Challenge 5: Government Intervention in IB

Government Intervention

The practice of government to intervene in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.

Why Governments Intervene in Trade

- Economic, political, and social objectives

- Strategic priorities (e.g., high-value industries)

- Revenue generation (e.g., tariffs)

- National security & protection of infant industries

- Cultural preservation and job creation

Instruments of Government Intervention

- tariffs

- nontariff trade barriers

- investment barriers

- subsidies and other government support programs

Tariffs

- Taxes on imported goods

- Increases cost to the importer,

exporter, and usually the buyer of the product; discourages product imports; generates government revenue

Non-Tariff Barriers

quotas, licenses, local content rules

Investment barriers

Rules or laws that hinder foreign direct investment; FDI limits, ownership restrictions

Quota

- Quantitative restriction on imports of a product during a specified period of time.

- Gives early importers monopoly power and the ability to charge higher prices; harms late importers; usually results in

higher prices to the buyer

Local Content Requirements

- Requirement that firms include a minimum percent of locally sourced inputs in the production of given products or services.

- Discourages imports of raw materials, parts, and supplies, which harms manufacturers' sourcing options; may result in higher costs and lower product quality for buyers

Regulations and technical standards

- Safety, health, or technical regulations; labeling requirements.

- May hinder the entry of imported

products and reduce the quantity of available products, resulting in higher costs to importers and buyers

Administrative and bureaucratic procedures

- Complex procedures or

requirements imposed on importers or foreign investors that hinder trade and investment.

- Slows the import of products or services; hinders or delays firms' investment activities

FDI and ownership restrictions

- Rules that limit the ability of

foreign firms to invest in certain industries or acquire local firms.

- Limits how much foreigners can invest in a country, and/or the proportion of ownership that foreigners can hold in firms in the country

Subsidies & and countervailing duties

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

Retaliations are labeled as countervailing duties

- Increases the competitive advantage of the grantee while diminishing the competitive advantages of those that do not receive the subsidy

Defensive Trade Barriers

- tariffs

- quotas

- local content requirements

- regulations and technical standards

- Administrative and Bureaucratic Procedures

Offensive Trade Barriers

- Subsidies & and countervailing duties

- FDI and ownership restrictions

Customs

the official government authority or agency responsible for regulating and monitoring the flow of goods entering (imports) and leaving (exports) a country

Foreign Trade Zones (FTZ)

-secure sites in U.S. under supervision of U.S. Customs

- offer storage, exporting, manufacturing, assembly, repacking, testing, and repairing services

Dispute between Airbus and Boeing

- China imposed 25% tariff on US aircraft which lowered Boeing's stocks

- China could buy from France's aircraft company, Airbus, instead

Firms use foreign trade zones to ________.

assemble foreign dutiable materials and components into finished products, which are then re-exported

_____ is(are) at odds with free trade, the unrestricted flow of products, services, and capital across national borders.

Government intervention

What is the primary purpose of the European Union's carbon border adjustment mechanism (CBAM)?

to ensure imported goods reflect their carbon emissions and prevent carbon leakage

A quantitative restriction on specific imports from a specific country for a set period of time is referred to as

quota

Governments impose export controls for the purpose of ________.

preventing the export of certain products to certain countries

_____ are checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs

Customs

Finances or other resources that a government grants to a firm or group of firms to ensure their survival or success is referred to as a

subsidy

On what basis is the US trying to ban or limit TikTok's operations in the US?

National security

Governments impose defensive barriers to _____.

Promote national security

Protect workers

Safeguard industries