Introduction
Governments use various methods to intervene in markets for different reasons. Modes of government interventions in markets include the use of tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping policies.
Hence, the government can influence the market either directly as a competitor or indirectly through tariffs and regulations. These interventions only occur for political and economic reasons.
Government interventions in markets and reasons for interventions in markets
Tariffs are taxes that governments levy on imports or exports. Governments use tariffs to protect emerging local firms from fierce foreign competitions, protect old firms from competition, and reduce cases of dumping. Dumping aims to avoid ‘too low’ prices of imports in the domestic market.
Subsidies are governments’ financial supports to any sector (Office of Fair Trading 26). They may include direct grants, additional capital, exemptions from taxes, guarantees, and low interest loans among others. Subsidies influence the market competition through changes in costs and production strategies.
Import quotas limit the amount of goods that a country can import within a certain period. Hence, quotas can influence production of goods in other countries. Quotas protect domestic firms, but may result in increased prices for consumers. They reduce imports to eliminate competition.
Voluntary export restraints happen when a government limits the amount of goods or services that local companies can export to other countries (Hill 216). This protects local firms from a fierce competition as witnessed in the case of cheap Japanese cars imported in the US in 1980s. Both countries applied voluntary export restraints to protect the domestic automobile industry of the US.
Local content requirements favour the use of locally manufactured parts, labour, services, supplies, and materials for production within the country rather than importing such resources. Hence, governments require a minimum use of local contents to promote domestic economies when foreign firms produce in a country.
Local content requirements could also happen because of political influences and the need to protect and benefit a given territory. It happens in the Nigeria Oil and Gas Industry in which the government has made it a law for all multinational oil and gas firms to incorporate local contents in their production chains (Falco, Gallo, Santillo, Troncone and Viecelli 213). Local contents can also include direct investments on the site.
Administrative trade policies are regulations that governments formulate to make it hard for other countries to import into another country (Hill 219). These are mainly non-tariff barriers to importers.
For instance, tedious and time-consuming inspection processes of imported goods at borders are instances of applying restrictive administrative trade policies to limit trade. Japan had used this method to limit foreign firms from importing into its markets as shown by FedEx Express and Netherlands’ tulip bulbs (Hill 219).
Antidumping policies protect domestic market prices by ensuring that imports do not have ‘too low’ prices below the cost of production or have fair market prices. The US has used antidumping policies to protect domestic markets from cheap imports from China.
Political reasons for government market intervention are numerous. They include protecting local jobs, national industries, protecting national security, retaliating against unfair market practices, protecting consumers from substandard goods, promoting foreign policies, and protecting human rights.
Economic reasons include protecting infant industries from foreign competitions and enhancing strategic trade policies. Hence, these reasons show that government intervention in markets can encourage or limit trade.
A government would engage in a market to offer either direct or indirect support to local industries. Moreover, difficult economic situations may also force governments to intervene in markets, as well as lobbying from workers in order to protect their jobs and markets.
Conclusion
Governments participate in the market through seven strategies, which include the use of tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping policies.
The major reasons are both economic and political reasons, but they aim to protect local jobs, unfair competition, enhance foreign policy, protect consumers from ‘dangerous’ goods and gain political favours from locals or voters.
Works Cited
Falco, De Massimo, Mosè Gallo, Carmela Santillo, Enzo Troncone, and Pier Viecelli. “Planning Large Engineering Project in high risk country areas: the Evaluation of Local Content strategies in the Oil & Gas industry through a robust planning technique.” International Journal of Systems Applications, Engineering & Development 2.6 (2006): 213-221. Print.
Hill, Charles. International Business: Competing in the Global Marketplace 9th ed. New York: McGraw-Hill, 2013. Print.
Office of Fair Trading. Government in markets. London: Crown, 2009. Print.