
- helps the nation-building process
Essential industry argument
protect essential industries so the country is not dependent on foreign supplies during war
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
Tariffs (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 value basis (export, transit, and import tariffs)
Subsidies
direct assistance to companies to make them more competitive (agricultural subsidies, overcoming market imperfections, valuation problems)
Quotas
limit the quantity of a product that can be imported or exported in a given time frame (Voluntary export restraint, embargoes)
Protectionism
governmental actions to influence international trade
Countries seek to influence
trade and respond to their economic, social, and political objectives
Stakeholders most affected by trade regulations
push hardest for trade rules favourable to them
The unemployed
can form an effective pressure group for import restrictions
Import restrictions to create domestic employment
- may lead to retaliation by other countries
- affect large and small economies differently
- reduce import handling jobs
- may decrease jobs in another industry
- may decrease export jobs because of lower incomes abroad
The infant-industry argument
says that production becomes more competitive over time because of
- increased economies of scale
- greater worker efficiency
Possible costs of import restrictions
include higher prices and higher taxes. Such costs should be compared with those of unemployment
Countries seek protection to promote industrialization because that type of production
- can use surplus agricultural workers more easily
- brings in investment funds
- diversifies the economy
- brings faster growth than primary products do
Industrialization argument
presumes that, although a country may develop an inefficient and non-globally competitive industrial sector, it will achieve economic growth by enabling the unemployed and underemployed to work in industry
When a country shifts from agriculture to industry
- output may increase if the agricultural workers produced little before
- demands on social and political services in cities may increase
- development possibilities in the agricultural sector may be overlooked
- industrial jobs may not be forthcoming
If import restrictions keep out foreign-made goods
foreign companies may invest to produce in the restricted area
Although prices for commodities fluctuate markedly
a shift to production of manufactures creates competitive risk
Terms of trade may deteriorate because
- demand for primary products grows more slowly than manufactured ones
- production cost savings for primary products will be passed on to consumers
Import substitution
restricting imports to boost local production of products they would otherwise import
Export-led development
promoting the development of industries with export potential
Industrialization emphasizes either
- products to sell domestically
OR - products to export
Comparable access argument
industries are entitled to the same access to foreign markets as foreign industries have to theirs
If domestic producers have less access to foreign markets than foreign producers have to their market
they may be disadvantaged but:
- restricting foreign entry may disadvantage domestic consumers
- negotiating equal market access for each product is impractical
Successful countries’ threats to levy trade restrictions to coerce other countries to change their policies
- must be believable
- involve products important to the other countries
Export restrictions may
- raise world prices
- require more controls to prevent smuggling
- be ineffective for digital products
- lead to product substitution or new ways to produce the product
- keep domestic prices down by increasing domestic supply
- give producers less incentive to increase output
Dumping
- may be used to introduce a new product
- may cause higher prices or subsidies in the exporting country
- is hard to prove
Optimum-tariff theory
addresses whether a foreign producer lowers export prices when an importing country places a tax on its products
An optimum tariff’s success
- shifts revenue to an importing country
- is difficult to predict
- may cause lower worker income in developing countries
Essential-industry argument
nations apply trade restrictions to protect crucial domestic industries so that they are not dependent on foreign supplies during hostile political periods
In protecting essential industries, countries must
- determine which ones are essential
- consider costs and alternatives
- consider political and economic consequences
Trade limitations may be used
to compel a foreign country to amend an objectionable practice
When facing import competition, companies can
- move abroad or find foreign supplies
- seek other market niches
- make domestic output competitive
- try to get protection
