Governments intervene in international trade to achieve political, social, or economic objectives. They do this through quotas, tariffs, and state subsidies.
Governments impose tariffs on imports to protect their domestic industries. While this raises the prices of imported goods, it usually only does so in a minor way for households.
Tariffs
The government can impose tariffs on imported goods to encourage domestic industries, address trade imbalances, or respond to unfair trading practices. These policies raise consumer costs but can also create jobs and improve economic outcomes. However, they must be balanced with the need for free markets and must take into account the interests of foreign nations.
Mercantilist governments often attempt to achieve political objectives through trade interventions, such as reducing their deficits and stimulating their economies. These policies typically introduce significant distortions into global trade and capital flows, and will eventually backfire and lead to unwanted trade deficits.
One of the most popular arguments for government intervention in international trade is that countries need to protect infant industries until they can compete with the established markets of other nations. This argument has been used to support industrialization in developing economies and to promote import substitution. But it does not hold up to scrutiny. For example, a beggar-thy-neighbor policy that boosts national income by subsidizing the production of a specific industry will provoke retaliation from other countries.
Subsidies
Governments often subsidize their domestic industries to help them compete against cheaper imports. They do this by giving financial aid or setting standards, certification needs, and quotas on the amount of goods that can be imported. These measures raise the cost of imports, restrict supply and choice for consumers, and distort markets. In some cases, they also encourage overproduction. These policies undermine free trade, but they can be justified by political and economic goals.
Political arguments for subsidies include preserving jobs, protecting important industries, and retaliating against unfair competition. They may also be used to promote national security and advance other policy goals. Subsidies can also be useful in correcting market failures, such as when the cost of producing a helpful good or service exceeds its demand.
Economic arguments for subsidies include achieving a first-mover advantage in emerging industries (as with Airbus and semiconductors). They can also be useful in helping firms recover from the initial losses of commercializing new technologies. However, it is crucial to understand that these incentives can discourage innovation and create inefficiencies in markets.
Import quotas
Import quotas are a form of trade protectionism that limits the amount of imported goods. These restrictions can lead to higher prices for consumers and lower economic efficiency overall. This is known as the “deadweight loss” of quotas.
The primary purpose of quotas is to protect domestic industries from cheaper foreign imports. However, there are many other uses for quotas. For example, quotas can be used to stabilize prices in domestic markets or to pressure other countries to reduce their tariffs.
Quotas also can be used to promote domestic business. By limiting the amount of imported products, local businesses can increase their sales. This can encourage domestic manufacturing and agriculture, which in turn can boost the economy.
In addition to protecting domestic businesses, quotas can help the government save foreign currency. This is particularly important if the country has a large deficit in its balance of payments. The foreign exchange savings can be put toward other spending priorities. Moreover, quotas can restrict competition from foreign suppliers, which may result in reduced product variety or quality.
Voluntary export restraints
Voluntary export restraints (VERs) are an example of government-sponsored protectionism that limits the amount of a commodity that can be exported to another country. While they are not as effective as a tariff or import quota, VERs can have serious effects on international trade. These restrictions limit the supply of a good and increase prices. For example, if the United States restricts wheat exports to Mexico, prices for Mexican wheat and American wheat will rise.
VERs are usually implemented at the request of importing countries that seek protection for domestic producers. These arrangements have been around since the 1930s, but became popular in the 1980s. However, they are no longer as effective as before the Uruguay round and the updating of the GATT in 1994. They can also have negative economic and social impacts on the importing country. They shrink market competition for the domestic industry, which allows them to raise prices and profits. Consumers suffer because they are forced to purchase expensive imported goods. In the case of Japan’s VER on automobile exports to the US, the initial agreement limited car exports to the US to 1.68 million in 1981, then increased to 2.30 million in 1985 before it was terminated in 1994.
Antidumping duties
The dumping of goods is a serious violation of free trade principles and can result in severe economic injury. Companies can petition government agencies to investigate and impose antidumping duties to level the playing field. However, a number of issues can affect the outcome of these investigations. For example, a company that petitions for antidumping duties must submit a detailed case record with information that agencies can verify and challenge. This can prevent companies from filing baseless petitions.
In the event of a dumping finding, the investigating authority must determine whether two fundamental criteria have been met: (1) that dumping has occurred, and (2) that the domestic industry is suffering material injury. This is usually done through a lengthy investigation that examines all relevant economic factors.
The Tokyo Round Code, which entered into force in 1980, provided substantial guidance on these issues. However, it did not provide specific guidelines on how to determine dumping and injury. This led to a large number of contested cases. In recent years, a number of developing countries have begun to adopt formal antidumping measures. These include Mexico, India, and Korea.
