Log in to StudySoup
Get Full Access to FAU - Class Notes - Week 7
Join StudySoup
Get Full Access to FAU - Class Notes - Week 7

Already have an account? Login here
Reset your password

FAU / Management / MAN / Why do governments intervene in markets?

Why do governments intervene in markets?

Why do governments intervene in markets?



Why do governments intervene in markets?

Countries specialize in products they can make most efficiently

-Importing products that they can produce less efficiently

Free Trade

Free Trade- Government does not restrict what citizens buy from another country or what they can sell  to another country

Many nations are nominally committed to free trade, they intervene in international trade to protect  the interests of politically important groups or promote the interests of key domestic producers

Consequences of Free Trade

• Static Economic Gains

-Free trade supports a higher level of domestic consumption and efficient utilization of resources • Dynamic Economic Gains

-Free trade stimulates economic growth and the creation of wealth  

What are the political arguments for government intervention?

Policy Instruments the Government uses to Intervene in Markets Governments use various methods to intervene in markets  

Trade policy usesseven main instruments

1.) Tariffs- Tax levied on imports/exports that effectively raise the cost of imported products relative  to domestic products If you want to learn more check out Who is the main authority in a democracy?

• Increase Gov revenue

• Force consumers to pay more for certain imports

• Are pro-producer and anti-consumer

• Reduce the overall efficiency of the world economy

Tariffs fall into two categories

Specific Tariffs- Levied as a fixed charge for each unit of a good imported  

What do trade barriers mean for managers?

Ex: $3 per barrel of oil

Ad Valorem Tariffs- Levied as a proportion of the value of the imported good  

Tariffs are placed on imports to product domestic producers from foreign competition by raising the  price of imported goods

2.) Subsidies- Government payments to domestic producers

-Take many forms including cash grants, low interest loans, tax breaks, and government equity  participation in domestic forms

-Help domestic producers

• Compete against low-cost foreign imports

• Gain export markets

-Consumers typically absorb the costs of subsidies

-Agriculture tends to be one of the largest beneficiaries of subsidies in most countries

3.) Import Quotas- Direct restriction on the quantity of some good that may be imported into a  country Don't forget about the age old question of To what degree are activities subdivided into separate jobs?

A common hybrid quota and a tariff is known as a tariff rate quota 

Tariff Rate Quota- A hybrid of a quota and a tariff where a lower tariff is applied to imports within  the quota than to those over the quota

Quota Rent- The extra profit that producers make when supply is artificially limited by an import  quota  

4.) Voluntary Export- Quota on trade imposed by exporting country, typically at the request of the  importing country’s government

-Import quotas and voluntary export restraints

-Benefit domestic producers  

-Raise the prices of imported goods

5.) Local Content Requirements - Demand that some specific fraction of a good be produced  domestically  

-Benefit domestic producers

-Consumers face higher prices Don't forget about the age old question of How much did tobacco cost in the 1600s?

6.) Administrative Policies - Bureaucratic rules designed to make it difficult for imports to enter a  country  

-Polices hurt consumers by limiting choice

7.) Antidumping Policies–also called countervailing duties–punish foreign firms that engage in dumping  and protect domestic producers from “unfair” foreign competition

Dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign  market below their “fair” market value  

-Enables firms to unload excess production in foreign markets  

-May be predatory behavior - producers use profits from their home markets to subsidize prices in a  foreign market to drive competitors out of that market, and then later raise prices

Why Do Governments Intervene In Markets?

There are two main arguments for government intervention in the market  If you want to learn more check out How do you calculate heat of fusion?

Political arguments - concerned with protecting the interests of certain groups within a nation (normally  producers), often at the expense of other groups (normally consumers)  

Economic arguments - concerned with boosting the overall wealth of a nation - benefits both producers  and consumers

What Are The Political Arguments For Government Intervention? 1.) Protecting jobs & industries- the most common political reason for trade restrictions  

-Results from political pressures by unions or industries that are "threatened" by more efficient foreign  producers and have more political clout than consumers  If you want to learn more check out How are victims seen by courts or police?

2.) Protecting industries deemed important for national security- Industries are often protected because  they are deemed important for national security

-aerospace or semiconductors If you want to learn more check out What do families do that is important for society? what about for the individuals in them?

3.) Retaliation for unfair foreign competition- When governments take, or threaten to take, specific  actions, other countries may remove trade barriers

-If threatened governments do not back down, tensions can escalate and new trade barriers may be  enacted

-Risky strategy

4.) Protecting consumers from “dangerous” products - Limit “unsafe” products

5.) Furthering the goals of foreign policy - Preferential trade terms can be granted to countries that a  government wants to build strong relations with  

-Trade policy can also be used to punish rogue states

6.) Protecting the human rights of individuals in exporting countries - through trade policy actions 7.) Protecting the Environment-International trade is associated with a decline in environmental quality -Concern over global warming

-Enforcement of environmental regulations

Economic Arguments For Government Intervention?

1.) The infant industry argument - an industry should be protected until it can develop and be viable and  competitive internationally  

-Accepted as a justification for temporary trade restrictions under the WTO

2.) Strategic trade policy – first-mover advantages can be important to success

-Governments can help firms from their countries attain these advantages  

-Governments can help firms overcome barriers to entry into industries where foreign firms have an  initial advantage

Retaliation & Trade War

• Paul Krugman argues that strategic trade policies aimed at establishing domestic firms in a  dominant position in a global industry are beggar-thy-neighbor policies that boost national  income at the expense of other countries

-Countries that attempt to use such policies will probably provoke retaliation

• Krugman argues that since special interest groups can influence governments, strategic trade  policy is almost certain to be captured by such groups who will distort it to their own ends

Development of the World Trading System

Until the Great Depression of the 1930s, most countries had some degree of protectionism -Smoot-Hawley Act (1930)- erect an enormous wall of tariff barriers

After WWII, the U.S. and other nations realized the value of freer trade

-Established the General Agreement on Tariffs and Trade (GATT) - a multilateral agreement to  liberalize trade

In the 1980s and early 1990s protectionist trends emerged

-Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other  countries

-Persistent trade deficits by the U.S

-Use of non-tariff barriers increased

The Uruguay Round of GATT negotiations began in 1986 focusing on

1.) Services and intellectual property

-Going beyond manufactured goods to address trade issues related to services and intellectual property,  and agriculture  

2.) The World Trade Organization

-It was hoped that enforcement mechanisms would make the WTO a more effective policeman of  the global trade rules

The WTO encompassed GATT along with two sisters organizations

• the General Agreement on Trade in Services (GATS)  

-working to extend free trade agreements to services  

• the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) -working to develop common international rules for intellectual property rights

The WTO has emerged as an effective advocate and facilitator of future trade deals, particularly  in such areas as services  

-159 members in 2013

-WTO’s policing and enforcement mechanisms are having a positive effect

-Most countries have adopted WTO recommendations for trade disputes  

-A magnet for various groups protesting free trade

The Future Of The World Trade Organization?

-The current agenda of the WTO focuses on  

-the rise of anti-dumping policies

-the high level of protectionism in agriculture

-the lack of strong protection for intellectual property rights in many nations

-continued high tariffs on nonagricultural goods and services in many nations

• The WTO launched a new round of talks at Doha, Qatar in 2001 that have already gone on for 12  years and are currently stalled.

• The agenda includes

-cutting tariffs on industrial goods and services

-phasing out subsidies to agricultural producers

-reducing barriers to cross-border investment

-limiting the use of anti-dumping laws  

What Do Trade Barriers Mean For Managers?

Managers need to consider how trade barriers affect the strategy of the firm and the implications of  government policy on the firm

1.) Trade barriers raise the cost of exporting products to a country

2.) Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations  outside that country

3.) To conform to local content requirements, a firm may have to locate more production activities in a  given market than it would otherwise

-Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing  them to have to change strategies

Page Expired
It looks like your free minutes have expired! Lucky for you we have all the content you need, just sign up here