Government Intervention Essay

1347 words - 5 pages

Arguments for government intervention in international trade take two paths: political and economic (Hill 2011, p205). Political intervention is concerned with protection of certain groups within the nation. These groups are usually the producers who have a lot to gain at the expense of consumers. On the other hand, economic arguments for intervention are concerned with increasing the wealth of the nation to the benefit of all i.e. producers and consumers. This paper discusses the arguments for the protectionist measures and the instruments governments apply in controlling trade and foreign direct investments. Firstly the instruments for trade policy available to governments are defined. The arguments for intervention are then looked at. Following this, the challenges and opportunities faced by international companies wishing to expand into these controlled markets are then analysed and discussed with examples. Finally conclusions are drawn from the analysis and recommendations made on multi-national strategies to adopt in harnessing opportunities availing.
Trade policy instruments
Governments have at their disposal various instruments to use in trade policing. The most common are briefly explained below;
Tariffs – Hill (2011, p199) defines this as a tax levied on imports or exports. The tax may be fixed (specific) or as a percentage of the value of the goods (ad valorem). Import tariffs help governments to increase revenue, protect local producers who gain and affect consumers who lose through higher priced goods. Import tariffs promote inefficiencies in local industries as goods are produced that could be more efficiently produced abroad. Export tariffs are less common. They are used to raise revenue on exports and to reduce exports from a sector e.g. China imposed a textile tariff in 2004.
Subsidies – government payments to local producers (Hill, 2011 p200). Subsidies take many forms such as cash grants, low interest loans, tax breaks and government equity in local firms (e.g. Airbus). In EU countries agriculture is an example of subsidy beneficiary.
Import quotas and voluntary export restraints (VERs) – an import quota is a restriction on quantity of imported goods, usually instituted by issuing import licences. A voluntary export restriction is a quota on trade usually imposed by exporting country at the request of importing country’s government. Import quotas and VERs benefit producers at the expense of consumers.
Local content requirements (LCR) – requires that a specific fraction of a good be produced domestically. This has been used by developing countries to promote local manufacturing thus moving away from simple assembly. Developed countries have used them to protect jobs and domestic industry.
Administrative polices – bureaucratic rules designed to make it difficult for imports to enter a country. They are a non-tariff barrier. For example France once required all VCR imports to pass through a small entry point that...

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