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TECHNIQUES OF ECONOMIC REWARD AND PUNISHMENT



When rewards are offered or economic punishments are threatened, at least two conditions must be satisfied to make the exercise of influence effective: (1) the target of the influence act must perceive that there is a genuine need for the reward or for avoidance of the punishment, and (2) no alternative market or source of supply must be easily available to the target. The specific techniques that can be used to reward or punish constitute various controls over the flow of goods between countries: tariffs, quotas, boycotts, and embargoes. Loans, credits, and currency manipulations can be used for rewards as well.

1. Tariffs. Almost all foreign-made products coming into a country are taxed for the purpose of raising revenue, protecting domestic producers from foreign competition, or other domestic economic reasons. The tariff struc-

216 Economic Instruments of Policy

ture can be used effectively as an inducement or punishment when a country stands to gain or lose important markets for its products by its upward or down­ward manipulation. The U.S. government, for example, has accorded both Po­land and Yugoslavia preferential tariff treatment in an effort to keep these two countries as independent of Moscow as possible. However, the president is authorized by an act of Congress to withdraw this favorable tariff structure any time he deems it to be in the "national interest"—that is, at any time that either Poland or Yugoslavia begins to conduct policies that are too vigorously anti-American.

2. Quotas. To control imports of some commodities, governments may establish quotas rather than tariffs (tariffs may, of course, be applied to the items that enter under quotas). Under such arrangements, the supplier usu­ally sends goods into the country at a favorable price but is allowed to sell only a certain amount in a given time period. The U.S. government maintains quotas on the import of sugar from the Philippines, the Dominican Republic, and other sugar-producing nations. Since these countries sell a large portion of sugar (their major export crop) to the United States, any shift in the size of the quotas could either assist or severely damage their economies.

3. Boycott. A trade boycott organized by a government eliminates the import of either a specific commodity or the total range of export products sold by the country against which the boycott is organized. Governments that do not engage in state trading normally enforce boycotts by requiring private importers to secure licenses to purchase any commodities from the boycotted country. If importers do not comply with this requirement, any goods purchased abroad can be confiscated and they can be prosecuted.

4. Embargo. A government that seeks to deprive another country of goods prohibits its own businesses from concluding any transactions with com­mercial organizations in the country against which the embargo is organized. An embargo may be enforced either on a specific category of goods, such as strategic materials, or on the total range of goods that private businesses normally send to the country being punished.

5. Loans, Credits, and Currency Manipulations. Rewards may in­clude favorable tariff rates and quotas, granting loans (a favorite reward offered by the major powers today to developing countries), or extending credits. The manipulation of currency rates is also used to create more or less favorable terms of trade between countries.

The choice of techniques or combination of techniques to be used will be influenced by the goals being pursued; the type of economic vulnerability or need that exists in the country being rewarded or punished; the estimated

217 Economic Instruments of Policy

effectiveness of alternative techniques; and, since dependence is usually a bilat­eral proposition, assessment of the possibility of countermeasures. A government will not seriously consider applying an embargo against another country if that country supplies badly needed resources; restrictions on imports through high tariffs or a boycott will not be very effective in damaging the competitor if it sells most of its products in another market; and an embargo will not deprive a competitor if it can easily purchase the commodities elsewhere at comparable prices. Some of the techniques and problems of applying economic rewards and sanctions in attempting to influence the behavior of other nations can best be seen through illustrations from the recent history of international politics.

 




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