15. With respect to Rationale of govt. influences on international trade mention and explain with examples A.

Economic Rationale B. Non-economic Rationale ANS:The rationale behind the government influencing international trade can be explained as follows A. Economic Rationale: The economic rationale includes infant industry argument and strategic trade policy Infant Industry Argument: When the industry is in the infant stage of its life cycle, it needs protection from the foreign competitors. Indian government protected our industry during 1947 to 1990. Private industrialists cannot invest heavily during infant stage. Therefore, the government has to interfere in business to provide capital and infrastructural facilities. Strategic trade policy: According to the strategic trade policy, the government intervention is essential in the form of subsidies. The government should provide the subsidies to certain domestic firms which have competitive advantage. These firms wit low cost advantage will move to the foreign markets and get the first mover advantages. Thus, government should use subsidies to support promising firms those are dynamic in newly emerging markets. Foreign competing firms may create entry barriers to the domestic firms even in the home country. Then the government intervention is necessary to provide entry to the domestic firms in the domestic market. US government played this role when Japanese automobile firms created entry barriers. Thus these arguments suggest a rationale of government intervention in the international business. Government role is essential when foreign firms create entry barriers by having the first mover advantages (market provided to Airbus when Boeing created entry barriers) However, it is criticized that the strategic trade policy looks nice in theory, but it may be unworkable in practice. B. Non-economic Rationale: Government also influences for national security, protecting industries, protecting jobs National Security: Strategic industries from the point of view of national security should be run by government. These industries include defence, aerospace, electronics, semiconductor, posts, railways and the like. Government runs these industries even in earlier market economies like USA and Japan. Even after liberalization and globalization of Indian economy, Government in India reserved eight strategic industries (from national security point of view) for exclusive public sector operation. Protecting Industries: One of the major objectives of the government is to protect the domestic industry from the foreign competitors. This can be done only if the government runs the industry as the foreign competitors will easily kill the private industry or business. This is clearly evident from the Indian experience. Most of the sick small scale industrial units have become mortal and more so,

after the entry of cheap products from China and East Asian countries (like Thailand, South Korea and Malaysia) into Indian market. Therefore the politicians argue that government should interfere in the business. Protecting jobs: The economic liberalization in India led to the closure of many small industries, downsizing of the large industries, outstretching of employees, privatization (or disinvestment) of public sector units etc. This in turn reduced the number of jobs in the country. This case is true for all the countries which liberalised and globalised their economies. Hence politicians argue that the government should interfere in business in order to protect the basic right of the people i.e. right for the job. Retaliation: The foreign business needs to be threatened and should be dealt with a tough approach. Only governments can deal with a tough approach and attitude with the foreign businesses. Governments can do this due to the power to take the tough decisions. Otherwise, the foreign businesses control the domestic business firms. As such, the politicians argue for the governments in business. 16. Explain giving with examples various ways & instruments of international trade control A. Tariff B. Non-tariff ANS: International trade can be controlled using following ways A. Tariff: Tariff barriers are types of direct price protection and take three common forms ad valorem duties, specific duties and compound duties. An ad valorem duty is a tax that is imposed as a percentage of value (price) of the imported or exported goods. A specific duty is a flat tax that is imposed regardless of the value of the imported or exported goods. A compound duty is one that combines ad valorem and specific duties B. Non-tariff: The most common form of non-tariff control measure is the quota or the quantitative restriction on the volume of imports. One well known example of this textile quota that was imposed by industrialized countries against the textile imports from developing countries. A recent variant of quotas is the voluntary export restrain(VER), whereby the exporting country is gently warned that it had better voluntarily restrained its exports to the importing country. During 1970s and 1980s the VER was a common tool used against Japan in products ranging from steel to machine tools to automobiles The 1970s and 1980s also saw the increasing application of another form of non-tariff control measure, antidumping restrictions, particularly by US and European union usually against Japan and other exporting countries in far east. This form of protection seeks to prevent exporters from dumping their products-selling their products at less than fair valuein the importing country The use of direct and indirect subsidies- that is a governments attempt to lower a firms or industrys cost by direct or indirect use of public funds .Government aloes uses forms of nontariff barriers: local content requirements technical standards and health regulations and procurement policies. Local content requirements are efforts to promote import substitution by specifying that a certain portion of value added must be produced inside the

country. For instance the European union has established strict local content rules for Japanese car manufacturer in Europe. Technical standards and health regulations relate to regulation of matter such as consumer safety, health and natural environment, labeling, packaging, quality standards and the like the US for instance prohibits imports of many types of agricultural products on such grounds Government also adopts procurement policies that typically favor domestic producers. For instance the US government has Buy American regulations to give US producers up to a 50% price advantage on Defense Department contracts. 17. Explain various strategies to deal with government influences imposed by guest country on trade. Give examples for each ANS: Following strategies can be used to deal with government influences imposed by guest country on trade: i. Increasing return to scale provide a justification for trade for reason other than comparative advantage, since firms will have incentive to produce and export in order to lower cost by attaining greater scale economies; an example of an industry where this is an important issue is the commercial airframes industry ii. Product differentiation can result in intra-industry trade since within the same industry, the same product can have different brand identities; for example the US will export certain types of automobiles(Ford Escort) and it will import other types of automobiles(BMWs) iii. Imperfect competition creates rents and trade policy could shift rents from the foreign country to the home country. For example the imposition quotas will increase domestic prices and thus can create rents for foreign produces; the home country may try to counterbalance it with a subsidy domestic producers, so as to put price pressure on foreign producers iv. Externalities and spillover effects (particularly in innovation and R&D) may sometimes provide a justification for industry protection for reasons other than industry infancy or national security. For instance, if the process innovations in commodity chip production can create spillovers in manufacture of specialized chips, then the government may have an incentive to protect the manufacturer of commodity chips v. Irreversible investments induce an asymmetry between entry and exit costs and can therefore lead to hysteretic responses to price or quantity shifts. For instance, firms in the US earth-moving equipment industry lost substantial market share in early 1980s when US dollar appreciated 35% in real terms against Japanese yen. Yet firms could not exit markets because cost of reentry(for example rebuilding of distribution network) would be prohibitive. Thus they had to stay on in many markets despite the fact that they were incurring losses.