Name: Mohamed Hashi Jama

Admission Number: BBM/2008/18

Course: International Purchasing

Course Code: BBM442

Individual Assignment

Date of Submission: 23rd February 2021

Q1. Governments have over the years used various political and economic arguments to
justify trade protectionism. Discuss (15mks)

Trade protectionism is a policy that protects domestic industries from unfair competition from
foreign ones.

Protectionism refers to government policies that restrict international trade to help domestic
industries. Protectionist policies are usually implemented with the goal to improve economic
activity within a domestic economy but can also be implemented for safety or quality concerns.

 Protectionist policies place specific restrictions on international trade for the benefit of a
domestic economy.

 Protectionist policies typically seek to improve economic activity but may also be the
result of safety or quality concerns.

 The value of protectionism is a subject of debate among economists and policymakers.

 Tariffs, import quotas, product standards, and subsidies are some of the primary policy
tools a government can use in enacting protectionist policies.

Protectionist policies are typically focused on imports but may also involve other aspects of
international trade such as product standards and government subsidies. The merits of
protectionism are the subject of fierce debate.

Critics argue that over the long term, protectionism often hurts the people and entities it is
intended to protect by slowing economic growth and increasing price inflation, making free
trade a better alternative. Proponents of protectionism argue that the policies can help to create
domestic jobs, increase gross domestic product (GDP), and make a domestic economy more
competitive globally.

The primary tools for trade protectionism are tariffs, subsidies, quotas, product standards and
currency manipulation.
Use of Tariffs

Import tariffs are one of the top tools a government uses when seeking to enact protectionist
policies. There are three main import tariff concepts that can be theorized for protective
measures. In general, all forms of import tariffs are charged to the importing country and
documented at government customs. Import tariffs raise the price of imports for a country.

Scientific tariffs are import tariffs imposed on an item by item basis, raising the price of goods
for the importer and passing on higher prices to the end buyer. Peril point import tariffs are
focused on a specific industry. These tariffs involve the calculation of levels at which import
tariff decreases or increases would cause significant harm to an industry overall, potentially
leading to jeopardy of closure due to an inability to compete. Retaliatory tariffs are tariffs
enacted primarily as a response to excessive duties being charged by trading partners.

Import Quotas

Import quotas are non-tariff barriers that are put in place to limit the number of products that can
be imported over a set period of time. The purpose of quotas is to limit the supply of specified
products provided by an exporter to an importer. This is typically a less drastic action that has a
marginal effect on prices and leads to higher demand for domestic businesses to cover the
shortfall. Quotas may also be put in place to prevent dumping, which occurs when foreign
producers export products at prices lower than production costs. An embargo, in which the
importation of designated products is completely prohibited, is the most severe type of quota.

Currency Manipulations

This currency manipulation would make its exports cheaper and more competitive. This method
can result in retaliation and start a currency war. One way countries can lower their currency's
value through a fixed exchange rate, like China's yuan. Another way is by creating so
much national debt that it has the same effect.
Product Standards

Product safety and high volumes of low-quality products or materials are typically top concerns
when enacting product standards. Product standard protectionism can be a barrier that limits
imports based on a country’s internal controls. Some countries may have lower regulatory
standards in the areas of food preparation, intellectual property enforcement, or materials
production. This can lead to a product standard requirement or a blockage of certain imports due
to regulatory enforcement. Overall, restricting imports through the implementation of product
standards can often lead to a higher volume of product production domestically.

Government Subsidies

Government subsidies can come in various forms. Generally, they may be direct or indirect.
Direct subsidies provide businesses with cash payments. Indirect subsidies come in the form of
special savings such as interest-free loans and tax breaks. When exploring subsidies, government
officials may choose to provide direct or indirect subsidies in the areas of production,
employment, tax, property, and more.

When seeking to boost a country’s balance of trade, a country might also choose to offer
subsidies to businesses for exports. Export subsidies provide an incentive for domestic
businesses to expand globally by increasing their exports internationally.

Advantages of Trade Protectionism

 The use of tariffs will protect new industries from foreign competitors.

 It will give the new industry’s companies time to develop their competitive advantages.

 Protectionism also temporarily creates jobs for domestic workers. The protection of

tariffs, quotas, or subsidies allows domestic companies to hire locally.

 It promotes use and consumption of local products.

Disadvantages of Trade Protectionism

 It may encourage Monopoly due to no/limited competition hence leading to unfair pricing
of Products.

 The domestic product will decline in quality and be more expensive than what foreign
competitors produce.

 It may slow economic growth due to the restrictive international trade

 This may affect country’s relationship with foreign counter parts, since the protectionism
decisions are political

 In the long term, trade protectionism weakens the industry. Without competition,
companies within the industry do not need to innovate. 
Q2. Purchasing abroad does not defer substantially from purchasing domestically or
nationally. Comment on this statement through discussion(15mks)

Purchasing refers to the activities related with the acquisition of goods, raw materials or
services necessary for firms to accomplish their business goals. This is referred as international
purchasing when those purchasing activities are carried out in international markets to support
the firm’s operations and ensure a reliable source of supply. While Domestic sourcing is the
activity of contracting for goods or services that are delivered or manufactured within the buyer's
home country borders. 

Purchasing domestically or abroad have their differences due the environment they take place in
however they share similarities as follows;

 Satisfying the basic needs of the consumers is the prime importance. It involves to find
out what the customer’s wants and how to meet their needs.
 The Purchasing principles remain the same, i.e. The Right Quality, Right Quantity, Right
Time, Right Source, Right Price and Right Place.
 Both domestic and international trade are voluntary exchanges, not coercive.

 Research and development, it is necessary in both by research that new facts are found
and in the light of these facts products are improved.
 The actors participate in a market where buyers and sellers interact in order to
exchange some good or service.

 They operate as suppliers, that is, producers, suppliers, exporters, transporters or

intermediaries. Or as derivative or final buyers in the form of importers,
intermediaries, users or consumers.

 Conditions of product quality and delivery must be established and who covers each
cost.

 There must be some means of payment and some security to receive payment.
 Each participant must be efficient and support the client, the ultimate goal of any
public or private activity.

 Taxes are paid

Q3. Faced with acquisition of capital equipment, a purchaser has a number of options in
addition to outright purchase. Discuss (20mks)

Capital equipment are physical assets that a company uses in the production process to
manufacture products and services that consumers will later use. Capital goods include buildings,
machinery, equipment, vehicles, and tools. Capital goods are not finished goods, instead, they
are used to make finished goods.

Below are some examples of capital goods that are used in the various industries as well as
examples of goods that can be both capital and consumer goods.

Capital Goods

 Factories or assembly line equipment used to manufacture cars and trucks

 Machines and technology

 Types of infrastructure, such as trains and cable or broadband lines

 Coffee machines used by a coffee shop

 Automobiles used by a delivery company would be a capital good, but for a family, they
would be a consumer good.

 Ovens used by a restaurant would be a capital good but can also be a consumer good.

 Computers can be used by companies but also by consumers.

 Landscaping equipment can be used by landscaping companies and by consumers.

Businesses invest money to acquire such equipment. Other than the outright purchase the
following are other forms acquisition of Capital Equipment.

Hire Purchase is a financing solution suitable for businesses wishing to purchase assets without
paying the full value immediately. The customer pays an initial deposit, with the remainder of
the balance and interest paid over a period of time. On completion, ownership of the asset
transfers to the customer.

Hire purchase financing solutions comes up with the following.

  Lower initial cost, but overall more expensive due to interest payments.
 Although you don’t own the asset, it is treated as if it had been for your accounts, and
depreciated.
 Again, for tax, depreciation is not allowed – it is replaced with Capital Allowance
 Payment installments are recorded on balance sheet
 Payments are apportioned between capital repayment and interest
 Total interest should be shown as an expense in P&L

Finance Leases

An alternative to Hire Purchase, a Finance lease typically has an initial period of fixed length at
full cost, followed by a secondary period at very low cost. The business customer never legally
owns the equipment, but they have most of the ‘risks and rewards’ associated with the asset,
hence for accounting purposes they do ‘own’ it. They are responsible for maintenance, insurance
etc. of the asset. At the end of the initial period, if the customer does not want to continue using
the equipment, they can arrange to sell it to a third party second hand, and obtain the bulk of the
proceeds.

 For accounting purposes, finance leased assets are treated in the same way as hire
purchase.
 Capital Allowances are not available, but depreciation is allowed (You will never see this
ever again)
 VAT charged by the finance company is payable on the initial installment and each
subsequent rental.
 For cars, most businesses will be able to recover 50% of the VAT.

Operating Lease

This is just renting the equipment for short period of time.

 This option is popular – generally cheaper overall and often comes with a related
maintenance contract (depending on the equipment)
  Common where an established second-hand market exists (cars, construction and office
equipment etc)
 Lease period typically 2-3 years, always less than working life of asset.
 Not listed on balance sheet – entire operating lease cost is shown on P&L.
 No capital allowances
 VAT added to each rental installment, so cost is spread throughout lease period.
 If car, can reclaim 50% of VAT.
 Any maintenance VAT may be reclaimed in full (if it can be identified separately).
Advantages of leasing or renting equipment

 you don't have to pay the full cost of the asset up front, so you don't use up your cash or
have to borrow money
 you have access to a higher standard of equipment, which might be too expensive for you
to buy outright
 you pay for the asset over the fixed period of time that you use it, which helps you budget
for the future
 as interest rates on monthly rental costs are usually fixed, it is easier to forecast cashflow
 you can spread the cost over a longer period of time and match payments to your income
 the business can usually deduct the full cost of lease rentals from taxable income
 if you have not bought the asset outright, you won't have to worry about any overdraft or
other loan taken out to finance the purchase being withdrawn at short notice, forcing
early repayment
 if you use an operating lease or contract hire, you may not have to worry
about maintenance
 the leasing company carries the risks if the equipment breaks down
 the leasing company can usually get better deals on price than a small business could and
will have superior product knowledge
 on 'long funding leases' - finance leases over seven years and sometimes over five years;
and some long operating leases - you can claim capital allowances on the cost of the
assets
  if you need to upgrade or replace the equipment, you can simply make a small adjustment
to your regular payment rather than invest a lump sum upfront
Disadvantages of leasing or renting equipment
However, there are also some disadvantages of leasing or renting equipment:

 you can't claim capital allowances on the leased assets if the lease period is for less than
five years (and in some cases less than seven years)
 you may have to put down a deposit or make some payments in advance
 it can work out to be more expensive than if you buy the assets outright
 your business can be locked into inflexible medium or long-term agreements, which may
be difficult to terminate
 leasing agreements can be more complex to manage than buying outright and may add to
your administration
 your company normally has to be VAT-registered to take out a leasing agreement
 when you lease an asset, you don't own it, although you may be allowed to buy it at the
end of the agreement

Credit Finance

A business can also purchase or acquire capital equipment through credit facilities such as loans
and mortgages. Business can take a loan to acquire required machines or take a mortgage to
acquire a building facility for their business operations.

Trade-in. This an arrangement in which business buys a new automobile or factory

machines/equipment at a reduced price by giving their old one, as well as money, in payment.

Through Auctions, a business may acquire capital equipment’s through auctioneers.

An auction is usually a process of buying and selling goods or services by offering them up
for bid, taking bids, and then selling the item to the highest bidder or buying the item from the
lowest bidder.