Essay: How governments intervene in the international trade process

A government’s political objectives often contradict economic proposals so that its market efficiency and international competitiveness become better. First of all the chapter discusses the different ways in which governments intervene in the international trade process, why do they do so and the economic and non-economic effects their actions have on the participants in the process. After that, it studies the role of the General Agreement on Tariffs and Trade and the World Trade Organization in the international trade arena. Finally, it discusses the different ways in which firms can deal with adverse trading conditions.

10.2 OBJECTIVES
In this unit we shall study about:
‘ Conflicting Results of Trade Policies
‘ Economic Rationales for Governmental Intervention
‘ Noneconomic Rationales for Government Intervention
‘ Instruments of Trade Control
‘ Dealing with Governmental Trade Influences

10.3 CONFLICTING RESULTS OF TRADE POLICIES
The governments not just intervene in trade to attain economic, social and/or political objectives, at also pursue political rationality along with it. However, it’s almost impossible to help the struggling constituencies without penalizing the prosperous. The conflicting goals are not the only threat; retaliation against protectionist actions is another persisting threat.
10.4 ECONOMIS RATIONALES FOR GOVERNMENTAL INTERVENTION
Another reason why governments impose policies on their agricultural sector is that they believe because of their intervention the rate of income growth would increase. Few examples of such interventions that lead to increased economic activity are investment policies-the provision of public goods, such as the research and development of new technologies and infrastructural development (roads, schools, health facilities). Sometimes, the private sector won’t be able to make these investments as private investors would not be likely to get the full benefit from investment in public goods because it is not possible or too expensive to exclude the non service payers created. It also happens that the consumption by one consumer fails to reduce the availability of the good or service for others. Consumers therefore don’t go in to paying for the good or service hence there is no market formation. Finally, due to the excessive capital requirements of the investment the private sector won’t be able to mobilize necessary financial resources. The public sector regarding most of these investments is capable of recovering the costs of intervention through user fees or through taxation of the commodities or the regional populations benefitting from the investment.
The second rationale for government intervention in the agricultural sector is the correction of market failures. In case of market imperfections, the prices of goods or services will not reflect their true scarcity values because the private sector cannot develop the institutions required for efficient market functioning. In rural credit markets there may be a lack of information on alternative lending and borrowing opportunities in other regions, or there may be no formal lending institutions to mobilize savings all of which may result in market failure. Another such example is market power; private sector suppliers (or consumers) can influence prices because they are not abundant and also because there is a lack of other market outlets for the buyers or sellers. These conditions are mostly found in factor markets (those for labour, credit, and land) and also sometimes in remote rural commodity markets.

10.4.1 Unemployment
Among the most effective types of political pressure there are the organized labor’s efforts to preserve domestic jobs. When imports are limited, local jobs are retained as firms and consumers have only one choice, to purchase domestically produced goods and services. For the effectiveness of such measures in limiting unemployment however the protectionist country has to be relatively small. These measures may also lead to retaliation. Thus the governments have to maintain balance between the costs of higher prices and the costs of unemployment and displaced production resulting from free trade.

10.4.2 Infant-Industry Argument
According to the infant industry argument, first presented by Alexander Hamilton in 1792, a government should protect emerging industries so that the country gets a comparative advantage from international competition till the time its firms are ready to compete in world markets effectively. Eventual competitiveness happens due to the movement along the learning curve along with the efficiency gains from achieving the economies of large-scale production. Nonetheless, for infant-industry protection a particular segment of the economy (typically local consumers) needs to incur the initial higher cost of inefficient local production.

10.4.3 Industrialization Argument
As in olden days, many of today’s emerging economies are using trade protection in order to encourage local industrialization.

1. Use of Surplus Workers.
It is easier to use surplus workers to increase manufacturing output than to increase agricultural output. But, it may also lead to decrease in agricultural output and increase in demand for social services, therefore making the improved agriculture practices more suitable in achieving economic success.

2. Promoting Investment Inflows.
Import restrictions may increase foreign direct investment in case foreign firms do not want to lose a lucrative or potential market. Policy makers are attracted by the possibility of FDI inflows resulting in increased local employment.

3. Diversification.
Price variations can have a large impact on economies relying on limited commodities for job creation and export earnings. Contrary to expectations, however, A country’s industrial base needs to be expanded or else manufacturing may result in the shifting of that dependence from the basic commodities to the downstream manufactured goods produced from them.

4. Greater Growth for Manufactured Products.
Terms of trade refers to the quantity of imports bought by a given quantity of a country’s exports. Many emerging nations have experienced declining terms of trade since there has been a gradual rise in the prices of raw materials and agricultural commodities while the prices of finished goods rose quite fast. Also due to the changes in technology there is less need of many raw materials. Further, cost savings realized from manufactured products result in higher profits and wages and in the increase in the industrialization process.

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