IBUS1101 Lecture Notes - Lecture 7: World Trade Organization, Free-Trade Area, Common External Tariff
5 Jun 2018
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Department
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Professor
Understand the nature of government intervention.
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Know the instruments of government intervention.
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Explain the evolution and consequences of government trade intervention.
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Describe how firms can respond to government trade intervention.
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Understand regional integration and economic blocs.
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Identify the leading economic blocs.
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Understand the advantages and implications of regional integration
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LO:
Protectionism is perhaps the leading manifestation of government intervention in
international business.
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Protectionism typically arises in the form of tariffs, nontariff barriers such as quotas, and
administrative rules designed to discourage imports.
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Protectionism= national economic policies designed to restrict free trade and protect
domestic industries from foreign competition.
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A tariff (also known as a duty) = tax a government imposes on imported products, effectively
increasing the cost of acquisition for the customer.
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A nontariff trade barrier = government policy, regulation, or procedure that impedes trade
through means other than explicit tariffs.
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Trade barriers are enforced as products pass through customs, the checkpoints at the ports of
entry in each country where government officials inspect imported products and levy tariffs.
An often-used form of nontariff trade barrier is a quota, a quantitative restriction placed on
imports of a specific product over a specified period. Government intervention may also
target foreign direct investment (FDI) flows via investment barriers that restrict the operations
of foreign firms.
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Government intervention affects economic activity in a nation by hindering or helping the
ability of its homegrown firms to compete internationally. Often companies, labor unions, and
other special interest groups convince governments to adopt policies that benefit the
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The Nature of Government Intervention:
Defensive Rationale
Protection of the national economy
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Protection of an infant industry (emerging industry)
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National security = Countries impose trade restrictions on products viewed as critical to
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Four major defensive motives are particularly relevant
Ch7: Government Intervention and Regional Economic
Integration
Wednesday, 18 April 2018
2:12 PM
Textbook Page 1
National security = Countries impose trade restrictions on products viewed as critical to
national defence and security. These include military technology and computers that help
maintain domestic production in security-related products
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National culture and identity
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Offensive rationale:
National strategic priorities = encourage the development of industries that bolster the
nation’s economy. It is a proactive variation of the infant industry rationale and related to
national industrial policy
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Increasing employment
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Offensive rationales for government intervention fall into two categories
Tariffs
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Quota
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Local content requirements
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Government regulations and technical standards
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Administrative or bureaucratic procedure
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Non-tariff trade barriers = are government policies or measures that restrict trade without
imposing a direct tax or duty. They include quotas, import licenses, local content
requirements, government regulations, and administrative or bureaucratic procedures. The
use of nontariff barriers has grown substantially in recent decades. Governments sometimes
prefer them because they are easier to hide from the WTO and other organizations that
monitor international trade.
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Currency controls restrict the outflow of widely used currencies, such as the dollar, euro,
and yen, and occasionally the inflow of foreign currencies. Controls can help conserve
especially valuable currency or reduce the risk of capital flight. They are particularly
common in developing economies. Some countries employ a system of dual official
exchange rates, offering exporters a relatively favorable rate to encourage exports,
while importers receive a relatively unfavorable rate to discourage imports.
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Currency controls both help and harm firms that establish foreign subsidiaries through
FDI. They favor companies when they export their products from the host country but
harm those that rely heavily on imported parts and components. Controls also restrict
the ability of MNEs to repatriate their profits—that is, transfer revenues from profitable
operations back to the home country
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Investment barriers
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Subsidies are monetary or other resources that a government grants to a firm or group
of firms, intended either to encourage exports or simply to facilitate the production and
marketing of products at reduced prices, to help ensure that the involved companies
prosper.
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Subsidies come in the form of outright cash disbursements, material inputs, services,
tax break and investment incentives
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Subsidies and other government support programs
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Instruments of Government Intervention
Textbook Page 2
Document Summary
Explain the evolution and consequences of government trade intervention. Describe how firms can respond to government trade intervention. Understand the advantages and implications of regional integration. Protectionism is perhaps the leading manifestation of government intervention in international business. Protectionism= national economic policies designed to restrict free trade and protect domestic industries from foreign competition. Protectionism typically arises in the form of tariffs, nontariff barriers such as quotas, and administrative rules designed to discourage imports. A tariff (also known as a duty) = tax a government imposes on imported products, effectively increasing the cost of acquisition for the customer. A nontariff trade barrier = government policy, regulation, or procedure that impedes trade through means other than explicit tariffs. Trade barriers are enforced as products pass through customs, the checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs.
