A government boycott is an absolute restriction against the purchase and importation of certain goods from other countries. An embargo is a refusal to sell to a specific country. A public boycott can be either formal or informal and may be government sponsored or sponsored by an industry. The United States uses boycotts and embargoes against countries with which it has a dispute. For example, Cuba and Iran still have sanctions imposed by the United States. Among US policy makers, there is rising concern, however, that government sponsored sanctions can cause unnecessary harm for both the United States and the country being boycotted without reaching desired results. It is not unusual for the citizens of a country to boycott goods of other countries at the urging of their government or civic groups. Nestle products were boycotted by a citizens group that considered the way Nestle promoted baby milk formula in less developed countries misleading to mothers and harmful to their babies.
A government can effectively regulate its international trade position by various forms of exchange control restrictions. A government may enact such restrictions to preserve its balance of payments position or specifically for the advantage or encouragement of particular industries. Three barriers should be considered; blocked currency, differential exchange rates, and government approval requirements for securing foreign exchange.
Blocked currency is used as a political weapon or as a response to difficult balance of payments situations. In effect, blockage cuts off all importing or all importing above a certain level. Blockage is accomplished by refusing to allow an importer to exchange its national currency for the sellers’ currency.
The differential exchange rate is a particularly ingenious method of controlling imports. It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want. The essential mechanism requires the importer to pay varying amounts of domestic currency for foreign exchange with which to purchase products in different categories. For example, the exchange rate for and desirable category of goods might e one unit of domestic money for one unit of a specific foreign currency. For a less desirable product, the rate might be two domestic currency units for one foreign unit. For an undesirable product, the rate might be three domestic units for one foreign unit. An importer of an undesirable product has to pay three times as much for the foreign exchange as the importer of a desired product.
Government approval to secure foreign exchange is often used by countries experiencing severe shortages of foreign exchange. At one time or another, most Latin American and East European countries have required all foreign exchange transactions to be approved by a central minister. Thus, importers who want to buy a foreign good must apply for an exchange permit, that is, permission to exchange an amount of local currency for foreign currency.
The exchange permit may also stipulate the rate of exchange, which can be an unfavorable rate depending on the desires of the government. In addition, the exchange permit may stipulate that the amount to be exchanged must be deposited in a local bank for a set period to the transfer of goods. For example, Brazil has at times required funds to be deposited 360 days prior to the import date. This is extremely restrictive because funds are out of circulation and subject to the ravages of inflation. Such policies cause major cash flow problems for the importer and greatly increase the price of imports. Clearly, these currency-exchange barriers constitute a major deterrent to trade.