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Lesson#13
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ROLE OF GOVERNMENTS IN INTERNATIONAL MARKETS
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ROLE OF GOVERNMENTS IN INTERNATIONAL MARKETS
Type of trading environments in countries:
There are two types of trade regimes in countries around the
world;
• Free Trade
– National
governments exert minimal influence on exporting and importing decisions of
private
firms and individuals
• Managed Trade
(also called fair trade)
– National
governments intervene to ensure that exports / international business of local
firms have
equitable share of foreign markets – to minimize domestic job
losses and market share in specific
industries
Rationales for trade intervention by governments:
Governments intervene in trade in their countries and abroad for
a variety of reasons. The most common
reasons are discussed below;
Industry-level needs
– National defense
argument – to promote local defense industry.
– Strategic
industry argument – to support development of essential industry in the country
(such as
textiles in Pakistan)
– Infant industry
argument – to support emerging industry in the country, to protect it in the
infancy
stage from foreign competition.
– Maintenance of
existing jobs – governments intervene to support certain industries to maintain
existing jobs in the economy.
– Government also
intervene to help make local firms compete internationally, so that the export
from the country increase.
National-level needs
– Governments also
intervene as part of the economic development programs
• import
substitution / export promotion
– Government also
intervene as a result of public choice (to pacify pressures from various
interest
groups)
• unemployment
level
•
political/interest group pressures
– Governments also
intervene in trade to ensure required revenue earnings to manage the
government and its programs.
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– Intervention in
trade is also done for regulating demand of certain products (cigarettes,
alcohol
etc.).
– Government also
intervene in trade to influence economic relationships with other countries
• trade deficit /
political or reactionary measures
Other needs
– For achieving
balance of payments adjustments.
– For price-control
objectives.
– For maintaining
spheres of influence by the countries and their governments.
– For preserving
national identities in certain industries.
– Governments also
intervene due to mere bureaucratic attitude
Forms of government controls:
Government exercise various types of tools to control / regulate
foreign businesses;
Control over foreign owned businesses through
– Taxes, ownership
controls, controls on profit remittances, controls on borrowings / investments
– licenses
Tariff
(taxes placed on goods involved in international trade)
– export duties
– import duties
– transit tariff
Form of taxes on international trade can be
– % of value (ad
valorem)
– fixed amount
on some unit of measurement (specific duty)
– a combination
(compound tariff)
Non tariff barriers can be
– direct price
influences
• export subsidies
• customs valuation
• other direct
price influences
– quantity controls
• import / export
quotas
• buy-local
legislation
• voluntary export
restraint (VER)
• embargo
– other controls
• licensing,
foreign exchange controls, administrative delays, reciprocal requirements,
restriction on services, technical & govt. regulations
Promotion of exports by governments:
Governments work to promote exports in a variety of ways. The
common forms are given in the
following;
Export subsidies
– tax breaks
– direct
payments to producers
– product price
support
– cheaper
resources (i.e. land, utilities)
– public
services provided at lower cost
Establishment of export trade / processing zones
Export financing programs
Training / assistance programs
Other governmental assistance
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