Governmental Influence on Trade

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Chapter SEVEN
governmentAL INFLUENCE ON TRADE

OBJECTIVES

To realize the rationales for government policies that enhance and restrict trade •To interpret the effects of pressure groups on trade policies •To understand the comparison of protectionist rationales used in high-income countries with those used in low-income countries’ economies •To comprehend the potential and actual effects of governmental intervention on the free flow of trade •To understand the major means by which trade is restricted and regulated •To grasp the business uncertainties and business opportunities created by governmental trade policies

Chapter Overview

A government’s political objectives are sometimes at odds with its economic proposals to improve a nation’s market efficiency and international competitiveness. Chapter Seven begins by discussing the reasons why and the ways in which governments intervene in the international trade process. It then examines the economic and the noneconomic effects of those actions upon participants in that process. Finally, the chapter considers the principle instruments of trade control, including both tariffs and nontariff barriers, and concludes with a discussion of ways in which firms can deal with adverse trading conditions both at home and abroad.

Chapter Outline

OPENING CASE: TEXTILE AND CLOTHING TRADE [See Fig. 7.1.]
The United States and Europe have a long history of protecting their domestic textile and garment manufacturing industries. Negotiated in response to political pressures from firms and workers in those countries, the Multifiber Arrangement (MFA) of 1974 permitted importing countries to (i) place tariffs on imported textiles and clothing and (ii) negotiate quotas with exporting countries. The arrangement included more than forty countries whose firms were heavily tied to the U.S. and European textile and garment markets. (Under the Arrangement tariffs were very complex, but in the United States, for example, tariffs averaged about 15 percent.) However, as the high-income countries became increasingly concerned about intellectual property rights and the protection of trade in services such as banking, they began to dismantle the MFA in exchange for concessions with respect to the curtailment of piracy and access to services markets. Thus, the origin of imports was dramatically altered as Chinese and Indian firms gained North American market share at the expense of both U.S. and Latin American competitors; similarly, Chinese and Indian firms gained European market share at the expense of West European, East European, and Turkish competitors. In the first month following the end of the MFA in 2005, the United States lost 12,000 jobs in related industries; Latin America experienced the closing of 18 apparel factories very soon thereafter.

Teaching Tips: Carefully review the PowerPoint slides for Chapter Seven.

I.INTRODUCTION
In principle, no country permits a totally unregulated flow of goods and services across its borders. Likewise, governments may choose to enable the global competetiveness of their own domestic firms. Protectionism refers to those government restrictions and incentives that are specifically designed to help a county’s domestic firms compete with foreign competitors at home and abroad. The rationale for such policies can be economic or noneconomic in nature. [See Fig. 7.2.] Whenever governments choose to impede the flow of imports and/or encourage the flow of exports, they simultaneously provide direct and/or indirect subsidies for their domestic firms.

II.CONFLICTING RESULTS OF TRADE POLICIES
While governments intervene in trade in order to attain economic, social, and/or political objectives, they also pursue political rationality when they do so. Officials enact those trade policies they feel will best protect their nations and citizens—and perhaps their personal political longevity. However, aiding...
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