The paper 'Motives behind Government Intervention in Trade" is a perfect example of macro and microeconomics coursework. Government intervention in trade refers to the actions taken by a government that affect the free market activities that happen in normal exchanges. This intervention in the normal market which ends up affecting voluntary market interventions may be in the form of taxes, assorted regulations, subsidies, price controls as well as control of government spending. Justification for government intervention is that when markets are left on their own, the decisions made by both businesses and consumers do not achieve efficiency (Economic Glossary, 2008).
Since World War II, governments all over the world are involved in activities that directly influence the normal market activities. Governments impose restrictions to free trade due to various economic, cultural, and political reasons. We will examine the various motives behind government intervention in trade. Economic Motives There are several economic motives why governments intervene in the trade as discussed below. They are mainly aimed at guarding the economy of a nation against the effects of trade policies that can harm it. Protection of local infant industries This is one of the main reasons why governments realize they have to intervene in trade.
The nature of economic trade means there is a lot of competition by multinational firms. Infant industries find it hard to establish themselves due to this competition and governments find it necessary to intervene in trade in order to protect them(Goldstein, 2007). This is done until they are sufficiently innovative, efficient and competitive internationally. Once this is done, protectionism is removed. This kind of intervention promotes competition among local industries (Hoekman et al, 2002, p.
150). Critics of this argument argue that it is hard and almost impossible for governments to determine the type of industries that need protection. Japan is used as an example because its protectionism of infant industries has become less efficient. Ideally, it’ s only until after a long time that a government can correctly determine the industries to protect. The other criticism is that domestic industries become complacent and less innovative which limits their ability to become more competitive. Another criticism is that this hinders the ability of small promising business ventures to solicit for funds in capital markets.
It is also argued that consumers suffer from having to pay high prices due to lack of competition among industries which is necessary for prices to go down. Protection means local companies do not look for creative ways of lowering production costs (Vorton, 2010). To pursue strategic trade policies This is the other main economic reason why governments intervene in trade. Each country has its own trade policies that it aims to use to grow its economy. To execute these policies, the government has to intervene in trade with the aim of ensuring its policies will succeed.
Proponents of this argument argue that this form of government intervention is important as it enables local industries to benefit from first-mover advantage. They also benefit from economies of scale from operating in large scale and from the fact that only a few of such companies take up a market. The main benefit of this form of intervention is an increase in national income. Local companies benefit by earning high profits which helps them establish themselves even in the international market (Bossche, 2008).
Critics of this form of intervention argue that it results in inefficiency and high production costs which eat on the profit margins of local forms. It may also lead to retaliation by other countries adopting the same policy. Additionally, governments lack the requisite intelligence to intervene well making this form of intervention unsuccessful sometimes (Carbaugh, 2009).
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