Import/Export Trade Distortions & Marketing Barriers PDF

CHAPTER 2 IMPORT/EXPORT TRADE DISTORTIONS AND MARKETING BARRIERS 1. Introduction  While countries generally do not mind exporting, they simply do not like imports. According to a survey of more than 28,000 people in twenty-three countries, even well-educated workers in p...

CHAPTER 2 IMPORT/EXPORT TRADE DISTORTIONS AND MARKETING BARRIERS 1. Introduction  While countries generally do not mind exporting, they simply do not like imports. According to a survey of more than 28,000 people in twenty-three countries, even well-educated workers in poorer countries are against free trade.  In addition, workers in the industries that face foreign competition tend to be against free trade. On the other hand, well-educated people in well-educated countries are more likely to favor trade.  2. Protectionism  Protectionism is defined as the restriction of international trade in order to benefit the domestic industry. Now, whilst protectionism has slowly faded away, particularly after the creation of the World Trade Organization it has started to gain some traction again in recent times. Let us look at some of the arguments made for protectionism below.  Protecting infant industry - the necessity to protect an infant industry is perhaps the most credible argument for protectionist measures. Some industries need to be protected until they become viable. South Korea serves as a good example. It has performed well by selectively protecting infant industries for export purposes.  Cont. …d  Reducing unemployment or protecting jobs - it is standard practice for trade unions and politicians to attack imports and international trade in the name of job protection. The argument is based on the assumption that import reduction will create more demand for local products and subsequently create more jobs.  Protect the Consumer - for instance, the EU completely bans products with pesticides or herbicides.  Retaliation and Unfair Competition - as we have seen with the US- China trade war, protectionist policies have been used in retaliation to other nations. The argument from the US’ point of view was that the Chinese already had very strict and protectionist policies, whilst the US’ freely allowed most Chinese goods in.  Cont. …d  National security - protectionists often use the patriotic theme. They usually claim that a nation should be self-sufficient and even willing to pay for inefficiency in order to enhance national security.  Keeping money at home - trade unions and protectionists often argue that international trade will lead to an outflow of money, making foreigners wealthier and local people not as good as. In addition, this protectionist argument assumes that foreigners receive money without having to give something of value in 3. Government: A Contribution To Protectionism  Government can be considered to be the root of all evil – at least as far as international trade is concerned. A government’s mere existence, even without tariffs or any attempt to interfere with import/export trade, can distort trade both inside and outside of its area.  At the international level, different governments have different policies and objectives, resulting in different rates for income and sales taxes.  Governments everywhere seem to be the main culprits in  Cont. …d  Back in the 19th Century, protectionist countries relied on simple tools such as tariffs, quotas, or purely restricting all goods entering.  These have now developed, with many nations using tools such as exchange rate controls, currency manipulation, or restrictions on Foreign Direct Investment (FDI). Let us look at these in more detail below.  Tariffs -tariffs are a tax placed on foreign goods, either targeted toward a particular country or industry or broadly applied to foreign imports. The governing idea behind implementing high tariffs that higher prices on imported goods will incentivize consumers to buy lower-priced domestically produced goods. Cont. …d  Import Quotas – the restrictions on the volume of the import of the goods and services over a particular time known as Quotas. They are also known as the non-tariff trade barriers. The restrictions lead to an increase in the price of the goods which further leads to a fall in the demand for the respective goods.  Subsidy - these are the tax credits that are granted to the domestic producer by the government of the country. This causes a difference in the price of the product that is faced by the producer and the one that is faced by the consumers the goal is still to shield the domestic firm.  Cont. …d  Restrictions on FDI - some governments also decide to impose restrictions on the FDI in order to prevent foreign nations from entering their market. For instance, China requires some industries to link up with local suppliers before they are allowed to sell their goods. Elsewhere, India places investment caps on specific industries. Media industries are only allowed to invest up to 24 percent, whilst FDI is completely banned in industries such as real estate and most agriculture markets.  Exchange Rate Controls - by controlling the exchange rate, a nation is able to dictate how much imports can cost. For instance, Cont. …d  Regulations - these are the policies and the guidelines that a government enlists, which shall be followed during the import of foreign goods and services.  Import Licensing - this means that the licenses of the importers which are issued to them by the government can be restricted in lieu of the policies of the government regarding international trade.  Some of the other measures that the countries can adopt are 4. Is Protectionism Good For The Economy?  In the long-run, protectionism is not good for the economy. It makes consumers and businesses pay more. And whilst it may protect jobs in the short-term, the economy as a whole would be better served in allowing cheaper imports in.  Although this may temporarily destroy some jobs, consumers benefit from lower prices. In turn, the income that would have been spent on the goods before can now be spent in other markets. In turn, employment is stimulated elsewhere in the economy. 5. International Trade: Market Entry Strategies  When an organization has made a decision to enter an overseas market, there are a variety of options open to it. These options vary with cost, risk and the degree of control which can be exercised over them.  Exporting - Exporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as the marketing of goods produced in one country into another. Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required.  The tendency may be not to obtain as much detailed marketing information as compared to manufacturing in marketing country; however, this does not negate the need for a detailed marketing strategy. Cont. …d  Licensing - Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor".  It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing. In Zimbabwe, United Bottlers have the license to make Coke.  Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation. Cont. …d  Joint ventures - Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation". Joint ventures are a more extensive form of participation than either exporting or licensing.  Management Contract - A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise that performs the necessary managerial functions in return for a fee. A company usually enters into a management contract when it believes a foreign company can manage its existing or new operation more efficiently.  For example, the British Airport Authority (BAA) has contracts to manage airports in Indianapolis (US), Naples (Italy) and Melbourne (Australia) because it has developed successful airport management skills. Cont. …d  Turnkey Operations –a turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. A turnkey project is a way for a foreign company to export its process and technology to other countries by building a plant in that country.  International Acquisition - Acquiring an international company can be structured in a few different ways. A company may choose to buy the entire company, buy parts of the company, or acquire a significant portion of the company that gives it certain ownership rights. Cont. …d  Greenfield Investment (GI) - refers to a type of foreign direct investment (FDI) where a company establishes operations in a foreign country. In a Greenfield investment, the company constructs new (“green”) facilities (sales office, manufacturing facility, etc.) cross-border from the ground up.  A Greenfield investment is a form of market entry commonly used when a company wants to achieve the highest degree of control over its foreign activities. 17 f ! ! o ! n d 2 E te r ap C h