10.

Government Intervention

 Learning objectives In this chapter, you will learn about: - Government intervention in international business - Rationale for government intervention - Instruments for intervention - How firms should respond to government intervention - Type of regional integration - Leading economic blocks - Why countries pursue regional integration

 Governments intervene in trade and investment to achieve political, social, or economic objectives. Government intervention often results from protectionism: national economic policies design to restrict free trade and protect domestic industries from foreign competition. Protectionism often leads to such specific types of intervention as tariffs, nontariff barriers (like quotas) and arbitrary administrative rules designed to discourage imports.

 A tariff (also known as a duty) is a tax imposed by a government on imported products, effectively increasing the cost of acquisition for the customer. Nontariff trade barrier is a government policy, regulation or procedure that impedes trade through means other than explicit tariffs. Trade barriers are enforced as products pass through Customs which are the check points at the ports of entry in each country where government officials inspect imported products and levy tariffs.

 Quota is an often-used form of nontariff trade barrier which is a quantitative restriction placed on imports of a specific product over a specified period of time. Government intervention may also target FDI flows through investment barriers that restrict the operations of foreign firms. Why does a government intervene in trade and investment activities? There are four main motives:

1. Tariffs and other forms of intervention can generate a substantial amount of revenue. 2. Intervention can ensure the safety, security, and welfare of citizens. 3. Intervention can help a government pursue economic, political or social objectives. 4. Intervention can help better serve the interests of the nations firms and industries.

Rationale for government intervention

A) Defensive rationale - Protection of the national economy - Protection of an infant industry - National security - National culture and identity B) Offensive rationale - National strategic priorities - Increasing employment / generating tax revenues.

Some instruments for government intervention

Tariffs are usually ad valorem that is, assessed as a percentage of the value of the imported product. Alternatively, the government may impose a specific tariff a flat fee or fixed amount per unit of the imported product based on weight, volume or surface area.

-Because high tariffs inhibit free trade and economic growth, governments have tended to reduce tariffs over time. In fact, this was the primary goal of the GATT (now the WTO). Many countries have liberalized their previously protected markets, lowering trade barriers and subjecting themselves to greater competition from abroad. -Continued reductions in tariffs represent a major driver of market globalization.

 Import license: governments occasionally require importing firms to obtain a formal permission to import and this restricts imports similar to quotas. Currency control: restrictions on the outflow of hard currency from a country, or the inflow of foreign currencies. Subsidies: are monetary or other resources a government grants to a firm, usually intended either to ensure their survival by facilitating the production and marketing of products at reduced prices or to encourage exports.

How firms should respond to government intervention

Strategies for managers: Research to gather knowledge and intelligence Choose the most appropriate entry strategies Take advantage of foreign trade zones Seek favorable customs classifications for exported products Take advantage of investment incentives and other government support programs Lobby for freer trade and investment.