Chapter 7 - ARBUS 301 Chapter 7 Government Intervention and Regional Economic Intervention The Nature of Government Intervention Protectionism national

Chapter 7 - ARBUS 301 Chapter 7 Government Intervention and...

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ARBUS 301: Chapter 7: Government Intervention and Regional Economic Intervention The Nature of Government Intervention - Protectionism: national economic policies designed to restrict free trade and protect domestic industries from foreign competition o Usually done through tariffs, quotes, arbitrary administration rules o Tariff: tax imposed on imported products effectively increasing the cost of acquisition for the customer o Nontariff trade barrier: a government policy regulation or procedure that impedes trade through means other than explicit tariffs o This works because products have to pass through customs Customs: checkpoints at the port of entry in each country where government officials inspect imported products and levy tariffs o Quota: a quantitative restriction placed on imports of a specific product over a specified period of time o Target FDI flows with investment barriers o Leads to price inflation because tariffs can restrict the supply of a particular product and reduce available choices - Could lead to adverse unintended consequences Rationale for Government Intervention - Why does a government intervene? 4 motives 1) Tariffs and other forms of intervention can generate substantial revenue 2) Intervention can ensure the safety, security, and welfare of citizens (eg. prevent import of contaminated food) 3) Means for gov’t to pursue economic, political, or social objectives through policies that promote job growth and economic development 4) Intervention can help better serve the interests of the nations’ firms and industries - Trade investment barriers can be defensive or offensive o Defensive barriers to safeguard industries, workers, and special interest groups and to promote national security o Offensive barriers to pursue strategic or public policy objectives (eg. increasing employment or generating tax revenues) DEFENSIVE RATIONALE Protection of the National Economy - Cannot compete with developing countries and their low cost - Curtail the import and low-priced products and outsourced labor - Fear advanced economy manufacturers will be undersold, wages will fall, and home country jobs will be lost - Protectionism is at odds with the theory of comparative advantage because trade barriers interfere with country-specific specialization of labor - Reduces the availability and increases the cost of products sold in the home market - Protection can trigger other governments to impose their own trade barriers Protection of an Infant Industry - Companies in emerging industries are inexperienced and lack the latest technology to scale with foreign competitors - Temporary trade barriers on foreign imports to ensure young firms gain a large share of the domestic market
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- Protecting infant industries has allowed some countries to develop a modern industrial sector o Eg. Japan and Korea in automobile and consumer electronics - Infant industry may try to preserve and remain dependent on government protection National Security - Trade restrictions on products critical to national defense and security (eg. military tech,
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