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Agricultural export subsidies have long been a

persistent source of conﬂict. In 2002, Poland, the

Czech Republic, Turkey, and Australia respectively

spent $56 million, $35 million, $28 million, and $2

million on agricultural export subsidies.The ﬁgures

for the following countries are: Switzerland ($292

million), Norway ($128 million), and the USA

($80 million). The EU by itself incredibly spent

$5985 million. In 2003, the EU trade ministers

applauded an agreement to put limits on the EU’s

forty-year-old practice of paying farmers subsidies

based on the amount of their production. However,

the EU has not reduced its $30.5 billion a year paid

in production-linked subsidies, nor has it made any

changes to its export subsidies – the highest in the

world. Developing countries complain bitterly that

these subsidies are harmful to trade by encouraging

European farmers to sell their produce abroad.

Interestingly, afﬂuent countries have been heavily

subsidizing their agricultural businesses (see Table

3.5). Their agricultural subsidies total almost $1 a

day (about six times the level of aid to developing

countries). While 75 percent of people in Sub-

Saharan Africa live on less than $2 a day, an average

European cow receives about $2.50 a day in subsidy.

On average, a Japanese cow does even better,

receiving about $7 a day in subsidy.

According to

the UNCTAD Secretary-General, “six or seven of

the top ten agricultural exporters are developed

countries, and I don’t think they could reach that

status without export subidies.”

Customs and entry procedures

Customs and entry procedures may be employed as

nontariff barriers.These restrictions involve classi-

ﬁcation, valuation, documentation, license, inspec-

tion, and health and safety regulations. Exhibit 3.1

describes how software products may be classiﬁed

and valued.

Classiﬁcation

How a product is classiﬁed can be arbitrary and

inconsistent and is often based on a customs ofﬁcer’s

judgment, at least at the time of entry. Product clas-

siﬁcation is important because the way in which a

product is classiﬁed determines its duty status. A

company can sometimes take action to affect the

classiﬁcation of its product. Sony argued that its

PlayStation 2, equipped with a 128-bit micro-

processor, a DVD player, and Internet connection,

was a big improvement over its PlayStation original

and that it should thus qualify as a computer.

However, the British customs ofﬁce chose to con-

tinue to classify PlayStation 2 in the video games cat-

egory, in effect imposing a duty of 2.2 percent or

about $9. Had Sony prevailed in getting the “digital

TRADE DISTORTIONS AND MARKETING BARRIERS

Table 3.5 Agricultural distortions. Protectionist policies in agriculture

are costly to all regions (billion dollars).

World OECD Non-OECD

Income loss

Agricultural policy of World 128.2 97.8 30.4

OECD 101.4 92.7 8.7

NonOECD 26.8 5.1 21.7

Forgone export revenue

World 378.0 255.8 122.2

OECD 257.7 234.9 22.8

NonOECD 120.3 20.9 99.4

Source:

Hans Peter Lankes, “Market Access for Developing Countries,”

Finance &

Development

(September 2002): 8–13.

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TRADE DISTORTIONS AND MARKETING BARRIERS

Do all countries classify software for customs pur-

poses in an identical manner? Many countries, includ-

ing the USA, will classify software products under an

identical Harmonized Tariff System (HTS) category.

However, software classiﬁcation poses similar chal-

lenges that arise with other products. Since only the

ﬁrst six digits of the HTS code are harmonized glob-

ally, a country may designate a more speciﬁc classiﬁ-

cation beyond those six digits. In rare cases, the

customs authority in another country may dispute the

general classiﬁcation of a product altogether based

on interpretation of its purpose and use.The rapid evo-

lution of information technology (IT) products is

making the process of determining classiﬁcation more

difﬁcult for this sector. Advancements in technologies

are outpacing updates to the existing HTS.Therefore,

it is prudent to check with the customs authority in

the recipient country to ensure proper classiﬁcation

of a product.

How is software valuation determined? Countries

vary in their methods for the valuation and assessment

of software duties on imports. Under Article VII of

the 1984 General Agreement on Tariffs and Trade

(GATT), it was declared that software valuation may

either be inclusive or exclusive of the cost or value for

the intellectual property component of the product.

However, it was recommended that software valuation

be based on the value or cost of the carrier medium

(i.e., optical disk) rather than the “intellectual prop-

erty” embedded on the medium. This decision was

based on the premise that the cost or value of the intel-

lectual property is distinguishable from the value of

the medium.This requirement is satisﬁed if the cost or

value of either the medium or the intellectual property

is identiﬁed separately on the commercial invoice. It

is important to note that this GATT ruling does not

cover software that includes features such as sound,

cinematic,or video recordings.Software incorporating

these features (e.g., game software) will be subject to

a separate valuation policy. For example, India differ-

entiates entertainment software, health care software,

and telecom software from standard software.

This decision has granted customs authorities

broad latitude in determining software valuation.

Therefore, one may expect to encounter different

software valuation regimes. The USA maintains the

practice of valuing software on the carrier medium.

In general, Canada, Western Europe and many Asian

countries also adhere to this method of valuation. In

the Middle East, the method of valuing software on

its full value or cost is frequently applied. Africa and

Latin America are regions where no deﬁned trend for

software valuation exists.

An additional consideration with software is the

assessment of taxes on the product. Unlike tariffs,

taxes on imports from the USA (e.g., value-added

taxes imposed at the border) are always assessed on

the full value of the software, including intellectual

property, unless the USA has a special tax treaty with

a particular country.

Is customized software treated differently than

packaged software? In most cases, the answer is no.

Packaged software is deﬁned as software that is gen-

erally available to the public by sale from stock at

retail selling points or directly from the software

developer or supplier. The vast majority of customs

agencies do not treat customized software differently

from packaged software. To conﬁrm that the soft-

ware’s destination does not treat the two types of soft-

ware differently, contact the Trade Information Center

or the customs authority in the recipient country.

Source:

Dava Kunneman and Jim Golsen, “Issues With

Software Exploration,”

Export America

(August 2001):

16–17.

EXHIBIT 3.1 SOFTWARE CLASSIFICATION AND VALUATION

processing units” (computers) classiﬁcation, there

would be no import tax.

Valuation

Regardless of how products are classiﬁed, each

product must still be valued. The value affects the

amount of tariffs levied. A customs appraiser is the

one who determines the value.The process can be

highly subjective, and the valuation of a product may

be interpreted in different ways, depending on what

value is used (e.g., foreign, export, import, or man-

ufacturing costs) and how this value is constructed.

In Japan, a commodity tax is applied to the FOB

factory price of Japanese cars.Yet American cars are

valued on the CIF basis, adding $1000 more to the

ﬁnal retail price of these cars.

Documentation

Documentation can present another problem at

entry because many documents and forms are often

necessary, and the documents required can be com-

plicated. Japan held up Givenchy’s import applica-

tion because the company left out an apostrophe for

its I’Interdit perfume.

Without proper documentation, goods may

not be cleared through customs. At the very least,

such complicated and lengthy documents serve to

slow down product clearance. France, requiring

customs documentation to be in French, even held

up trucks from other European countries for hours

while looking for products’ nonFrench instruction

manuals which were banned.

License or permit

Not all products can be freely imported; controlled

imports require licenses or permits. For example,

importations of distilled spirits, wines, malt bever-

ages, arms, ammunition, and explosives into the

USA require a license issued by the Bureau of

Alcohol, Tobacco, and Firearms. India requires a

license for all imported goods.An article is consid-

ered prohibited if not accompanied by a license. It

is not always easy to obtain an import license, since

many countries will issue one only if goods can be

certiﬁed as necessary.

Japan simpliﬁed its licensing procedure in 1986.

Previously, a separate license application had been

required for any new cosmetic product, even when

only a change in shade was involved. The new

requirements categorize cosmetics into seventy-

eight groups and list permitted ingredients.A mar-

keter simply notiﬁes the government of any new

product using those ingredients.

Inspection

Inspection is an integral part of product clearance.

Goods must be examined to determine quality and

quantity.This step is closely related to other customs

and entry procedures. First, inspection classiﬁes and

values products for tariff purposes. Second, inspec-

tion reveals whether imported items are consistent

with those speciﬁed in the accompanying docu-

ments and whether such items require any licenses.

Third, inspection determines whether products

meet health and safety regulations in order to make

certain that food products are ﬁt for human con-

sumption or that the products can be operated

safely. Fourth, inspection prevents the importation

of prohibited articles.

Marketers should be careful in stating the

amount and quality of products, as well as in pro-

viding an accurate description of products. Any

deviation from the statements contained in invoices

necessitates further measurements and determina-

tion, more delay, and more expenses.

Inspection can be used intentionally to discour-

age imports. Metal baseball bats from the USA, for

instance, are required to carry a stamp of consumer

safety, and this must be “ascertained” only after

expensive on-dock inspection.

Health and safety regulations

Many products are subject to health and safety

regulations, which are necessary to protect the

public health and environment. Health and safety

TRADE DISTORTIONS AND MARKETING BARRIERS

regulations are not restricted to agricultural prod-

ucts. The regulations also apply to TV receivers,

microwave ovens, X-ray devices, cosmetics, chemi-

cal substances, and clothing.

Concern for safety was used by Japan against alu-

minum softball bats from the USA. The manufac-

turing process leaves a small hole in the top which

is ﬁtted with a rubber stopper. Japan thus bans the

bats on the ground that the stopper might ﬂy out

and hurt someone.According to US manufacturers,

this fear is unfounded.

Product requirements

For goods to enter a country, product requirements

set by that country must be met. Requirements

may apply to product standards and product

speciﬁcations as well as to packaging, labeling, and

marking.

Product standards

Each country determines its own product standards

to protect the health and safety of its consumers.

Such standards may also be erected as barriers to

prevent or slow down importation of foreign goods.

Because of US grade, size, quality, and maturity

requirements, many Mexican agricultural com-

modities are barred from entering the USA.

Japanese product standards are even more complex,

and they are based on physical characteristics rather

than product performance. Such standards make it

necessary to repeat the product approval process

when a slight product modiﬁcation occurs (such as

color), even though the performance of the product

in question remains the same. Furthermore, these

standards are frequently changed in Japan in order

to exclude imports.

Packaging, labeling, and marking

Packaging, labeling, and marking are considered

together because they are closely interrelated. Many

products must be packaged in a certain way for

safety and other reasons (see It’s the Law 3.1).

Canada requires imported canned foods to be

packed in speciﬁed can sizes, and instructions

contained within or on packages must be in English

and French.The Canadian Labeling Act also requires

all imported clothing to carry labels in both

languages.

Product testing

Many products must be tested to determine their

safety and suitability before they can be marketed.

This is another area in which the USA has some

trouble in Japan. Although products may have won

approval everywhere else for safety and effective-

ness, such products as medical equipment and phar-

maceuticals must go through elaborate standard

testing that can take a few years – just long enough

for Japanese companies to develop competing

products. Moreover, the reviews take place behind

the Health and Welfare Ministry’s closed doors.

In 1995, Japan’s Ministry of International Trade

and Industry started requiring imported software

products to be certiﬁed by agents of the Japan

Accreditation Bureau. The accreditation require-

ment may reveal how US software is designed while

delaying US bids on public contracts.

The EU’s global approach to testing and certiﬁ-

cation for product safety provides manufacturers

with one set of procedures for certifying product

compliance with EU health, safety, and environ-

mental requirements. The various means by which

manufacturers can certify product conformance

include manufacturer self-declaration of confor-

mity, third-party testing, quality assurance audit,

and/or approval by a body authorized by an EU

member state and recognized by the EU Commis-

sion. The mark CE on the product signiﬁes that all

legal requirements concerning product standards

have been met. To be legally marketed in the

European Union, more than half of American prod-

ucts must bear the CE mark. Unfortunately, certi-

ﬁcation of product tests and registrations for

information technology, medical devices, and

certain products can only be carried out in Europe,

and the practice is costly and uncompetitive.

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TRADE DISTORTIONS AND MARKETING BARRIERS

Product speciﬁcations

Product speciﬁcations, though appearing to be an

innocent process, can wreak havoc on imports.

Speciﬁcations can be written in such a way as to

favor local bidders and to keep out foreign suppli-

ers. For example, speciﬁcations can be extremely

detailed, or they can be written to closely resemble

domestic products. Thus they may be used against

foreign suppliers who cannot satisfy the speciﬁca-

tions without expensive or lengthy modiﬁcation.

Japan’s Nippon Telephone & Telegraph Company

(NTT) was able to use product speciﬁcations as a

built-in barrier when it was forced to accept bids

from foreign ﬁrms. At one time, it did not even

provide any speciﬁcations and bidding details in any

language apart from Japanese. Its speciﬁcations are

highly restrictive and written with existing Japanese

products in mind. Instead of outlining functional

characteristics, NTT speciﬁes physical features right

down to the location of ventilation holes, the details

of which are almost identical to those of Nippon

Electric. For example, NTT requires metal cabinets

for modems, whereas most US makers use plastic.

Parts must be made by the Japanese to qualify for

bidding. In general, NTT goes well beyond speciﬁ-

cations for performance. GATT has established

procedures for setting product standards using

performance standards rather than detailed physical

speciﬁcations.

TRADE DISTORTIONS AND MARKETING BARRIERS

Imported foods account for a large proportion of

US consumption. Imported ﬁsh and shellﬁsh, for

example, account for 68 percent of such foods con-

sumed in the USA. Likewise, as a percentage of total

consumption in a particular food category, the

imports of apple juice, asparagus, pecans, and grapes

respectively command 63 percent, 60 percent, 47

percent, and 45 percent. In the winter, American con-

sumers enjoy Chilean grapes, peaches, and plums,

Mexican cantaloupes and cucumbers, and Argentine

apples.

A rule of the US Department of Agriculture, taking

effect in 2004, requires supermarkets to either label

or display the birthplace of beef, pork, lamb, ﬁsh,

produce, and peanuts. It is not yet clear as to the kinds

of foods that require labeling. The Agriculture

Department wants to focus on “whole” foods (i.e.,

items that keep their identity). As such, whole foods

include mixed lettuce in a bag and a tray of ground

beef, but they exclude ingredients in a processed item

(e.g., apples prepared in a pie). Grocers certainly are

not happy about it, contending that such a task should

be the responsibility of food companies.

In all likelihood, the rule requires a grocer’s label

on a steak to reveal where the animal was born,

raised, and slaughtered. About 18 percent of beef

consumed by Americans started life outside the

USA (e.g., in Canada, Mexico, Australia, and New

Zealand). A typical steer can change hands several

times before arriving at a packing plant.The rule will

be a nightmare for meatpackers who will need to

spend tens of millions of dollars per plant to prevent

animals of different nationalities from mingling.

While consumerism is used as the justiﬁcation,

protectionism may be the real reason behind the label

law. The primary author of the legislation happened

to be the Senator from South Dakota where ranchers

want to discourage Canadian cattle from entering the

US market. In addition, produce growers in Florida

and California, facing Mexican competition, were able

to persuade several members of the US Congress to

go along. Interestingly, chicken, the most popular

meat in the USA, does not require labeling, probably

due to the fact that the USA imports relatively little

chicken meat. In addition, although Americans spend

46 percent of their food dollars outside their home,

the restaurant industry does not have to contend with

the label law.

Source:

“Food Fight: US Grocers Battle Origin Labels,”

Asian Wall Street Journal

, June 27–29, 2003.

IT’S THE LAW 3.1 WHAT IS THE NATIONALITY OF THAT STEAK?

Quotas

Quotas are a quantity control on imported goods.

Generally, they are speciﬁc provisions limiting the

amount of foreign products imported in order to

protect local ﬁrms and to conserve foreign cur-

rency. Quotas may be used for export control as

well. An export quota is sometimes required by

national planning to preserve scarce resources.

From a policy standpoint, a quota is not as desirable

as a tariff since a quota generates no revenues for a

country. There are three kinds of quotas: absolute,

tariff, and voluntary.

Absolute quotas

An absolute quota is the most restrictive of all. It

limits in absolute terms the amount imported

during a quota period. Once ﬁlled, further entries

are prohibited. Some quotas are global, but others

are allocated to speciﬁc foreign countries. Japan

imposes strict quotas on oranges and beef. To

appease the EU, it has lifted quotas on skimmed

milk powder and tobacco for Europe. The most

extreme of the absolute quota is an embargo, or a

zero quota, as shown in the case of the US trade

embargoes against Libya and North Korea.

Tariff quotas

A tariff quota permits the entry of a limited quan-

tity of the quota product at a reduced rate of duty.

Quantities in excess of the quota may be imported

but are subject to a higher duty rate. Through the

use of tariff quotas, a combination of tariffs and

quotas is applied with the primary purpose of

importing what is needed and discouraging exces-

sive quantities through higher tariffs. When the

USA increased tariffs on imported motorcycles in

order to protect the US motorcycle industry, it

exempted from this tax the ﬁrst 6000 big motorcy-

cles from Japan and the ﬁrst 4000–5000 units from

Europe.

Voluntary quotas

A voluntary quota differs from the other two kinds

of quota, which are unilaterally imposed. A volun-

tary quota is a formal agreement between nations,

or between a nation and an industry.This agreement

usually speciﬁes the limit of supply by product,

country, and volume.

Two kinds of voluntary quota can be legally dis-

tinguished: VER (voluntary export restraint)

and OMA (orderly marketing agreement).

Whereas an OMA involves negotiation between two

governments to specify export management rules,

the monitoring of trade volumes, and consultation

rights, a VER is a direct agreement between an

importing nation’s government and a foreign

exporting industry (i.e., a quota with industry par-

ticipation). Both enable the importing country to

circumvent the GATT’s rules (Article XIX) that

require the country to reciprocate for the quota

received and to impose that market safeguard on a

most-favored-nation basis. Since this is a gray area,

the OMA and VER may be applied in a discrimina-

tory manner to a certain country. In the case of a

VER involving private industries, a public disclosure

is not necessary.

The largest voluntary quota is the Multi-Fiber

Arrangement (MFA) for forty-one export and

import countries. This international agreement on

textiles allows Western governments to set quotas

on imports of low-priced textiles from the Third

World. The treaty has been criticized because

advanced nations are able to force the agreement on

poorer countries (see Marketing Ethics 3.1).

As implied, a country may negotiate to limit vol-

untarily its export to a particular market.This may

sound peculiar because the country appears to be

acting against its own self-interest. But a country’s

unwillingness to accept these unfavorable terms will

eventually invite trade retaliation and tougher terms

in the form of forced quotas.It is thus voluntary only

in the sense that the exporting country tries to avoid

alternative trade barriers that are even less desirable.

For example, Japan agreed to restrict and reprice

some exports within Great Britain. In reality, there

is nothing voluntary about a voluntary quota.

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TRADE DISTORTIONS AND MARKETING BARRIERS

Financial control

Financial regulations can also function to restrict

international trade.These restrictive monetary poli-

cies are designed to control capital ﬂow so that cur-

rencies can be defended or imports controlled. For

example, to defend the weak Italian lira, Italy

imposed a 7 percent tax on the purchase of foreign

currencies. There are several forms that ﬁnancial

restrictions can take.

Exchange control

An exchange control is a technique that limits the

amount of the currency that may be taken abroad.

The reason exchange controls are usually applied is

that the local currency is overvalued, thus causing

imports to be paid for in smaller amounts of cur-

rency. Purchasers then try to use the relatively cheap

foreign exchange to obtain items that are either

unavailable or more expensive in the local currency.

Exchange controls also limit the length of time

and money an exporter may hold for the goods sold.

French exporters, for example, must exchange the

foreign currencies for francs within one month. By

regulating all types of capital outﬂow in foreign

currencies, the government either makes it difﬁcult

to obtain imported products or makes such items

available only at higher prices.

Multiple exchange rates

Multiple exchange rates are another form of

exchange regulation or barrier. The objectives of

multiple exchange rates are twofold: to encourage

exports and imports of certain goods, and to dis-

courage exports and imports of others.This means

that there is no single rate for all products or indus-

tries, but with the application of multiple exchange

rates, some products and industries will beneﬁt and

some will not. Spain once used low exchange rates

for goods designated for export and high rates for

those it desired to retain at home. Multiple

exchange rates may also apply to imports.The high

rates may be used for imports of particular goods

with the government’s approval, whereas low rates

may be used for other imports.

Since multiple exchange rates are used to bring

in hard currencies (through exports) as well as to

restrict imports, this system is condemned by the

International Monetary Fund (IMF). According to

the IMF, any unapproved multiple currency prac-

tices are a breach of obligations, and the member

may become ineligible to use the Fund’s resources.

In 1985, South Africa, in trying to stem capital

outﬂow, started to require nonresidents to transact

capital transactions at a separately freely ﬂoating

exchange rate (i.e., the ﬁnancial rand). The ﬁnan-

cial rand was much more depreciated than the

TRADE DISTORTIONS AND MARKETING BARRIERS

To protect its processing or manufacturing industry, a

country uses tariff escalation.While setting low tariffs

on imported materials that are used by its industry,the

country sets higher tariffs on imported ﬁnished prod-

ucts that could compete with the domestic industry’s

own products. This form of tax discrimination is a

problem for countries that try to move up the technol-

ogy ladder.They are discouraged from expanding their

processing industries. Instead, they are forced to rely

on commodities whose prices tend to be volatile.

According to the IMF, the Multi-Fiber Agreement

may have cost as many as nineteen million jobs for

low-skilled workers in developing countries.When the

Multi-Fiber Agreement quotas and tariffs are com-

bined, twenty-seven million jobs may have been lost.

Each job saved in this fashion in a developed country

replaces thirty-ﬁve jobs in developing countries.

Furthermore, industrial countries that employ these

schemes particularly hurt their own low-income citi-

zens who must spend a larger share of their income

on necessities.

Source:

Hans Peter Lankes, “Market Access for Develop-

ing Countries,”

Finance & Development

, September 2002,

8–13.

MARKETING ETHICS 3.1 UNNATURAL ADVANTAGE

commercial rand exchange rate. In 1995, as politi-

cal uncertainty declined, South Africa uniﬁed the

two exchange rates.

Prior import deposits and credit restrictions

Financial barriers may also include speciﬁc limita-

tions on import restraints, such as prior import

deposits and credit restrictions. Both of these bar-

riers operate by imposing certain ﬁnancial restric-

tion on importers.A government can require prior

import deposits (forced deposits) that make imports

difﬁcult by tying up an importer’s capital. In effect,

the importer is paying interest for money borrowed

without being able to use the money or obtain inter-

est earnings on the money from the government.

Importers in Brazil and Italy must deposit a large

sum of money with their central banks if they intend

to buy foreign goods. To help initiate an aircraft

industry, the Brazilian government has required

an importer of “ﬂyaway” planes to deposit the full

price of the imported aircraft for one year with no

interest.

Credit restrictions apply only to imports; that

is, exporters may be able to obtain loans from the

government, usually at very favorable rates, but

importers will not be able to receive any credit or

ﬁnancing from the government. Importers must

look for loans in the private sector – very likely at

signiﬁcantly higher rates, if such loans are available

at all.

Proﬁt remittance restrictions

Another form of exchange barrier is the proﬁt

remittance restriction. ASEAN countries share a

common philosophy in allowing unrestricted repa-

triation of proﬁts earned by foreign companies.

Singapore, in particular, allows the unrestricted

movement of capital, but many countries regulate

the remittance of proﬁts earned in local operations

and sent to a parent organization located abroad.

Brazil uses progressive rates in taxing all proﬁts

remitted to a parent company abroad, with such

rates rising to 60 percent. Other countries practice

a form of proﬁt remittance restriction by simply

having long delays in permission for proﬁt expatri-

ation. To overcome these practices, MNCs have

looked to legal loopholes. Many employ various

tactics such as countertrading, currency swaps, and

other parallel schemes. For example, a multi-

national ﬁrm wanting to repatriate a currency may

swap it with another ﬁrm which needs that cur-

rency, or these ﬁrms may lend to each other in the

currency desired by each party.

Another tactic is to negotiate for a higher value

of an investment than the investment’s actual worth.

By charging its foreign subsidiary higher prices

and fees, an MNC is able to increase the equity

base from which dividend repatriations are calcu-

lated. In addition, compared to proﬁt repatriations,

the higher prices and fees are treated as costs or

expenses and are thus paid more freely to the parent

ﬁrm.

PRIVATE BARRIERS

As conventional trade barriers are lowered, gov-

ernments are shifting their attention to competition

policy to address environmental and labor objec-

tives and private barriers. Private barriers are

certain business practices or arrangements between

or among afﬁliated ﬁrms.

Japan’s keiretsu is a good example of private bar-

riers. The keiretsu system deals with cooperative

business groups. Such a group includes manufactur-

ers, suppliers, retailers, and customers. Members of

the group seek long-term security through inter-

locking directorates and through owning shares

in each other’s companies.Toyota Motor Corp. pro-

vided $83 million to help out Tomen Corp., a

money-losing trading ﬁrm. Both belong to the same

keiretsu, and it is a tradition for members of the

keiretsu to subsidize each other.

Mitsubishi even

arranges for the executives of its afﬁliated com-

panies to have lunch together so as to discuss busi-

ness dealings. Naturally, the companies that belong

to the same keiretsu will grant preferential treatment

to the other members. Korea’s chaebol system also

functions in a similar fashion.

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TRADE DISTORTIONS AND MARKETING BARRIERS

Private barriers are not unique to Asia. In

Germany, banks are strong and often take a leader-

ship role. In the case of Deutsche Bank, it owns at

least 10 percent of some seventy companies, and its

bank executives sit on some 400 corporate boards.

As such, it is in a position to encourage its clients

to do business with each other – rather than with

outsiders.

While nontariff barriers are not as transparent as

tariffs, private barriers are the worst in terms of

transparency (or the lack of it). It is difﬁcult for an

outsider to gain business if potential buyers refuse

to explain why they do not want to buy from a

foreign ﬁrm. Certainly, private barriers will be the

next signiﬁcant challenge.

WORLD TRADE ORGANIZATION (WTO)

Virtually all nations seek to pursue their best

interests in international trade. The result is that

sooner or later international trade and marketing

can be disrupted. To prevent or at least alleviate

any problems, there is a world organization in

Geneva known as the WTO (with General

Agreement on Tariffs and Trade (GATT) as its

predecessor).

Created in January 1948, the objective of GATT

is to achieve a broad, multilateral, and free world-

wide system of trading. For example, its code

requires international bidding on major projects.

GATT provides the forum for tariff negotiations and

the elimination of trade discrimination.

The four basic principles of GATT are

1 Member countries will consult each other con-

cerning trade problems.

2 The agreement provides a framework for nego-

tiation and embodies results of negotiations in

a legal instrument.

3 Countries should protect domestic industries

only through tariffs, when needed and if permit-

ted. There should be no other restrictive

devices such as quotas prohibiting imports.

4 Trade should be conducted on a nondiscrimina-

tory basis.

Reductions of barriers should be mutual and rec-

iprocal because any country’s import increases

caused by such reductions will be offset by export

increases caused by other countries’ reduction of

restrictions.This concept is the basis of the princi-

ple of the most favored nation (MFN), which is

the cornerstone of GATT.According to this princi-

ple, countries should grant one another treatment

as favorable as treatment given to their best trading

partners or any other country. For example, reduc-

tions accorded France by the USA should be

extended to other countries with which the USA

exchanges the MFN principle (e.g., to Brazil).

Likewise, if a country decides to temporarily

protect its local industry because that industry is

seriously threatened, then the newly erected barri-

ers must apply to all countries even though the

threat to its industry may come from only a single

nation. The MFN principle thus moves countries

away from bilateral bargaining to multilateral (or

simultaneous bilateral) bargaining. Each country

must be concerned with the implications that its

concessions for one country would mean for other

countries. The only exception is that an advanced

country should not expect reciprocity from less

developed countries. To better reﬂect actual prac-

tice, the MFN principle is now called the NTR

(Normal Trade Relations) by the USA.

The USA does not accord MFN status to com-

munist countries that restrict emigration, but this

requirement may be waived by the President. After

China ﬁrst received MFN status from the USA in

1980, mushroom imports from China jumped from

nothing to nearly 50 percent of all US mushroom

imports. This increase owed much to the decline

of canned mushroom duties, from 45 percent to

10 percent.

Seven successive rounds of multilateral trade

negotiations under GATT auspices produced a

decline in average tariff on industrial products in

industrial countries from more than 40 percent

in 1947 to about 5 percent in 1988. The Uruguay

round of multilateral trade negotiations, launched in

Punta del Este, Uruguay, in September 1986, aimed

to liberalize trade further, to strengthen GATT’s

TRADE DISTORTIONS AND MARKETING BARRIERS

role, to foster cooperation, and to enhance the

interrelationships between trade and other eco-

nomic policies that affect growth and development.

The Uruguay round attempted to deal with new

areas such as services, intellectual property rights,

and trade-related investment. Developed nations

offered to reduce trade protection to their agricul-

ture and textile industries in exchange for less

developed countries’ greater imports of services

and greater respect for intellectual property.

However, the different countries’ varying interests

repeatedly stalled the talks. Agricultural disputes

even led to violent protests by farmers in France,

Japan, South Korea, and others.

Not surprisingly, Lee Kuan Yew of Singapore

once called GATT the General Agreement to Talk

and Talk. Fortunately, delegations from more than a

hundred countries were able ﬁnally to conclude

negotiations at the end of 1993 after seven years

of talks. The 109 nations signed the 22,000-page

agreement in 1994. This most ambitious and com-

prehensive global commercial agreement in history

provides for a phase-out of the Multi-Fiber

Arrangement (MFA) over a ten-year period while

reforming trade in agricultural goods. The agree-

ment also lowers tariffs by more than one-third

($700 billion), writes new rules of trade for intel-

lectual property and services, and strengthens the

dispute settlement process.

Just like the Uruguay round, the 2002 to 2004

Doha round has generated a great deal of contro-

versy and conﬂict.While the richer economies press

the developing countries to open up their markets,

the poorer countries have accused the advanced

economies of maintaining a very high level of agri-

cultural supports, thus damaging the poor coun-

tries’ farm-dependent economies. The talks in

Cancun in mid-2003 ended up with the delegates

from the poorer countries walking out in protest of

the advanced economies’ insincere efforts to end

agriculture subsidies.

As a result, the future of the

WTO itself could be jeopardized. Hopefully, logic

and practicality should ultimately prevail.

Because GATT was set up in 1948 as a tempo-

rary body, the Uruguay round agreement wanted to

replace GATT with the World Trade Organization

(WTO) in 1995. At the beginning, GATT and the

WTO coexisted, but GATT ceased to exist after a

one-year period.The WTO, being more permanent

and legally secure, will have more authority to

settle trade disputes, and will serve along with the

International Monetary Fund and the World Bank

to monitor trade and resolve disputes. The WTO

will encompass the current GATT structure as well

as the Uruguay round agreements. It will provide a

single, coordinated mechanism to ensure full, effec-

tive implementation of the trading system, and it

will also provide a permanent, comprehensive

forum to address the new or evolving issues of the

global market.

The WTO’s strengthened dispute settlement

system should be better able to limit the scope

for unilateral and bilateral actions outside the multi-

lateral system. Under GATT’s dispute resolution

system, the USA and other members could and

indeed did veto the decisions of arbitration boards.

As a result, nations could refuse to adopt negative

decisions. For example, a GATT panel twice found

that the European Union’s oilseed subsidies

impeded the tariff-free access to the EU market that

was promised to the USA in a 1962 trade agree-

ment; yet the EU failed to adequately reform

subsidies harmful to US oilseed producers.

Under the WTO, a nation’s veto of a panel’s deci-

sion is eliminated. Other important changes under

the new dispute settlement mechanism include: (1)

ﬁxed time limits for each stage of the dispute set-

tlement process, (2) automatic adoption of dispute

settlement reports, (3) automatic authority to retal-

iate on request if recommendations are not imple-

mented, (4) creation of a new appellate body to

review panel interpretations of WTO agreements,

and (5) improved procedural transparency and

access to information in the dispute settlement

process. The new procedures yield a panel ruling

within sixteen months of requesting consulta-

tions. Unfortunately for the USA, one early ﬁnding

involved a challenge of Venezuela and Brazil con-

cerning an Environmental Protection Agency (EPA)

regulation governing US imports of gasoline. The

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