Political, economic, and cultural motives behind governmental intervention in trade.
Despite the advantages of free trade, government intervention is common.
The main political motives behind government intervention in trade include:
- protecting jobs
- preserving national security
- responding to other nations on fair trade policies
- gaining influence over other nations
The most common economic reasons given for nations attempt to influence international trade are:
- protection of young industries from competition
- protection of a strategic trade policy
According to the infant industry argument, it countries even merging industries need protection from international competition during their development phase, until they become sufficiently competitive internationally. Although conceptually appealing, this argument can cause domestic companies to become noncompetitive, and inflate prices. Believers in strategic trade policy argue that government intervention can help companies take advantage of economies of of scale and the first movers in their industries. But government assistance to domestic companies can result in inefficiency, higher costs, and even trade wars between nations.
Perhaps the most common cultural motive for trade intervention is protection of national identity. On wanted cultural influence can cause a government to block imports that it believes are harmful.
Methods governments used to promote international trade.
A subsidy is financial assistance to domestic producers in the form of cash payments, low interest loans, tax breaks, product price supports, or some other form. It is intended to assist domestic companies in fending off international competitors. Critics charge that subsidies amount to corporate welfare and are detrimental to the long-term.
Governments also can offer export financing -- lends to exporters that they would not otherwise receive or linens at below market interest rates. Another option is to guarantee that the government will repay a companies lend if the company should default on repayment -- called a loan guarantee.
Most countries permit trade with other nations by creating what is called a foreign trade zone (FTZ) -- a designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures. Finally, most nations have special government agencies responsible for promoting exports. These agencies organized trips abroad for trade officials and business people and open offices abroad to promote home country exports.
Government restriction of international trade.
A tariff is a government tax levied on a product as it enters or leaves a country. And export tariff is one that is levied by the government of a country that is exporting a product. A tariff levied by the government of a country that a product is passing through on its way to its final destination is called a transit terror. And import tariff is one that is levied by the government of a country that is importing a product.
Three categories of import tariff are:
- ad valorem tariffs
- specific tariffs
- compound tariffs
A restriction on the amount (measured in units or wait) of a good day can enter or leave a country during a certain period of time is called a quota. Governments may impose import quotas to protect domestic producers or export quotas to maintain adequate supplies in the home market or increased prices of a product on world markets.
A complete ban on trade (imports and exports). In one of more products with a particular country is called an embargo. Laws stipulating that a specified amount of a good or service be supplied by producers and the domestic markets are called local content requirements. Governments can also discourage imports by causing administrative delays (regulatory controls of bureaucratic rules to impair imports) or currency controls (restrictions on the convertibility of a currency).
The world trade organization promotes free trade.
The General Agreement on Tariffs and Trade (GATT) was a treaty designed to promote free trade by reducing the care of and nontariff barriers to international trade.
The Uruguay Round of GATT negotiations that ended 1994, made significant process and several areas:
- international trade and services was included for the first time
- intellectual property rights were clearly defined
- tariff and nontariff barriers in agricultural trade were reduced significantly
- the World Trade Organization (WTO) was created
The three main goals of the WTO are to help the free flow of trade, to help negotiate further opening of markets, and to settle trade disputes between its members. A key component of the WTO is the principal of nondiscrimination called normal trade relations that requires WTO members to treat all members equally.
When a company exports, a product at a price either lower than the price it only charges in its domestic market or lower than the cost of production, it is said to be dumping. The WTO allows a nation to retaliate against dumping under certain conditions.
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