1. List and discuss some political and economic reasons for governments intervening in the markets.
Arguments for government intervention take two paths: political and economic. Political arguments are concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers). Economic arguments are typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers).
Political arguments cover a range of issues: preserving jobs; protecting industries deemed important for national security; retaliating against unfair foreign competition; protecting consumers from "dangerous" products; furthering the goals of foreign policy; and advancing the human rights of individuals in exporting countries.
Protecting Jobs and Industries:
This argument is for protecting jobs and industries from unfair competition. Governments intervene by placing duties and tariffs on certain imports.
National Security:
Argument is that certain industries need to be protected as they are important for national security, such as defense-related industries (i.e. aerospace, advanced electronics, semiconductors, etc). Semiconductors are important components of defense products that it would be dangerous to rely primarily on foreign producers for them.
Retaliation:
This argument states that governments should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game". If it works, it may liberalize trade and bring with it resulting economic gains. However, it is risky; the country that is being pressured may not back down and instead may respond to the imposition of punitive tariffs by raising trade barriers of its own. If a government does not back down, results could be higher trade barriers all around and an economic loss to all involved.
Protecting Consumers:
Intervention is also argued to be for the good of the consumer. Regulations are put into place by governments to protect consumers from unsafe products.
Furthering Foreign Policy Objectives:
Governments sometimes use trade policy to support their foreign policy objectives. Government may grant preferential trade terms to a country with which it wants to build strong relations. Trade policy also been used to pressure or punish "rogue states" that do not abide by international law or norms. Theory is the pressure might persuade rogue state to mend its ways, or it might hasten a change of government.
Protecting Human Rights:
Governments sometimes use trade policy to try to improve human rights policies of trading partners.
Economic arguments cover the infant industry argument and the strategic trade policy.
The infant industry argument states that because new manufacturing industries cannot compete with established industries, governments should protect these industries by using tariffs, import quotas or subsidies as temporary support until they have grown strong enough to compete in an international market. Strategic trade policy has two components to its argument. One is that by appropriate actions, government can help raise national income if it can ensure that firms that gain first-mover advantage in an industry are domestic rather than foreign enterprises. Thus, a government should use subsidies to support promising firms that are active in newly emerging industries. Second, it might pay a government to intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms that have already reaped first-mover advantages.
2. (a) Critically discuss the following statement: Low wages in less developed countries mean that developed countries cannot hope to compete effectively.
This statement is false. Countries need to concentrate on their comparative advantage – developed countries concentrate on capital
