Module 5: IB-300

Strategic Trade Policy: National Asset or Liability?

Strategic Trade Policy: Use of trade policy instruments, including tariffs, subsidies, or quotas, to shape companies’ strategic interactions

Nationalization

The process of taking privately owned property and converting it to a publicly owned asset (gov steps in and takes private property for itself)

• motivated by the belief that government can manage a public good or necessity better than the private, profit-driven sector

• 2 approaches: communist and European approach

Nationalization: Communistic

• The state owns and directly controls major industries (or all industries, depending on how far the system goes)

• aims to prevent exploitation by private industries and provide universal access to essentials

Nationalization: European approach

• does not aim to eliminate private ownership, rather, they selectively nationalized key industries while leaving most of the economy in private hands

• can provide stable, affordable public services and reduce inequality without centralizingthe  entire economy

Privatization

The government sells a full organization or part to the open market in order to privatize the company 

• to gain more efficiency in business operations, raise money, or reduce the government’s bureaucracy 

• Money can be invested, for example education or things that benefit society

Reasons why governments restrict trade

• protect infant industries, national security reasons, and promote fair competition

Reasons why governments restrict trade: Protect National Defense

• Governments may restrict or regulate trade in specific industries (e.g., defense, technology, energy) to protect national security

• Economists say this is a weak argument and is used to gain an emotional advantage

Reasons why governments restrict trade: Impose sanctions

• inflict economic damage, punish, or encourage change of behavior

• seldom achieve their goal

• product collateral economic damage

Reasons why governments restrict trade: protect an infant or dying industry

• give infant industries chance to grow and build comparative advantage

• without this lower-cost imports will underprice in local market

• slow down impact of dying industry—move capital into other sectors

Reasons why governments restrict trade: Protect Domestic Jobs

• “Cheap foreign labor” argument does not hold up, wages don’t account for all production costs

• argument has strong emotional appeal

Reasons why governments restrict trade: Ensure Fair Competition

• import duty to bring the cost of imports up to the cost of domestic goods

• Don’t ban imports, but equalize them

• Consumer impact: Import duty increases the price they pay

Reasons why governments restrict trade: Protect consumers

• Governments limit importation of counterfeit goods and any good or services that may threaten physical, mental or social well-being

Different types of tariff barriers 

What is meant by government stability?

• maintains itself in power

• fiscal, monetary, and political policies predictable and and not subject to sudden, radical changes

• protection from unfair competition

• protection from terrorism, cyber crime, and other threats

Democracy practices and % of the world that live in a full democracy?

• power comes from the people

• strong protection for civil liberties

• 5% of the world live in a full democracy

Authoritarian practices and % of the world is under authoritarian rule?

• power is concentrated in one leader, party, or small elite

• civil liberties are restricted; dissent is discourages or punished

• 1/3 of the world live in an authoritarian regime

Democracy Index

• offers a global snapshot of the state of democracy, measuring political freedoms, civil liberties, and how power is exercised in practice

Different types of tariff barriers

• import tariffs and export tariffs

Import tariffs

• taxes on imported goods for the purpose of raising their price to reduce competition for local producers or stimulate local production

Export tariffs

• taxes on exported goods for the purpose of restricting exports of certain items (maintain domestic supply or national security)