Why do governments intervene in trade

No country wants to see its unemployment rates rise as it will raise levels of crime as well as general dissatisfaction.

Governments should focus on creating an environment that maintains high levels of employment, as well as new employment opportunities being offered all the time. This keeps the economy healthy and promotes economic growth. If the domestic economy is struggling to compete with international competitors, a government may impose certain tariffs to direct consumer attention back to local businesses and therefore insulate and protect their own economy from outside competition.

Certain governments may implement tariffs on certain products that they feel are harmful to the environment or do not adhere to specific environmental standards.

Imports, in general, may be subject to some sort of environmental tariff because of the environmentally unfriendly nature of importing and exporting goods petrol, jet fuel, excessive packaging etc. There are many cases in which international competitors may use highly aggressive trade tactics such as flooding the market.

This may cause domestic traders to be run out of business as international traders will get a foothold in the market share. Aggressive trade practices can happen quite unexpectedly and without warning. Governments need to put barriers in place to protect their economies from this sort of aggressive trade practice. Within certain countries, a purely emotional or sentimental argument is used for certain trade tariffs and barriers.

A good example of this would be in China and Japan. Both countries have a strong cultural connection towards rice and believe that rice grown outside of their home countries is not right for the palates of its citizens. While this may not make logical sense to many, this argument is seen as acceptable to many.

Throughout the world, many other countries use emotional arguments for bans on certain items or services. Canada places limits on international publishing, TV and bookselling, while India does not allow for outside investments in print media.

And these are just a few examples. When you look at the list of banned and restricted import goods of any country, you should notice that most of the items listed are considered dangerous, such as guns, knives, and other weapons. Certain animal products, as well as products, made from endangered animals such as ivory jewellery etc. There is also the concern of some animal products being diseased, and importing them runs the risk of having an outbreak. This is something that we need to be incredibly careful of in These lists will differ from country to country, based on what health professionals deem safe.

In an effort to prevent overdosing and incorrect consumption of medical drugs especially prescription drugs , bans and tariffs are often placed on medication, especially for individual orders and use. In the times of the COVID pandemic, the government is more strict than ever when it comes to movement of goods and also people.

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This loss is signified in the attached chart as the yellow triangle. If a ceiling is to be imposed for a long period of time, a government may need to ration the good to ensure availability for the greatest number of consumers.

One way the government may ration the good is to issue ticket to consumers. A government will only allow as much of good to be out in the marketplace as there are available tickets. To obtain the good, the consumer must present the ticket and the money to the vendor when making the purchase. This is generally considered a fair way to minimize the impact of a shortage caused by a ceiling, but is generally reserved for times of war or severe economic distress.

Prolonged shortages caused by price ceilings can create black markets for that good. A black market is an underground network of producers that will sell consumers as much of a controlled good as they want, but at a price higher than the price ceiling. Black markets are generally illegal. However these markets provide higher profits for producers and more of a good for a consumers, so many are willing to take the risk of fines or imprisonment. A binding price floor is a price control that limits how low a price can be charged for a product or service.

A price floor is a price control that limits how low a price can be charged for a product or service. Generally floors are set by governments, although groups that manage exchanges can set price floors as well. The purpose of a price floor is to protect producers of a certain good or service. By establishing a minimum price, a government seeks to promote the production of the good or service and ensure that the producers have sufficient resources to go about their work. For a price floor to be effective, it must be greater than the free-market equilibrium price.

If the price floor is lower than what the market would already charge, the regulation would serve no purpose. Since the price is set artificially high, there will be a surplus: there will be a higher quantity supplied and a lower quantity demanded than in a free market.

As a result, a government will generally do significant research into the current market conditions for a good or service before setting a price floor. Price Floor : If a price floor is set above the equilibrium price, consumers will demand less and producers will supply more.

An example of a price floor is the federal minimum wage. In this case the suppliers are employees and employers are the consumers. The federal government has established a price that all employers must pay their workers. Obviously employers can pay more than that amount, but they cannot pay less.

The purpose of setting this floor is to ensure that all employees make enough money from their jobs to provide for their basic needs. History of the Federal Minimum Wage : History of the federal minimum wage in real and nominal dollars. The federal minimum wage is one example of a price floor.

A price floor will only impact the market if it is greater than the free-market equilibrium price. If the floor is greater than the economic price, the immediate result will be a supply surplus. As you can see from, a higher base price will lead to a higher quantity supplied. However, quantity demand will decrease because fewer people will be willing to pay the higher price. This will lead to a surplus of supply. Surplus from a price floor : If a price floor is set above the free-market equilibrium price as shown where the supply and demand curves intersect , the result will be a surplus of the good in the market.

A price floor will also lead to a more inefficient market and a decreased total economic surplus. An effective price floor will raise the price of a good, which means that the the consumer surplus will decrease. While the effective price floor will also increase the price for producers, any benefit gained from that will be minimized by decreased sales caused by decreased demand from consumers due to the increase in price.

Since well designed price floors create surpluses, the big issue is what to do with the excess supply. The first option is to let inventories grow and have the private producers bear the cost of storing it. The other option is for the government that set the price floor to purchase the excess supply and store it on its own. The government could then sell the surplus off at a loss in times of a food shortage. Deadweight loss is the decrease in economic efficiency that occurs when a good or service is not priced at its pareto optimal level.

Deadweight loss is the decrease in economic efficiency that occurs when a good or service is not priced and produced at its pareto optimal level. In a perfectly competitive market, products are priced at the pareto optimal point. Consumer surplus is the gain that consumers receive when they are able to purchase a product for less than the price they are willing to pay; producer surplus is the benefit producers receive when the sell a product for more than they are willing to sell for.

While price controls, subsidies and other forms of market intervention might increase consumer or producer surplus, economic theory states that any gain would be outweighed by the losses sustained by the other side. This net harm is what causes deadweight loss. Deadweight loss can be visually represented on supply and demand graphs. Deadweight loss : This chart illustrates the deadweight loss created when a price floor is instituted on the market for a good.

The amount of deadweight loss is shown by the triangle highlighted in yellow. The chart above shows what happens when a market has a binding price ceiling below the free market price.

Without the price ceiling, the producer surplus on the chart would be everything to the left of the supply curve and below the horizontal line where y equals the free market equilibrium price. The consumer surplus would equal everything to the left of the demand curve and above the free market equilibrium price line.

In this case, the reason for that limitation is due to quantity produced. The consumer would purchaser more of the product at the ceiling price, but the producers are unwilling to supply enough to meet that demand because it is not profitable.

As a result all of the goods that might have been produced and consumed if the good was priced optimally are not, representing a net loss for society. Many argue that price controls ensure resource availability, but most economists agree that these controls should be used sparingly. When unemployment is especially high or when there is a shortage of goods, it can be difficult for people to get what they need at an affordable price.

The main appeal of government imposed price controls is that they can ensure that citizens can purchase what they need in times of national economic hardship. USFA Depression Price Fixing Poster : During the depression the US government fixed prices on basic staples, such as food, to ensure people would be able to obtain their basic necessities. Well designed price controls can do three things. Second, regulation can protect the producers of a good and ensure that they get sufficient revenue.

This in turn limits the possibility of shortages, which benefits consumer. Finally, when shortages occur, price controls can prevent producers from gouging their customers on price. Generally price controls are used in combination with other forms of government economic intervention, such as wage controls and other regulatory elements.

While price controls may appear to be a sound decision in theory, most economists believe these controls should be used sparingly. By keeping prices artificially low through price ceilings, consumers demand a higher quantity than producers are willing to supply, leading to a shortage in the controlled product.

Price floors often lead to surpluses, which can be just as detrimental as a shortage. One of the best known price floors in the minimum wage, which establishes a base line per hour wage that must be paid for work. As a result, employers hire fewer employees than they would if they could pay workers lower than the minimum wage. As a result the supply of workers is greater than the amount of work, which creates higher unemployment.

Taxes are the primary means for governments to raise funds for its programs and to pay off its debts. So, the tariff will impact make versus buy, on-shore or off-shore, or off-shore other domicile decisions. Not cause foreigners to pay a tax. Unless there is a foreign corporation, in a tariff-able product category, who does work in US, and imports the product to US. Or imports, in such a product category, to a wholesale, or distribution network, in US.

Peter Scott. As an institution, the government is a big saver. Forget all the self serving lies put out there. What the government pays its' employees, which the employees then go out and spend as households. Well, that's the households. When the government spends on say, a polio vaccine, that's an investment in my eyes. That's savings. The same holds true for all government supported research. The same is true for public education, roads, bridges, water and sewage treatment plants.

I'm a little less satisfied with the military as savings, but hey how about all the defense related scientific research. Basic scientific research. You know, the kind that somehow leads to valuable things far afield. All the conservative attacks on government. Well most of them. I take them as pointed to the undermining of the democratic process. The wealthy and the powerful want the public to turn away from expecting and employing the government for the betterment of the community at large.

They don't want the general population to use the government to promote the general welfare. Hence the attacks on social security, medicare, medicaid, snap, chip, uc, public education. They distrust a sense of community in the general population. This all seems so logical and also seems to be an accurate reflection of reality. To me this means it should be possible to build a computational -graphical model.

Steve Keen has done something like this that explores the effects of private debt vs public debt ratios on GDP growth. But it is, if not too complex, not at all compelling. What seems to be needed is perhaps an open source effort to construct a model based on agreed principles and a limited number of variables and "states" that can model passed events and has a predictive capacity.

This should be a lot easier than weather and climate change. And perhaps more valuable. It needs to be recognized that the world is a closed system and has profound vulnerabilities. If we are headed for a global beggar thy neighbor scenario the formation of this situation should be plotted and the means of escape demonstrated in a compelling way. We'v been in a beggar scenario for quite a while now. You appear a little naive to me. Thinking that the leadership is sincerely looking for an understanding to improve the welfare of their country and citizens.

The corruption economics. How about it. The Mystro. The top economist in the whole country. The largest and most destructive financial and economic event in 79 years.

And he didn't see it coming and in fact contributed to it. And when we have telescopes that can see billions of light years out into space. How else do you understand that? It seems to be true that the Oligarchy is a pretty stable political structure trending up while democracy is trending down I think the US may be an Oligarchy. But that does not remove any interest in economic understanding. Even Oligarchs need to understand what's going on.

A sometimes painful renegotiation of almost every trade item is ongoing and will likely continue till the next World economic boom cycle gets into high gear. The Euro may be forced to be the reserve currency of the world. But we don't want wage repression. But we still have huge capital inflow from excess saving nations. Hope it can steer extra saving from foreign nations toward the productive investment, instead of speculative investment.

Will these fiscal polices somehow balance the trade and capital better than current policies? One course of action would be to tax Chinese currency manipulation rather than Chinese exports. In order to undervalue the renminbi against the dollar, China drives the dollar's value up by buying dollar-denominated financial assets, principally U.

Treasury bills and bonds. To discourage China from doing so, the U. For example, the U. Treasury would withhold tax on interest paid on Treasury bonds held by China. By taxing the precise actions that cause distorted exchange rates, the United States would increase the incentive for China and other currency manipulators to allow the values of their currencies to reflect market fundamentals. An important benefit of this approach is that it would explode the myth, commonly held in China, that the United States wants or needs China to buy U.

Treasury bonds. If China were to stop manipulating its currency, the dollar would decline against the renminbi, boosting U. If other currency manipulators -- such as Singapore and Taiwan -- do not absorb the implied lesson, their bilateral tax treaties with the United States could also be canceled and the amendment applied to them as well.

Thanks to years of experience at combating money laundering and terrorist financing, which involves far smaller sums than the trillions of dollars that China has invested in U. Treasury Department should have no problem tracking and identifying any attempts at evasion. Michael mentioned many times the wage repression of Germany. So only valid approach is across board BAT. VCR, I do not think that it is quite as simple as simply taxing Chinese currency manipulation rather than Chinese exports.

This is in essence what Japan did after the Plaza Accords. Thank you for this post. I remember reading your very similar arguments in The Great Rebalancing Chapter 2?

It does as always leave me with some questions, though: 1 Am I correct that the implication is that the US and UK are cursed, not blessed, by being home to the largest capital markets?

Given your analysis, why are you in favour of saving the EU instead of its dissolution? It seems like Greece, Spain, Italy, etc would be better off by its abolition.

Obviously you've already thought this through--I just can't connect the dots. The way I see it. There's nothing wrong with large, open capital markets - they'r good things. It's just that they get abused. Stop the abuse. Stop the abusers. I'm not Mike, but I think he's right. They should put in place capital controls, limiting the movement of currency into this country, or preferably taxing it.

I always understood Mike to be in favor of the European Union, the community of Europe, and also believing that the Euro, the EMU was ill-conceived and doomed to failure from the beginning.

Let me add this to 2. Mikes' thinking was the EMU was ill-conceived in not necessarily the idea of it, but how it was being implemented and administered. Hi Yok! Thanks for the reply. Re: 1: I believe that capital controls would stop or at least significantly slow down the movement of currency into the US and GBR. In that case, wouldn't that in turn reduce the ability for the US and GBR to be the world's preeminent financial centers?

More to the point, wouldn't this be a good thing? I ask this question largely because I never thought of it before--I always just assumed that there was an advantage to having Wall Street and the City.

I'm now beginning to think that this advantage really only exists when a country needs to attract capital, and neither country has a scarcity of capital at the moment--rather, they have a scarcity of production caused by too much capital. Is this the correct interpretation?

Yok--Re 2: the EU--I guess that whether it was initially poorly implemented or not, it is difficult to see the creditor countries just accepting the previous EU without the Euro actually, it's difficult to see the European creditor countries accepting anything other than the status quo, which is untenable.

German policies may have been reckless, but German politicians aren't going to do anything that hastens their own banks to seize up and their own unemployment rates to shoot up significantly. Hi Claire. Your questions get progressively more difficult.

I'm not Mike, but I think "Yes, you'r right, capital controls, tax on incoming capital would reduce the activity on wall street. The more freedom they have the more speculative they become. With greater wealth concentration and capital currency available and weak demand and lack of good investment opportunity, the lust for wealth and power gets the best of them and they gamble. I think the financial sector is very bloated and wasteful. The way I see it - they're long overdue for a trimming.

Would of answered sooner but Mike didn't get your stuff from the 20th out till Aug 1. Capital controls are the quickest way to derail an economy and send it into recession.

I know I have lived through the period of capital controls in UK. They were imposed to stop capital flight when markets were rightly spooked by a socialist government. They had no success in promiting investment in domestic businesses and if capital did not leak out much, then profits earned abroad were left off-shore. When a subsequent government declared the intention of scrapping capital controls there were many people in the City, the Bank of England and the Treasury who were afraid there would be a rush to export money and a run on the pound.

What happened instead was - money flowed in. This leads to the explanation. If you are contemplating moving your money to a destination for investment, the primary concern is, can you get it out again. If the answer is yes then you have eliminated that barrier. If the answer is no, then of course you do not invest. This is simply an extension of the basic truth, 'Money flows to where it is best treated.

To qutoe Voltaire "common sense is not so common". Best post ever professor. Really should be required reading for policy makers everywhere. Other countries think that solution is painful.

The import sector of the US economy doesn't like it either. Tariffs were the way the US Government was mainly financed before the year Ian S. But that's a straw dog. My first reply was to Claires question about the advisability of having capital controls. Now to your question about barriers to keep foreign money out - please read the last paragraph of Michael's article. It cannot be done in the US or UK. Apart from the impossibility, why would that be desirable?

In the UK the majority of manufacturing industry and several service business are majority owned by foreign corporations. But British capital thus released from domestic assets has taken a minority share in nearly every successful company in the world.

I read the last paragraph in Mike's article. I suggest to you that you re-read it; you'r not understanding him correctly. Hey, we don't even do soft controls by using red tape, fees, time, taxes, say like the Chinese do. Of course we do have some tariffs and controls, but speaking in a general sense. Mike has made this point several times before, and we have used capital controls before.

You are making false associations - holding in is the exact opposite of holding out. So we might expect opposite reactions from the public. Also too, implied within your post is the idea foreign money coming in is a blessing - wrong.

Unless the foreign money is accompanied by new technology or managerial expertise, the net effect is harm to the country. You imply that a developed, rich country is solely dependent on private investment for growth - wrong. You say a socialist government is bad - that's another false association. All governments, to the extent that they promote the welfare of the general public are socialist. A republican, what they call a democratic government, is in fact, of a socialist nature.

Socialism - to place under the control, responsibility, authority, or ownership of the public, where the public can be considered to exert, or have meaningful control. The so-called western democracies were in fact more socialist than the Soviet Union.

Governments save like crazy. Think of the government and households as institutions. Are you saying there is no realization in the US administration that, to effectively close the US trade deficit, the monetary side of international trade needs to be addressed, ie.

I would find this hard to believe. Well, the US administration is not a single individual, and in any case it has competing objectives. The US benefits politically internationally by having the reserve currency or at least it believes it does. The question is whether the drag on the domestic economy is worth the political benefits they receive internationally. Immediately after WWII, the overwhelming consensus was that the price was worth paying; now the overwhelming consensus may reverse.

Might have been possible ten years ago. UN Security Council would have to sign-off also. Not likely to happen either. The IMF comment is a little strange. Firstly, the US has a veto. Do not publish as comment, just correct the typo: Sub par.

Could be done very simply, the way the Alaskan Permanent Fund distributes money to Alaskan residents. Firstly, I'm having trouble understanding the causality and relationship between government spending and current account deficits. Specifically, what percentage of U.

However, it isn't intuitive to me how this relationship works for the US's fiscal deficits and causality in the function. I would appreciate help thinking about this or reference to further reading.

Secondly, excellent post Michael. I thoroughly enjoyed the reading. Thank you for the insight this blog brings. My reasoning is that SDR is expected to be reserve currency at some unspecified future date. Could be in this century if US tariffs are raised high enough.

IMF has a gold reserve for some unknown reason at least to me. To back SDR if some members are recalcitrant? To cover non-performing-loans? Pettis's arguments":Page 29 of "The Great Rebalancing" : " If the tariffs caused Fredonian real household income to decline