Government intervention Flashcards
What is government intervention?
Governments intervene in trade and investment to achieved political, social, or economic objectives
What is the nature of government intervention?
Protectionism
What is protectionism?
Natural economic policies that restrict free trade.
Usually intended to raise revenue or protect domestic industries from foreign competition
Consequences of protectionism
Reduced supply of goods to buyers
Price inflation
Reduced variety, fewer choices available to buyers
Reduced firm and industrial competitiveness
General rationale for government intervention
Generate substantial government revenue- key in undeveloped economies
Ensure the safety, security and welfare of citizens
Pursue broad economic, political and social objectives for the nation
Serve the interests of the nations firms and industries
Defensive rationale for government intervention
Protection of the national economy
Protection of an infant industry
National security
National culture and identity
Offensive rationale for government intervention
National strategic priorities
Increase employment
Types of government intervention (8)
Tariff
Non tariff trade barrier
Quota
Investment barriers
Subsidies
Local contract requirements
Administrative practices
Anti-dumping duty
What is a tariff?
A tax on imports (sometimes exports)
What is a nontariff trade barrier?
Government policy, regulation, or procedure that impedes trade
What is a quota?
Quantitative restriction on imports of a specific product
What are investment barriers?
Rules or laws that hinder FDI
What are subsidies?
Government grants to a firm or group of firms to ensure their survival or success
What are local content requirements?
Requirement that a certain proportion of the value of the goods made in one country originate from that country
What are administrative practices?
Bureaucratic rules that make it harder to import foreign goods
What is anti dumping duty?
Costs levied on imports that have been dumped (selling below costs to unfairly drive domestic firms out of business)
How can firms respond to government intervention?
Seek favourable customs classifications for imported products
Take advantage of investment incentives and other government support programmes
Lobby for freer trade and investment
Example of protectionism
US Steel industry convinced the government to adopt policies that benefit themselves
Tariffs to import foreign steel
Gave US industry time to grow
Save jobs but higher material costs makes the companies less competitive
Outcomes of government intervention
Increase GDP indicated people have more money to spend, reducing global poverty
Decreasing tariffs - trade barrier- means countries trade more openly, major factor in growth of global commerce, rising income around the world
What is economic freedom?
Absence of government coercion
People can work, produce, consume and invest how they want
Flourished with appropriate intervention
Too much can harm the economy
Index of economic freedom
Advanced economies- FREE
Emerging markets- MOSTLY FREE
Developing economies- MOSTLY UNFREE OR REPRESSED
How should firms respond to government intervention? (6)
Research to gather knowledge and intelligence
Choose the most appropriate entry strategies
Take advantage of foreign trade zones
Seek favourable customs classifications for exported products
Take advantage of investment incentives and other gov support programmes
Lobby for freer trade and investment
RESCCIIL
What is the GATT
General agreement on tariffs and trade
1947 23 nations signed
WTO
World trade organisation 1995 150 nations
