Want A Thriving Business? Focus On TRADE !

The degree of government involvement in trade varies from passive to active.

The types of participation include administrative guidance, state trading and subsidies –

Administrative Guidance Many governments routinely provide trade consultation to private companies. 

Japan has been doing this on a regular basis to help implement its industrial policies.

This systematic cooperation between the government and business is labeled "Japan,Inc." To get private firms to conform to the Japanese government's guidance, the government uses a carrot-and-stick approach by exerting the influence through regulations,recommendations, encouragement, discouragement, or prohibition. 

Japan's government agencies' administrative councils are influential enough to make importers restrict 'their purchases to an amount not exceeding a certain percentage of local demand. 

The Japanese government denies that such a practice exists, claiming that it merely seeks reports on’ the
amounts purchased by each firm.

Government Procurement and State Trading State trading is the ultimate in gov-ernment participation, because the government itself is now the customer or buyer who determines 20 what, when, where, how, and how much to buy. 

In this practice the state engages in commercial operations, either directly or indirectly, through the agencies under its control. 

Such business activities are either in place of or in addition to private firms. Although government involvement in business is most common with the communist countries, whose governments are responsible for the central planning of the whole economy, the practice is definitely not restricted to those nations. 

The U.S. government, as the largest buyer in the world, is required by the Buy American Act to give a bidding edge to U.S. suppliers in spite of their higher prices. 

When the government is further involved in reselling imported products, matters become even more complicated. American tobacco companies complained that Japan's Tobacco and Salt Agency kept prices of their products artificially high and that sales representatives from this government tobacco monopoly participated in discrediting the advertising of American products. 

The Government Procurement Code requires the signatory nations to guarantee that they will provide suppliers from other signatory countries treatment equal to that which they provide their own suppliers. 

This guarantee of "national treatment" means that a foreign government must choose the goods with the lowest price that best meet. 

The specifications regardless of the supplier's nationality. The Code requires that technical specifications not be prepared, adopted, or applied with a view to creating obstacles to international trade. 

The purchasing agency must adopt specifications geared toward performance rather than design and must base the specifications on international standards, national technical regulations, or recognized national standards, where appropriate. 

Subsidies According to GATT, "subsidy is a "financial contribution" provided directly or indirectly by a government and which confers a benefit." Subsidies can take many forms including. Cash interest rate, value-added tax, corporate income tax, 'sales tax, freight, insurance, and infrastructure. 

Subsidized loans for priority sectors, preferential rediscount rates, and budgetary subsidies are among the various subsidy policies of several Asian countries. 

There are several other kinds of subsidies that are not so obvious. 

Brazil's rebates of the various taxes, coupled with other forms of assistance, can be viewed as subsidies. 

Tennessee, Ohio, Michigan, and Illinois, in order to attract foreign auto makers to locate their plants in those states, provided such services as highway construction, training of workers, and tax breaks, which are simply subsidies in disguise. 

Sheltered profit is another kind of subsidy. A country may allow a corporation to shelter its profit from abroad. 

The United States in 1971 allowed companies to form domestic international sales corporations (DISCs) even though they cost the U.S. treasury more than $1 billion a year in revenue. 

GATT, the multilateral treaty, eventually ruled that a DISC was an illegal export subsidy. 

A new U.S. law allows companies that meet more stringent requirements to form foreign sales corporations (FSCs), which have the same purpose as DISCs.

The Subsidies Code, technically named the Agreement on Interpretation and Application of Article VI, XVI and XXIII of the General Agreement on Tariffs and Trade, recognizes that government subsidies' distort the competitive forces at work in international trade. 

The rules of the international agreement negotiated during the Tokyo Round of Multilateral Trade Negotiations (MTN) differentiate between export subsidies and domestic subsidies. 

The  Code's rules also differentiate between subsidies paid on primary products (e.g., manufactures) and those paid on no primary products and primary minerals. 

A primary product is any product of farm, forest, or fishery in its natural form or that has undergone such processing as is customarily required to prepare it for transportation and marketing in substantial volume in international trade (e.g., frozen and cured meat). 

The Code prohibits the use of export subsidies on no primary products and primary mineral products. 

There is considerable debate over what should be considered manufactured products, since such products are not entitled to any subsidies. 

For instance, according to the United States, the EU's export subsidies for such manufactured products as pasta and wheat flour are banned by the international subsidies code. The EU's position is that pasta and wheat flour are not manufactured products. 

To combat subsidies, the United States has proposed the adoption of the "traffic light" approach to provide a framework for the classification of all subsidy programs. Based on a subsequent GATT agreement, there are three Categories:

1. Prohibited (red light) subsidies,
2. Permissible but actionable (yellow light) subsidies, and
3. Permissible but no actionable (green light) subsidies.

The permissible but actionable subsidies are actionable multilaterally and countervailable unilaterally if they cause adverse trade effects. 

Regarding permissible but nonactionable subsidies, they are not countervailable if provided according to criteria intended to limit their potential for distortion.

Customs and Entry Procedures Customs and entry procedures can be employed as nontariff barriers. 

These restrictions involve classification, valuation, documentation, license, inspection, and health and safety regulations.

Classification How a product is classified can be arbitrary and inconsistent and is often based on a customs officer's judgment, at least at the time of entry. 

The U.S. Customs reclassified Nissan's imported truck cabs and chassis from "parts" with 4 percent duty to "assembled

vehicles" subject to 25 percent levies instead.

Product classification is important because the way in which a product is classified determines its duty stamps. 

A company can sometimes take action to affect the classification of its product. 

For example, a ruling of the U.S. Customs resulted in a 100 percent punitive tariff on certain Japanese computers. 

Toshiba and NEC, however, took advantage of the

ruling's loophole by importing boards without microprocessor chips. 

The boards were not classified as computers and were thus allowed to enter the United States duty-free. 

The microchips were then installed after entry.

In the United States, if an imported product is determined to have the acceptable minimum percentage of materials produced in a designated country, it can be classified by a customs officer as having duty-free status. 

Classification thus determines if certain product categories

are qualified for a special treatment, but it also determines whether some products should be banned altogether. 

Most countries ban obscene, immoral, and seditious materials, as well as imports of counterfeit coins, bills, securities, postage stamps, and narcotics. 

In South Korea,prohibited articles include books, printed matter, motion pictures, phonograph records,sculptures, and other like articles that are deemed subversive or injurious to national security or detrimental to the public interest, as well as articles used for espionage or intelligence activities.

Valuation Regardless of how products are classified, each product must still be valued. 

The value affects the amount of tariffs levied. 

A customs appraiser is the one who’ determines the

value. 

The process can be highly subjective, and the valuation of a product can be interpreted in different ways, depending on what value is used (e.g., foreign, export, import, or

manufacturing costs) and how this value is constructed. 

In Japan a commodity tax of 15 percent is applied to the FOB factory price of Japanese cars. 

Yet U.S. cars are valued on the ElF basis, adding $1,000 more to the final retail price of these cars.