Government Influence on Trade

Question 1

U.S. Vietnamese Catfish Debate

Answer 1

Government employed intervention tools such as dumping and 64% tariff

Question 2

Why do governments intervene?

Answer 2

Because government goals and firm goals are not always aligned. There are both economic and non-economic reasons

Question 3

Why is government intervention too quickly negative?

Answer 3

Is not condusive to trade freedom or overall wealth for companies because it ends up costing someone (consumers)

Question 4

Who are the stakeholders in government policy?

Answer 4

• firms
• consumers
• employees
• local communities
• NGOs and environmental groups
• industry groups
• citizens

Question 5

Who is the largest stakeholder for the government to consider?

Answer 5

The unemployed have a lot of influence and can cause civil unrest for the government

Question 6

Economic reasons for intervention

Answer 6

• Fighting unemplyment
• Protecting infant industries
• Promoting industrialization
• Improving comparative position

Question 7

Why would governments make taxpayers support specific industries?

Answer 7

Because these industries are more stable, have more income, and require more skill so that the country can increase exports

Question 8

Tariff

Answer 8

Duty or tax on a product

Question 9

Subsidies

Answer 9

Government support of an industry by offering financial incentives (cash distributions, tax breaks, indirect government contracts)

Question 10

VERs

Answer 10

Voluntary Export Restraints

-Not really voluntary but countries can limit the number of exports in a specific industry

Question 11

Embargo

Answer 11

Trade prohibition (USA to Cuba)

Question 12

Domestic Content Laws

Answer 12

Requiring that a certain amount or percentage of production take place in the home country (local companies)

Question 13

Administrative delays

Answer 13

A country can say that is wants to study and test issues more which is a thinly veiled tactic to give local companies a competitive advantage

Question 14

Anti-dumping actions

Answer 14

Imposing a penalty to address dumping (fish example)

Question 15

Immigration

Answer 15

Work visas can be used as a trade restriction to protect local jobs

Question 16

Why is the “Chicken tax” ironic for the US?

Answer 16

In 1963 Germany imposed a 25% tariff on US chickens and the US retaliated with a 25% tariff on pickups and work vehicles from Europe. Fast forward to 2013 and to avoid this tax on its own products, Ford imports from Europe and converts them here. When the US government finds out, Ford has to pay fines and loses money so a US company now has to pay taxes to produce its own goods

Question 17

Fighting unemployment logic and tools

Answer 17

Logic: The unemployed are a huge pressure group
Tools: Tariffs, quotas, domestic content laws
Problems: Affects another country’s exports and therefore their unemployment

Question 18

Protecting infant industries: logic and tools

Answer 18

Logic: Long-term growth comes from new, innovative industries and new industries are too small to compete with global competitors
Tools: Subsidies, FDI regulations, domestic content laws
Problems: Makes foreign products uncompetitive, limits foreign ownership, unclear when an industry reaches adulthood

Question 19

Maintaining essential industries: logic and tools

Answer 19

Logic: defense, transportation, scarce resources should be under control and available in case of a national emergency
Tools: Subsidies, export ban, FDI regulation
Problems: Hurts foreign competitors, how do we define “scarce”?

Question 20

Maintaining spheres of influence: logic and tools

Answer 20

Logic: Politically friendly countries should be rewarded economically and politically unfriendly should be punished
Tools: Tied aid, preferential tariffs, subsidies, embargoes
Problems: Hurts firms and individuals who are not responsible for government’s policies

Question 21

Improve comparative position: logic and tools

Answer 21

Logic: To level the playing field since some countries subsidize, manipulate currency, or have high tariffs or quotas
Tools: Anti-dumping and counterveiling procedures
Problems: Leads to prolonged retaliation, difficult to prove dumping versus effective cost containment

Question 22

Why did Walmart pull out of India?

Answer 22

Indian government began requiring retailers to source 30% of products from small to medium Indian companies

Question 23

Who wins by protectionism?

Answer 23

• Import-competing industries
• Government
• Domestic producers
• Special interest groups

Question 24

Boeing v. Airbus

Answer 24

Because this industry bring great revenues and tax benefits to the country, both were being subsidized (very expensive to produce)
Boeing - Indirect subsidies by government, NASA, etc
Airbus - European union subsidizes airbus

Question 25

Who loses by protectionism?

Answer 25

• Consumers(higher prices, lower selection)
• Foreign producers
• Internal economy
• Global economy

Question 26

GATT

Answer 26

General Agreement on Tariffs and Trade

• Formed in 1947 to abolish tariffs
• Replaced by World Trade Organization

Question 27

WTO

Answer 27

World Trade Organization

• 153 current members (most of the world)
• Governments can bring charges of unfair trade practices to WTO
• Rulings are meant to be binding

Question 28

Reasons NOT to influence trade

Answer 28

• Expensive
• Creates inefficiencies
• Encourages lobbying
• Encourages retaliation
• Damages overall competitiveness

Question 29

How to deal with government influence on trade?

Answer 29

Countries can…

• Move operations to a lower cost country
• Concentrate on markets with less international competition
• Internal innovations
• Seek government protection