Physical and Social Factors Affecting the Flow of Goods and Services

In response to a variety of physical and social factors (i.e., political/legal, behavioral, economic, and geographic), governments enact measures designed to either enhance or restrict international trade flows. These measures invariably affect the competitive environment in which companies operate, either enhancing or hindering their capacity to compete on an international scale. To an extent, of course, the converse is also true: companies influence government trade policies that affect their activities.

Why Governments Intervene in Trade

All countries seek to influence trade, and each has economic, social, and political objectives:
• Conflicting objectives
Interest groups

Import Restrictions to Create Domestic Employment

May lead to retaliation by other countries

Small economies are less likely to retaliate

Also, other economies usually don’t retaliate with small economies that limit imports

May decrease export jobs because of price increases for components and lower incomes abroad

The unemployed can form an effective pressure group for import restrictions. Workers displaced because of imports are often the ones who are least able to find alternative work. In addition, displaced workers often spend their unemployment benefits on living expenses rather than on retraining—in the hopes that they will be recalled to their old jobs.

When they do seek retraining, many workers, especially older ones, lack the educational background necessary to gain required skills. Worse still, some train for jobs that do not materialize.

Although every country has full employment as an economic objective, using trade policy to achieve this is problematic.

Even if successful, the costs may be high and need to be borne by someone.

The Prospect of Retaliation

Trade restrictions designed to support domestic industries typically trigger a drop in production in some foreign countries, and they react.

Cons of limiting imports:

1. mean fewer import-handling jobs,

2. it will cause lower sales in other industries because they must incur higher costs for components.

3. Imports stimulate exports, although less directly, by increasing foreign income and foreign-exchange earnings, which are then spent on new imports by foreign consumers. Thus, restricting earnings abroad will have some negative effect on domestic earnings and employment.

Analyzing Trade-Offs

* Limiting imports cause higher prices and higher taxes vs. costs of unemployment from not limiting important *

Infant Industry argument

Some newly established activities are initially high cost relative to established foreign enterprises and it requires time for them to become competitive

The industry requires a temporary period of protection or assistance during which its costs will fall enough to permit it to survive international competition without assistance.

The infant-industry argument says that production becomes more competitive over time because of:
• Increased economies of scale
• Greater worker efficiency

The infant-industry argument presumes that the initial output costs for an industry in a given country may be so high as to make its output noncompetitive in world markets. Eventual competitiveness is not the reward for endurance but the result of the efficiency gains that take time. Therefore, the industry’s government needs to protect an infant industry long enough for its fledgling companies to gain economies of scale and their employees to translate experience into higher productivity. Although it’s reasonable to expect production costs to decrease over time, there is a risk that costs will never fall enough to create internationally competitive products. This risk poses two problems.

Determining Probability of Success

First, governments must identify those industries that have a high probability of success. Some