The governments often interfere in trade and restrict free trade activities for three reasons: political, cultural, or economic, or some combination of all the three. In certain cases, states interfere in trade activities when the need arises to support their domestic business activities. Besides, the governments can intervene in rigid economic conditions when workers pressurize their governments to cut down on imports, when they have feelings of insecurity that they will be dismissed from their jobs, or fearing that their living standards would be affected.
PART A. What are some political reasons why governments intervene in trade?
Explain the role of national security concerns.
Political Reasons for Government Intervention
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The governments of all countries intervene in trade activities for economic growth and for various political reasons. Some of the reasons for governments intervening are explained in this article.
Political motives are used by ruling governments to implement their policies. More often, government’s officials base their trade-focused decisions on personal motives and the interests of their political party. The political grounds responsible for the state interference in trade are the following:
- Protection of jobs: A stiff competition was faced by China Lucky Film from dominating Kodak to capture the largest share of the film market in China. Anticipating the annihilation of CLM, the government offered $240 million in loans to CLF at a low interest rate and further initiated restrictions on foreign companies for collaboration in film manufacturing activities within the country (Hoekman).
- National Security: Industries essentials to security of the country often receive state financing, which is true in case of imports and exports.
Responding to unfair trade practices by other nations, many economists agree that trade will not be deemed fair if one country actively aspires to protect its industries by introducing unreasonable tariffs and quotas. In such cases, the country sees a threat to its nation’s security and implements the policies that can challenge the policies of other nations.
The governments of dominating countries often set up business relations with smaller countries for their personal motives. For example, for a long time, the United States has been maintaining strong business liaisons with the countries in South and North America, and also the Caribbean, which strongly depended on business and financial aid from the USA. Therefore, a breach in political relations could reduce economic activities between the USA and one of their trading partners (Marcin).
PART B. What cultural motives do nations have for intervening in free trade?
Often countries restrict trade on goods and services in order to obtain cultural goals, which is the most widespread measure of protection of national originality of the country. Undesirable cultural influence on the country can cause concern to citizens. Therefore, governments occasionally ban certain imports to restrict some cultural product from entering the country. An example is that, 35 percent of all music aired on all Canadian radio stations should be the music performed by Canadian artists (Bauman).
The widespread cultural motives for state interference in trade activities are:
- For protection of growing industries: New-born industries require protection of the government from the global competition at the time of their early development until they become competitive enough. The reason why it is significant is because business demands time for growth and maturity and to acquire the necessary knowledge for becoming more efficient and innovative. Thus, such measures bring better probability for a business to become more competitive in the market. Encouraging home industries to compete with foreign companies by providing technical and quality assistance is one of the cultural motives of a nation’s government.
- To implement a strategic cultural policy: This argument often assumes that the strategic cultural policy can lead to increase in the level of the nation’s income. Firms generate greater profits when they start to reap advantages of being first movers, thereby consolidating their positions in the global markets (Gilpin).
PART C. What is the World Trade Organization (WTO)?
Describe how the WTO settles trade disputes.
The World Trade Organization (WTO) was set up in 1995 to replace the GATT. The WTO headquarters are situated in Geneva, Switzerland, and were established to facilitate the imports and exports by the nations and for conducting their business globally (WTO). It is the only unique international organization which works on trade rules between the countries. The mechanism for intensifying trade consists of agreements which are drafted and signed by the majority of participant countries and which are ratified in their parliaments.
Besides, the WTO gives technical assistance, helps in settlement of trade disputes, keeps track of international commercial policies, provides the organized forum for trading negotiations, and extends the organized platform for settlement of trade disputes. There has been more than 300 disputes settled by the World Trade Organization from the moment of its creation in January 1995, and these disputes covered a wide spectrum of economic activities (WTO).
Any country violating the international trade laws and adopting unfair trade practices is penalized in form of certain trade restrictions and sanctions with all member countries of the WTO. The WTO agreements are legally designed to formulate key rules of international trade which have the form of contracts. These contracts demand of signatories to honor trade and commerce rules and to maintain their commercial policies within the coordinated limit. The WTO allows for the environment of justice and smooth application of commercial laws. It is expected that agreements will give a wider choice of products and services and the best availability of products to consumers. The companies can enjoy a smooth chain of deliveries, access to the markets, and an amplified movement of the goods and services worldwide.
The well-known principle of "Most Favored Nation" goes back to GATT. This means that if one country is granted permission to trade, then all member countries should be given equal privileges. One more principle of "National Treatment" stipulates that foreign goods and services should be commensurate to the same volume of domestic goods and services (Gritsch).
One philosophy emphasizes that the settlement of trade disputes can prevent the escalation of animosities, which can touch off a war. In other respects, with fewer trade barriers, people are more capable to cooperate with each other.
The WTO, however, continues to expand its role and power in international trade, thus remaining a controversial and little-known organization. The original charter was to link the limited functions of GATT to lower tariffs on goods. Now, the WTO interferes with social goals, such as public health services, ecological and other programs, which are best for the nation but restrict the international trade activities.
The WTO works in the form of "rounds", which are in shape of long-term conferences. The final round was the Uruguay Round, ratified in 1994 by the US Congress. The controversy that took place in the Uruguay Round dragged the WTO to impose more enforcement authority. The most powerful tool allows a country to impose trade restrictions if another nation violates the agreement (Gilpin).
Other disputable initiatives of the Uruguay Round were the concept of liberalization of investments, which directed the countries to treat foreign investors as though they were domestic investors. This initiated a flood of FDI which gave freedom to the domestic investors of a nation.
Do governments promote or restrict trade? It is observed that government intervention is most often meant to satisfy certain political motives. Some arguments presented here state that government intervention is to offer job security to workers by promoting its own industrialization and provide security to its citizens. However, government’s moves are always politically motivated towards satisfying their own personal motives. The WTO agreements and its initiatives to settle trade disputes have encouraged many foreign investors to challenge the internal and sovereign laws of the country as if they were citizens. Such effort may often have led to excessive foreign influence, intervention and undue attention to foreign investors at the expense of people of the country.