Name: Abhishek Timsina
Trimester: IV
Assignment 2 (841 words)
Q. The government of Nepal had taken some intervention action in the last fiscal year, regarding
imposing restrictions on foreign goods import. Do you think that governments should interfere
in business?
Ans:
According to the country's central bank, Nepal Rastra Bank, foreign currency reserves fell by more
than 16% to 1.17tn Nepali rupees ($9.59bn; £7.36bn) in the seven months to the middle of
February of last fiscal year. Over the same period, the amount of money sent to Nepal by people
working abroad fell by almost 5%. Worried by rapidly receding foreign currency reserves and
growing trade imbalance, the government in April 2022 took some intervention in foreign trade
by imposing restrictions on the import of foreign goods that the government had termed luxury
goods. Besides this reason there are many other reasons why government should interfere in free
trade:
• During economic instability such as inflation, depression, unstable interest rates, and
exchange rates, the government should interfere in foreign trade by taking corrective
actions to maintain economic stability.
• The government should interfere in ensuring the national security and sovereignty of the
country as some industries are considered critical for national culture and sovereignty. For
example, rice holds significant cultural and historical importance in countries like China,
Japan, and Korea. Restricting imports of rice in these countries can be a way to preserve
traditional agricultural practices and cultural identity associated with rice cultivation.
• The government should interfere in free trade for trade balance. If a country continuously
imports more than exports it may create a huge trade deficit so the government
intervenes in the form of import restriction so as to reduce the trade deficit and stabilize
currency by restricting imports.
• Protecting domestic industries is another reason for government intervention in business.
The government should interfere to protect domestic industries from unfair competition,
often from foreign companies that might have advantages like lower labor costs or
government subsidies. This protection can take the form of tariffs, import restrictions, or
other trade barriers.
• Government intervenes in free trade to prevent unemployment as import restrictions
promote domestic production hence increasing domestic production and higher
employment. With import restrictions, domestic industries are promoted and they
generate more employment opportunities.
• The government also interferes on business to prevent transport and shipment to
unfriendly countries. For example, in the context of Qatar and the Gulf Cooperation
Council (GCC) countries, there was a blockade imposed on Qatar by several GCC countries
in 2017. This blockade included restrictions on Qatar's transportation routes, impacting
its imports and exports.
It's important to note that government intervention in foreign trade is a complex and debated
topic. While such interventions can be effective in addressing short-term economic challenges,
they can also have unintended consequences. Some of the negative consequences of government
intervention could be as follows:
• Government intervention can result in higher prices for imported goods. This directly
impacts consumers by increasing the cost of everyday items and reducing their purchasing
power as government intervention includes tariffs and more taxes for imported goods.
• When a government intervenes in free trade by imposing trade barriers, they are likely to
face retaliation from its trading partner countries which leads to reduced export
opportunities. For example, The United States imposed tariffs on a wide range of Chinese
imports, including electronics, machinery, and consumer goods. In response, China
retaliated by imposing tariffs on American goods, particularly agricultural products like
soybeans, pork, and grains.
• Government intervention in foreign trade might significantly decrease foreign direct
investment. With government intervention in foreign trade, the foreign country tends to
avoid such countries for investment as they fear that foreign business within the country
might also have to face government intervention. Uncertainty about policy changes and
fear of expropriation can deter both domestic and foreign investment.
• Corruption, favoritism, and rent-seeking behavior can all be encouraged by government
intervention. Individuals and businesses can attempt to influence government decisions
in order to acquire unfair benefits, hindering fair competition and economic growth.
Taking the example of the Nepal government imposing restrictions on the import of foreign
goods, the government managed to increase foreign currency reserve but it also reduced trade
activities led to a drastic drop in government revenue. As taxes on the import of gasoline-powered
vehicles were the key contributor to the national treasury, with not enough money in the treasury,
the government could not finance its projects and programs, particularly in the construction
sector. Rather than restricting imports, the best way to narrow the trade deficit is to produce
more and export more.
As government intervention does have both positive and negative impacts there is no one best
way for better foreign trade and whether the government should intervene or not still remains a
debatable topic. In summary, government intervention in the economy can be necessary and
beneficial in many situations, particularly when addressing market failures, providing essential
public goods, and protecting the well-being of citizens. However, the extent and nature of
government intervention should be carefully considered, and policies should be designed and
implemented thoughtfully to minimize negative consequences, such as corruption and rent-
seeking while maximizing positive outcomes for society as a whole. The decision to intervene or
not should be based on a thorough assessment of the specific circumstances and objectives at
hand.
