Question

Please list and briefly explain the Industry-level arguments nations use for Trade Intervention.

And the  two National Economic Development Programs governments use to support domestic business and protecting them from foreign imports competition.

Answer 1

Case Specifics

The reason for implementing measures of protectionism or trade intervention is the fact, that some industries are in their native stages and do not have the ability to compete with the developed world which through the active use of technology and capital are able to produce goods at much lesser rates than developing or underdeveloped counter parts.

As industries begin developing, their availability of capital is low. As the industry matures and demand is created, capital rises and so does the overall technology and therefore reduces the costs of operations. Developed countries have already gone through this critical phase, whereas developing ones or underdeveloped ones are still in the process of developing themselves on these critical elements.

Thus, the need for protectionist measures, that help the industries in growing which is also known as trade intervention takes place. Another reason for the same is that there may be economic situations such as recession or inflation in the economy, whereby it may be necessary for governments to protect the fluidity of capital and therefore they may choose to increase or decrease the capital by changing taxation which is another form of trade intervention.

For example, during a recession the flow of capital in any economy is low and the demand for goods and services and the general price levels is low. Trade intervention during this time, to increase the demand for goods and services becomes essential as companies themselves are unable to correct this situation. The government lowers taxes which creates fluidity and the market becomes stable.

Two Government Programs to protect the economy from foreign trade are as follows: -

1) Tariffs: -

Tariffs are applied as taxes on imports of goods and services. As foreign companies with excess capital have the ability to produce at lower costs, it gives domestic makers an unfair disadvantage in which they face increased competition and lack of business. Tariffs increase costs of imported goods in a country and accordingly, the local firms get protected as their demand is not hampered due to imported goods being less expensive.

2) Quotas: -

Through the help of quotas, the government sets an upper limit to the amount of goods and services which can be imported into the country. As this falls down, the local producers are protected which can then supply alternatives in bulk. It makes imports expensive and ineffective in managing local demand and people need to shift over to domestic producers to gain money from such transactions.

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