International Business Environments and Operations, 13/e Global Edition

Part Three Theories and Institutions: Trade and Investment

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Chapter Seven
Governmental Influence On Trade

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Chapter Objectives
To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies

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Physical and Social Factors Affecting the Flow of Goods and Services

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The Role of Stakeholders

All countries seek to influence trade, and each has economic, social, and political objectives: Conflicting objectives Interest groups

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Why Governments Intervene in Trade

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Import Restrictions to Create Domestic Employment

May lead to retaliation by other countries Are less likely retaliated against effectively by small economies Are less likely to be met with retaliation if implemented by small economies May decrease export jobs because of price increases for components May decrease export jobs because of lower incomes abroad
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Protecting Infant-Industries
The infant-industry argument for protection holds that governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production

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Developing an Industrial Base

Countries seek protection to promote industrialization because that type of production:
Brings faster growth than agriculture Brings in investment funds Diversifies the economy Brings more income than primary products do Reduces imports and promotes exports Helps the nation-building process

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Assumptions in Developing an Industrial Base

Surplus Workers Investment Inflows Diversification Growth in Manufactured Goods Import Substitution and Export-Led Development Nation Building

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Economic Relationships with Other Countries

Trade controls are used to improve economic relations with other countries Their objectives include improving the balance of:
payments raising prices to foreign consumers gaining fair access to foreign markets preventing foreign monopoly prices assuring that domestic consumers get low prices lowering profit margins for foreign producers
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Maintaining Essential Industries

In protecting essential industries, countries must: Determine which ones are essential Consider costs and alternatives Consider political consequences

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Preventing Shipments to Unfriendly Countries

Considerable governmental interference in international trade is motivated by: political rather than economic concerns maintaining domestic supplies of essential goods preventing potential enemies from gaining goods that would help them achieve their objectives

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Maintaining or Extending Spheres of Influence

Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodies. A countrys trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not.

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Preserving National Identity

To sustain this collective identity that sets their citizens apart from those in other nations, countries limit foreign products and services in certain sectors.

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Instruments of Trade Control

Trade controls that directly affect price and indirectly affect quantity include: tariffs subsidies customs-valuation methods special fees

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Nontariff Barriers: Direct Price Influences

Subsidies Aid and Loans Customs Valuation Other Direct Price Influences

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Nontariff Barriers: Quantity Controls

Trade controls that directly affect quantity and indirectly affect price include:
quotas voluntary export restraint (VERs) buy local legislation standards and labels specific permission requirements administrative delays reciprocal requirements restrictions on services
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Dealing With Governmental Trade Influences

When facing import competition, companies can: Move abroad Seek other market niches Make domestic output competitive Try to get protection

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Tactics for Dealing with Import Competition

Convincing Decision Makers Involving the Industry and Stakeholders Preparing for Changes in the Competitive Environment

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Future: Dynamics and Complexity

Trade restriction changes bring about winners and losers among countries, companies, and workers The international regulatory situation is becoming more complex Production shifts create uncertainties and dynamics for companies operations

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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