International Trade Policy & Strategic Trade Policies

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  • 0:00 International Trade
  • 0:41 Political Government…
  • 2:35 Economic Government…
  • 4:00 Policy Instruments
  • 6:44 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Lombardo
Governments sometimes intervene in international trade. In this lesson, we'll examine the arguments against strategic trade policy and discuss the policy instruments used by governments to influence international trade flows.

International Trade

Did you know that countries around the world are limited when it comes to the amount of sugar that they can export to the United States? With our country's huge demand for sugar, why would our government cap the amount countries can export to the United States? The answer is a complicated one.

In this lesson, we'll examine why governments sometimes intervene in international trade, look at the different policy instruments available for governments to influence international trade, and discuss the arguments against the strategic trade policy. First, let's look at why there is governmental intervention in international trade, or the exchange of goods between national borders.

Political Government Intervention

There are actually two reasons for government in international trade: political and economic. The political arguments for trade intervention are plentiful. So, let's take a look at each one.

The first political reason is to protect jobs and overall industries from international business. For example, if countries were able to flood the U.S. market with their sugar, then domestic producers would lose business. Jobs, along with the entire sugar industry, could be lost if the sugar was able to be purchased cheaper in continuous amounts.

Another key political reason for government intervention in trade is the protection of national security. Sugar would not be classified in this example, but any defense-related industries, such as semiconductors or aerospace, would garner protection.

A more vengeful reason for intervention would be due to political retaliation as part of a foreign policy. For example, when the U.S. develops tension with a foreign country over terrorism support or the handling of an international crisis, one weapon in the government's arsenal is to set up trade restrictions to potentially hurt the country's economy.

The protection of consumers is another key reason for government intervention. This prevents countries from exporting products to the U.S. that are not up to U.S. standards. These products can hurt consumers. An example of this is the recent China lead paint disaster with children's toys.

Governments also use trade policies to improve human rights with other countries. Countries that employ strict human rights laws can be rewarded with a (MFN) most favored nation status. This designation means that the country is able to export goods with very low tariffs and other beneficial terms.

There are also economic reasons for government's intervention in trade policy.

Economic Government Intervention

Governments also intervene in trade policy for economic reasons. One of the biggest reasons is to protect new industries from fierce competition. This matter is especially important to the industries in developing countries who might not survive up against larger nations. One problem with this ideology is that protecting infant industries can sometimes create inefficient organizations that are not suited to eventually enter the global business arena. For example, due to protectionism means, Brazil was able to develop the world's tenth largest auto industry, due to tariff barriers and quotas. Unfortunately, when those protectionary means were removed, Brazil's foreign imports dramatically increased, and the auto industry could not compete with their competition's products.

The last economic reason for government intervention is based on the strategic trade policy, which cites that, due to scale economies, only a few large global firms would survive if not for government intervention. Many economists are concerned with this type of intervention, in that it hurts companies that are early entrants into a new product. Also, many economists feel that a government that pushes to have their domestic firm remain in control of an industry is acting selfishly and will end up hurting global competitors and the global economy.

Policy Instruments

Now that you have an understanding of why governments get involved in trade policies, let's learn about the different instruments that governments can use to affect trade. The oldest forms of trade policy are tariffs, which protect domestic industries from foreign competition by increasing the cost of imported goods through a tax. Tariffs are also beneficial to the home country as they raise revenue. A negative to tariffs is that consumers in the domestic market usually end up paying more for imports, due to the tariff. For example, the U.S. places a 35% tariff on Chinese auto tires and 40% tariff on Japanese leather.

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