What are the 5 Reasons for Government Intervention in International Trade?

Protagonists of national security argument claim that a nation should be. Self-reliant and be ready to pay for inefficiency when the case relates to national security. Recently, Pentagon has pressed for development of flat-panel industry even though the same can be bought much cheaper from Asian countries. One must remember that in today’s world no nation can be fully self-reliant.

2. Foreign Policy Goals Argument:

Commerce has become an important tool to achieve foreign policy goals. Preferential treatment may be given to a country or countries with which strong relations are to be built. Pakistan was rewarded when it provided its airbase to the US during the Afghan war. Iraq was punished through imposition of trade sanctions after it invaded Kuwait.

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The US has maintained long- running trade sanctions against Cuba. At times trade sanctions have been applied against the countries doing trade with such countries. Iran, North Korea and Libya were also in the list of unfavorable nations of the US. India was denied high tech computers when it exploded nuclear bomb in 1998.

If a nation is to be favored, it may be granted ‘most favored nation’ status. The EU has granted preferential treatment to bananas from certain former colonies. Governments, sometimes, restrict export of strategic goods even to friendly nations in order to ensure that these goods do not fall into the hands of potential enemies. The US government prohibits US companies to export powerful encryption technologies, for this reason. Restrictions may be imposed even on nondefence goods to prevent another country helping enemy.

3. Strategic Trade Policy Argument:

P. Krugman proposed a new trade theory. The theory argues that an industry has economies of scale and the world market will profitably support only few firms. Countries may predominate in export of certain products simply because they had firms who were able to capture first-mover advantages. The dominance of Boeing in the commercial aircraft industry is attributed to such factors.

According to strategic trade policy argument, a government should use subsidies to support such firms; the second argument is that it might pay government to intervene in an industry if it helps its domestic firms overcome the barriers to entry created by foreign firms that have already reaped the first-mover advantages. This has been the logic of government support of Airbus Industries.

The governments of Britain, France, Germany and Spain had given a subsidy of $13.5 billion to Airbus. The US government had also given huge R&D grant to Boeing during 1950w and 1960s. Japanese government did the same for Japanese semi-conductor industry to compete with the first-mover advantage-holder semi-conductor industry of the US.

4. Safety Argument:

Governments have all over been concerned to protect consumers from ‘unsafe’ products. Most countries prohibit imports of marijuana and products made from endangered animal species. The US in its desire to increase public safety, permanently banned in 1978 the imports of 58 types of military-style assault weapons. Chile restricted imports of Salmon eggs by contending that they might be diseased. The EU banned the import of hormone-treated beef to protect its populace from the probable negative health consequences.

Recently, many countries shifted orders for apparel from China to India and Pakistan, as China had been reeling under SARS (severely acute respiratory syndrome). Government of India was in two minds to allow or disallow use of GM (genetically modified) cotton seeds. Many of the EU nations, such as, Germany, Switzerland, Austria, and Luxembourg are against genetically altered organisms. Developed countries are very tough with regard to quality when the agri commodities come from developing countries.

In medical services, the interests of patients are protected by the enforcement of standards for the qualifications of medical doctors and others.

5. Emotional Argument:

Many arguments may have no economic rationale but they are so strong that no logic works. Rice is a very emotional issue among the Japanese. For years it has been told that rice grown outside Japan is not suitable for their palates and also not healthy. China limits rice import since rice farming has been a historical and cohesive force in uniting Chinese families.

Preserving cultural identity and heritage has been a very strong argument. Countries, at times, prohibit import of products and services that might undermine this identity. The French government protects its movie industry by limiting foreign films on French television and gives subsidies to the French film makers to produce films.

It is out of fear that the English language and Anglo-Saxon culture will weaken its cultural identity. Similarly, Canada limits foreign publishing, cable TV, bookselling, and musical performance. India does not allow foreign investment in print media out of emotions.

Many democratic countries create barriers by raising the bogey of human rights. China was not granted ‘most favored nation’ status for a long time due to its poor human rights record. At other times restrictions are placed against a country to protest against child labor.-Many a time, punitive measures are undertaken on the perception that the other country is not providing free access to its markets.

Environmental issues have also been the reasons for imposition of trade restrictions. Many nationalists and patriots argue for restrictions on the ground that international trade will lead to outflow of wealth from local people to foreigners, as is locals will get no value in return.

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