Chapter 6 Business - Government Trade relations

Chapter 6 Business - Government Trade relations - Lecture...

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Lecture notes for chapter 6 Business - Governement Trade Relations Chapter 6 Business - Government Trade relations 1. INTRODUCTION This chapter explores business-government trade relations, considers why nations erect barriers to trade, and explores the cultural, political, and economic motives for such barriers. It also examines the instruments countries use to restrict imports and exports, and how the global trading system promotes trade. 2. WHY DO GOVERNMENTS INTERVENE IN TRADE? Free trade is the pattern of imports and exports that would result in the absence of trade barriers. Governments impose restrictions on free trade for political, economic, and cultural reasons. A. Political Motives 1. Protect Jobs Short of an unpopular war, nothing will oust a government faster than high unemployment. All governments become involved when trade threatens jobs at home. 2. Preserve National Security
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Industries essential to national security receive government-sponsored protection for both imports and exports. a. Imports Governments restrict imports to guarantee domestic supply, which preserves national security. Many countries fiercely protect their agricultural sector for national security reasons because a nation that imports its food supplies could face starvation in times of war. b. Exports Governments have national security motives for banning certain defense-related goods from export to other nations. Agencies review requests to export technologies or products that have dual uses meaning they have both industrial and military applications. 3. Respond to “Unfair” Trade Many argue that it makes no sense for one nation to allow free trade if others do not. Governments threaten to close their ports or to impose high tariffs if another nation does not concede on a certain trade issue. 4. Gain Influence Governments of the largest nations may become involved in trade to gain influence over smaller nations. The United States wishes to maintain control over Central, North, and South America and the Caribbean basin.
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B. Economic Motives 1. Protect Infant Industries The infant industry argument says that emerging industries need protection from international competition during development until they become competitive internationally. Protection can be removed after it gains the knowledge to become innovative, efficient, and competitive. a. Drawbacks Governments may make errors in distinguishing between industries worth protecting and those that are not. Protection can cause domestic firms to grow complacent toward innovation and limit their competitiveness and increase consumer prices. Small promising ventures today can get private funding. 2. Pursue Strategic Trade Policy New trade theorists believe government intervention helps firms take advantage of economies of scale and enjoy first-mover advantages. First-mover advantages result because economies of scale limit the number of companies in an industry.
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