Chap 8: Government Intervention in International Business

Export control

A government measure intended to manage or prevent the export of certain products or trade with certain countries.

Nontariff trade barrier

A government policy, regulation, or procedure that impedes trade through means other than explicit tariffs.

Quota

A quantitative restriction placed on imports of a specific product over a specified period of time.

Tariff

A tax imposed on imported products, effectively increasing the cost of acquisition for the customer.

Foreign trade zone (FTZ)

An area within a country that receives imported goods for assembly or other processing and re-export. For customs purposes the FTZ is treated as if it is outside the country's borders.

Customs

Checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs.

The nature of government intervention

Despite the value of free trade, governments often intervene in international business. Protectionism refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition. Government intervention arises typically in the form of tariffs, nontariff trade barriers, and investment barriers. Tariffs are taxes on imported products, imposed mainly to collect government revenue and protect domestic industries from foreign competition. Nontariff trade barriers consist of policies that restrict trade without directly imposing a tax. An example of a nontariff trade barrier is a quota, a quantitative restriction on imports. Managers find out what tariffs apply to their products by consulting harmonized code schedules, available from government agencies.

Consequences of government intervention

Economic freedom refers to the extent of government intervention in the national economy. Government intervention and trade barriers can raise ethical concerns that affect developing economies and low-income consumers. However, government intervention also can be used to offset such harmful effects.

Maquiladoras

Export assembly plants in northern Mexico along the U.S. border that produce components and typically finished products destined for the United States on a tariff-free basis.

Subsidy

Financing or other resources that a government grants to a firm or group of firms, intended to ensure their survival or success.

How firms can respond to government intervention

Firms should conduct research to understand the extent and nature of trade and investment barriers abroad. When trade barriers are substantial, FDI or joint ventures are often the most appropriate entry strategies. Where importing is essential, the firm can take advantage of foreign trade zones, areas where imports receive preferential tariff treatment. Government assistance in the form of subsidies and incentives helps reduce the impact of protectionism. Firms sometimes lobby the home and foreign governments for freer trade and investment.

Import license

Government authorization granted to a firm for importing a product

Instruments of government intervention

Governments also impose regulations and technical standards, as well as administrative and bureaucratic procedures. Countries may also impose currency controls to minimize international withdrawal of national currency. FDI and ownership restrictions ensure that the nation maintains partial or full ownership of firms within its national borders. Governments also provide subsidies, a form of payment or other material support. Foreign governments may offset foreign subsidies by imposing countervailing duties. With dumping, a firm charges abnormally low prices abroad. A government may respond to dumping by imposing an anti-dumping duty. Governments support homegrown firms by providing investment incentives and biased government procurement policies.

Rationale for government intervention

Governments impose trade and investment barriers to achieve political, social, or economic objectives. Such barriers are either defensive or offensive. A key rationale is the protection of the nation's economy, its industries, and its workers. Export controls limit trade in sensitive products deemed critical to national security. Governments also impose barriers to protect infant industries.

Countervailing duty

Increased duties imposed on products imported into a country to offset subsidies given to producers or exporters in the exporting country

Evolution of government intervention

Intervention has a long history. In the late 1800s, many countries imposed substantial protectionism. From the 1930s onward, countries reduced trade barriers worldwide. The nature and outcomes of government intervention have varied across Latin America, Japan, India, and China. The most important development for reducing trade barriers was the General Agreement on Tariffs and Trade (GATT), replaced in 1995 by the World Trade Organization (WTO). The 150 members of the WTO account for nearly all world trade

Protectionism

National economic policies designed to restrict free trade and protect domestic industries

Dumping

Pricing exported products at less than their normal value, generally less than their price in the domestic or third-country markets, or at less than production cost

Local content requirements

Requirement that a manufacturer include a minimum percentage of added value that is derived from local sources.

Currency control

Restrictions on the outflow of hard currency from a country or the inflow of foreign currencies.

Antidumping duty

Tax charged on an imported product whose price is below usual prices in the local market or below the cost of making the product

Intervention and the global financial crisis

The crisis arose from inadequate regulation in the banking and finance sectors. In response, governments are implementing new regulations. Governments are also increasing protectionism, to safeguard jobs and wage levels, and providing new subsidies to their countries' industries. Government reforms are having ripple effects that extend beyond the banking and financial areas.

Investment incentive

Transfer payment or tax concession made directly to foreign firms to entice them to invest in the country.