Govt. Intervention

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Government

intervention in

InternationalBusiness


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The Nature of Government

InterventionAn important dimension ofcountry risk. Governments intervene in trade and

investment to achieve political, social, oreconomic objectives.

Intervention alters the competitive landscapeby hindering or helping the ability of firms tocompete internationally.

But, intervention is at odds with the

theory of comparative advantage, whichargues for more international trade, notless


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Key Concepts

Protectionism: national economic policies thatrestrict free trade, usu. intended to raise revenue orprotect domestic industries from foreign competition.

Government intervention arises in various forms:

Tariff -- a tax on imports (e.g., citrus, textiles)

Nontariff trade barrier -- government policy,regulation, or procedure that impedes trade

Quota -- quantitative restriction on imports of aspecific product (e.g., imports of Japanese cars)

Investment barriers rules or laws that hinderFDI (e.g., Mexicos restrictions in its oil industry)


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Example of Protectionism

Bush administration imposed tariffs on imports of foreign

steel to protect U.S. steel manufacturers from foreign

competition, aiming to give the U.S. steel industry time

to restructure and revive itself.

The steel tariffs were removed within two years.


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Example

In 1980s, the U.S. government imposed

voluntary export restraints (quotas) on imports

of cars from Japan, to insulate U.S. auto industry.

Result 1: Detroit automakers had less of an incentive to

improve quality, design, and overall product appeal.

Result 2: Detroits ability to compete in the global auto

industry was weakened.


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Consequences of Protectionism

Reduced supply of goods to buyers

Price inflation

Reduced variety, fewer choices available to buyers

Reduced industrial competitiveness

Various adverse unintended consequences(e.g.,while the U.S. dithers, other countries can raceahead)


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Rationale for Government

Intervention1. Tariffs and other barriers can generate

government revenue.

2. Safety, security, and welfareof citizens (e.g., FDAbarriers on drug imports; barriers intended toprotect national security)

3. Broad-based economic, political, or socialobjectives(e.g., job creation)

4. Reduce foreign competition

5. Protect infant industries

6. Preserve national culture and identity


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Tariffs are Widespread

Developing economies -- tariffs are common. Advanced economies -- tariffs still a factor

mainly in textiles, clothing, and agriculturalproducts (e.g., the U.S. recently collected more

tariff revenue on shoes than on cars; $1.63billion vs. $1.60 billion in 2001). The European Union applies tariffs of up to 236

percent on meat, 180 percent on cereals, and17 percent on tennis shoes.

United Nations estimates that trade barriers ingeneral cost developing economies over $100billion in lost trading opportunities withdeveloped countries every year.


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WTO: A Force for Reducing

Tariffs Governments have tended to reduce tariffs over

time.

Tariff reduction was the primary goal of the GeneralAgreement on Tariffs and Trade (GATT)

In 1995, the GATT became the World TradeOrganization (WTO).

Countries as diverse as Chile, Hungary, Turkey, andSouth Korea have liberalized their previouslyprotected markets, lowering trade barriers.


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Nontariff Trade Barriers

Government policies that restrict trade without imposing adirect tax or duty. Quotas restrict the physical volume or value of products that

firms can import into a country. Voluntary export/import restraints are voluntary quotas

imposed bygovernments whereby firms agree to limit exportsor imports of certain products. Import license a formal permission to import, which restricts

imports in a way that is similar to quotas- a complicated,bureaucratic process in some countries

Government regulations and technical standards e.g.,

safety regulations for motor vehicles, health regulations forhygienic food preparation, labeling requirements identifyingcountry of origin, etc.

Administrative or bureaucratic procedures


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Investment Barriers

FDI and ownership restrictions are common inindustries such as broadcasting, utilities, airtransportation, military technology, and financialservices, oil, fisheries, etc.

Examples- Canada government restricts foreign ownership of

local movie studios and TV shows to protect itsindigenous film and TV industry from excessiveforeign influence.

Mexico government restricts FDI by foreigninvestors to protect its oil industry. Services sector FDI and ownership restrictions

are burdensome because services usually cannotbe exported; must establish physical presence in the

market


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Subsidies

Government grants (monetary or other resources) tofirms or industries, intended to ensure their survivalby facilitating production at reduced prices, orencouraging exports.

Examples: cash disbursements, material inputs,services, tax breaks, provision of infrastructure,government contracts at inflated prices.

For example, in France the government provideslarge subsidies to Air France, the national airline.


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Investment Incentives

Similar to subsidies, transfer payments or tax concessions

made directly to individual foreign firms to entice them

to invest in the country.

Examples

Hong Kong government put up most of the cash $1.74billion to build Hong Kong Disneyland.

Austin, TX and Albany, NY competed to have Samsung

Electronics build a semiconductor plant in their regions.Austin won, offering $225m in tax relief and otherconcessions to attract the $300m plant; employs 1,000workers.


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Market Liberalization in

China 1949 Mao Tse Tung established a communist regime,

featuring centralized economic planning, agriculturalsector, inefficient state-run industries, very limitedinternational trade.

1980s began to liberalize economy. 1992 joined Asia-Pacific Economic Cooperation (APEC)

group, a free-trade organization.

2001 joined the WTO; committed to reducing tradebarriers and protecting intellectual property.

2004Chinas GDP was four times the level it was in1978, and foreign trade exceeded $1 trillion.


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Documents

Govt. Intervention