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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