Onkvisit S., Shaw J. International Marketing: Analysis and Strategy
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certified that some 316,000 US jobs have been lost
or threatened due to trade with Mexico and
Canada, the number is far lower than predicted. On
balance, NAFTA has increased jobs and reduced
inflation without affecting wages.
23
CONCLUSION
For countries to want to trade with one another,
they must be better off with trade than without
it. The principles of absolute and comparative
46
TRADE THEORIES AND ECONOMIC DEVELOPMENT
Figure 2.7 The United Kingdom and its strategic location
advantage explain how trade enables trading nations
to increase their welfare through specialization.
Trade allows a country to concentrate on the pro-
duction of products with the best potential for its
own consumption as well as for exports, resulting
in a more efficient and effective use of its resources.
Absolute production costs are not as relevant as
relative costs in determining whether trade should
take place and what products to export or import.
Basically, a country should specialize in manufactur-
ing a product in which it has the greatest compara-
tive advantage. If no comparative advantage exists,
there will be no trade, since there is no difference
in relative production costs between the two coun-
tries (i.e., a situation of equal relative advantage).
Comparative advantage is not determined solely
by labor but rather by the required factors of
production necessary to produce the product in
question.This advantage is often determined by an
abundance of a particular production factor in the
country. Thus it is advantageous for a country to
export a product that requires its abundant factor
as a major production input.
Trade theories, in spite of their usefulness,
simply explain what nations should do rather than
describe what nations actually do.The desired trade
pattern based on those theories related to compar-
ative advantage and factor endowment often devi-
ates significantly from the actual trade practice. It
is thus necessary to modify the theories to account
for the divergence caused by extraneous vari-
ables. Industrial nations’ high-income levels, for
instance, may foster a preference for high-quality
products that less developed countries may be
unable to supply. Furthermore, trade restrictions, a
norm rather than an exception, heavily influence
the extent and direction of trade, and any investiga-
tion is not complete without taking tariffs, quotas,
and other trade barriers into consideration.
Perhaps the most serious problem with classical
trade theories is their failure to incorporate mar-
keting activities into the analysis. It is inappro-
priate to assume that consumers’ tastes are homo-
geneous across national markets and that such
tastes can be largely satisfied by commodities that
are also homogeneous. Marketing activities such
as distribution and promotion add more value to a
product, and the success of the product is often
determined by the planning and execution of such
activities.
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
CASE 2.1 THE UNITED STATES OF AMERICA VS. THE UNITED STATES OF EUROPE
The European Union
The European Union (EU), once known as the European Common Market, is a prime example of a very high level
of economic cooperation. Formed by the 1957 Treaty of Rome, the EU has grown from six to fifteen members.
Sweden, Austria, and Finland joined the EU in 1995.The EU’s institutions that function as the three traditional
branches of democratic government are the European Parliament (as the legislative branch), the Court of Justice
(as a judiciary), and the Council of Ministers of the European Communities (as the executive branch).The Council
appoints members of the Commission of the European Communities, which initiates legislative proposals (regu-
lations or directives) for the Council.
The passage in 1985 of the Single European Act (SEA), an amendment to the Treaties of Rome, was largely
responsible for the development of the Single Internal Market.Taking effect in 1987, this legal instrument makes
it possible for the Council of Ministers to adopt an Internal Market directive or regulation on the strength of a
qualified majority (forty-four of sixty-seven votes). Council votes are assigned by a weighted average.The Council
of Ministers thus no longer has to reach unanimous agreement for a directive to be passed. However, unanimity
is still required for fiscal matters (e.g., taxation), decisions on the free movement of persons, and directives or
regulations on the rights and interests of employed persons.
The EU member states have ceded substantial sovereignty to the EU. As an example, the EU’s highest court
ruled in 2001 that France was breaking an EU law by maintaining a ban on British beef, since the European
Commission had already eased a worldwide embargo on British beef exports that was imposed over fears about
mad cow disease (BSE).
Because an EMU envisages total fiscal and monetary integration, nations that agree to join the union must
work out an economic arrangement in which trade between member countries directly benefits each of the coun-
tries’ economic objectives. The features of an EMU require a common monetary policy formulated by a single
institution; highly coordinated economic policies; and adequate, consistent constraints on members’ public sector
deficits and their financing.
It should be readily apparent that the formation of an EMU is a complex and exceedingly difficult task because
this level of cooperation requires the harmonization of national economic policies – especially in the monetary
and fiscal areas. A member country must give up the prospect of currency devaluation as a short-term instrument
for solving economic problems. For an EMU to function effectively, member countries should have similar eco-
nomic conditions. In the case of the EU, economic disparities are highly evident and will probably increase when
the EU admits some Eastern European countries as new members.
Under the EU members’ EMU agreements, the EU has created a central bank and adopted a single currency.
According to the terms of the Maastricht Treaty, the EU nations wishing to join the monetary union must meet
the following five economic criteria: annual inflation, public sector budget deficit, public sector debt, long-term
interest rates, and exchange rate. In 1999, fixed conversion rates were adopted for the participating nations’
currencies, and the European Central Bank (ECB) started to execute a common monetary policy. Following
a transition period, the currencies were replaced by a new currency called the euro. At the beginning of
2002, twelve EU countries (not counting Denmark, Sweden, and the United Kingdom) introduced euro coins
and notes.
The EU is unique in the sense that it is the first time advanced economies have agreed to cooperate econom-
ically on such a grand scale. Naturally, with the fall of the Berlin wall in 1989, countries emerging from com-
munism coveted EU membership.To promote stability in the region, the EU is expanding.Ten new members have
been admitted for accession in 2004. The ten new members are: Cyprus, the Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Turkey, Bulgaria, and Romania have candidate status.
While Bulgaria and Romania are on course for accession in 2007, Turkey was told to wait at least two more
years before starting talks on joining.
NAFTA
The North American Free Trade Agreement (NAFTA) is a free trade agreement.Taking effect in January 1994,
NAFTA comprises Canada, Mexico, and the USA. NAFTA, in terms of population, is larger than the European
Union but slightly smaller than the European Economic Area. In addition, NAFTA’s combined output is about
20 percent larger than that of the European Union.
NAFTA progressively eliminates almost all US–Mexico tariffs over a ten-year period and also phases out
Mexico–Canada tariffs at the same time. Such barriers to trade as import licensing requirements and customs
user fees are eliminated. NAFTA establishes the principle of national treatment to ensure that NAFTA countries
will treat NAFTA-origin products in the same manner as similar domestic products. Service providers of the
member nations will receive equal treatment.To protect foreign investors in the free trade area, NAFTA has estab-
lished five principles:(1) nondiscriminatory treatment, (2) freedom from performance requirements, (3) free trans-
ference of funds related to an investment, (4) expropriation only in conformity with international law, and (5) the
right to seek international arbitration for a violation of the Agreement’s protections.
48
TRADE THEORIES AND ECONOMIC DEVELOPMENT
Canada’s locus of economic activity has always been along the US border, which stretches for some four thou-
sand miles. It is not too surprising that the natural axis of trade has always been from north to south rather than
east to west. Canada is the largest single market for US exports as well as the largest manufactures market of
the USA.
The USA is Mexico’s most important trading partner, absorbing about two-thirds of total Mexican exports
worldwide. On the other hand, Mexico is the third largest US trading partner, ranking after Canada and Japan.
Approximately 70 percent of all of Mexico’s imports come from the USA, and 15 cents of every additional dollar
of Mexican GDP is spent on American goods and services. To modernize its infrastructure and plant facilities,
Mexico is purchasing most of the durable goods and industrial materials from the USA. Not surprisingly, Mexico
is the fastest growing major US export market. Mexico is, by far, the largest US trading partner in Latin America,
accounting for about half of US exports to and imports from the region.
President Vicente Fox of Mexico has advocated a progressive move toward a North American common market
that will allow free movement of labor among the three NAFTA members. Neither Canada nor the USA has shown
much enthusiasm for the proposal. Instead, the USA is more interested in expanding the free trade area and thus
maintaining the same level of economic cooperation.
As the EU expands, the USA itself is trying to persuade the other American countries to join the free
trade area.The Free Trade Area of the Americas (FTAA), when completed, will be the world’s largest free trade
area stretching from the southern tip of Argentina northward to Alaska. In December 1994, at the first Summit
of the Americas, the USA and thirty-four other democratically elected leaders in the Western Hemisphere took
the first step by committing to establishing the FTAA by 2005. The idea of the FTAA is to allow import tariffs
to fall to zero over a decade or more. Nontariff barriers will be gradually eliminated, and trade in services will
be liberalized. When formed, the FTAA will be the largest free-trade area in the world.
Points to consider
1 Discuss the obstacles and opportunities presented by the EU market. How should Japanese and American
firms adjust their marketing strategies to meet the challenges?
2 Discuss the benefits and difficulties involved as the EU absorbs several new members.
3 Assess the likelihood that the EU will be able to establish a political union.
4 Why is it that organized labor in the USA opposes NAFTA and further expansion when it never objected to
the US–Canada Free Trade Agreement which preceded NAFTA?
5 Should the USA advance NAFTA to the next stage to become, say, a common market? Or instead of verti-
cal advancement, should the USA push for horizontal advancement by creating the FTAA?
QUESTIONS
1 Is trade a zero-sum game or a positive-sum game?
2 Explain (a) the principle of absolute advantage and (b) the principle of relative advantage.
3 Should there be trade if (a) a country has an absolute advantage for
all
products over its trading partner,
and (b) if the domestic exchange ratio of one country is identical to that of another country?
4 What is the theory of factor endowment?
5 Explain the Leontief Paradox.
6 Discuss the validity and limitations of trade theories.
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
7 Distinguish among (a) free trade area, (b) customs union, (c) common market, (d) economic and monetary
union, and (e) political union.
8 Does economic cooperation improve or impede trade?
DISCUSSION ASSIGNMENTS AND MINICASES
1 Name products or industries in which the USA has a comparative advantage as well as those in which it has
a comparative disadvantage.
2 Why is it beneficial for the well-endowed, resource-rich USA to trade with other nations?
3 For a country with high labor costs, how can it improve its export competitiveness?
4 Explain how the advanced economies should cope with the shift in comparative advantage.
5 There was a proliferation of regional trading arrangements in the 1990s.The European Union and the North
American Free Trade Agreement in particular have commanded a great deal of world attention. There are
numerous reasons for the formation of a regional trading arrangement. Some of the reasons are economic
in nature, while others are political. As a policy maker for a medium-sized and developing country, list and
explain the reasons that may motivate you to consider forming or joining a regional trade group.
NOTES
1 Adam Smith,
Wealth of Nations
(1776; reprint, Homewood, IL: Irwin, 1963).
2 David Ricardo,
The Principles of Political Economy and Taxation
(1817; reprint, Baltimore: Penguin, 1971).
3 “A Fresh Look at Keynes,”
Finance & Development
(December 2001): 60–3.
4 Richard S.Tedlow,
Giants of Enterprise: Seven Business Innovators and the Empires They Built
(New York,
NY: HarperBusiness, 2003).
5 Eli Heckscher, “The Effects of Foreign Trade on the Distribution of Income,” in
Readings in the Theory of
International Trade
, ed. Howard S. Ellis and Lloyd A. Matzler (Homewood, IL: Irwin, 1949); and Bertil
Ohlin,
Interregional and International Trade
(Cambridge, MA: Harvard University Press, 1933).
6 Leslie Lipschitz, Timothy Lane, and Alex Mourmouras, “The Tosovksy Dilemma,”
Finance & Development
,
September 2002, 30–3.
7 Michael E. Porter,
The Competitive Advantage of Nations
(New York, NY: Free Press, 1990).
8 Paul Cashin, Paolo Mauro, and Ratna Sahay, “Macroeconomic Policies and Poverty Reduction: Some Cross-
Country Evidence,”
Finance & Development
(June 2001): 46–9.
9Porter,
Competitive Advantage
.
10
Offshore Finance U.S.A.
(September/October 2001): 66.
11 G. D. A. MacDougall, “British and American Exports: A Study Suggested by the Theory of Comparative
Costs,”
Economic Journal
(December 1951); Robert Stern, “British and American Productivity and
Comparative Costs in International Trade,”
Oxford Economic Papers
(October 1962); Bela Balassa, “An
Empirical Demonstration of Classical Comparative Cost Theory,”
Review of Economics and Statistics
(August 1963).
12 Wassily W. Leontief,“Domestic Production and Foreign Trade:The American Capital Position Re-examined,”
Proceedings of the American Philosophical Society
(September 1953); Wassily W. Leontief, “Factor
Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis,”
Review of
Economics and Statistics
38 (November 1956): 386–407.
50
TRADE THEORIES AND ECONOMIC DEVELOPMENT
13 “Trade Specialist Calls Current Rules Outdated,”
IMF Survey
, July 15, 1991, 209, 216.
14 “Opening Up to Capital Flows? Be Prepared Before Plunging in,”
IMF Survey
, May 19, 2003, 137.
15 “‘Let Chaos Reign,’ Grove Urges Execs,”
San José Mercury News
, September 27, 1995.
16 “Economists Discuss Transition to Market-Oriented Economies,”
IMF Survey
, February 4, 1991, 34–7.
17 J. E. Meade,
Trade and Welfare
(New York, NY: Oxford University Press, 1955); R. G. Lipsey and K.
Lancaster, “The General Theory of Second Best,”
Review of Economic Studies
24 (1956): 11–32.
18 “Report Highlights Benefits of Economic and Monetary Union in Europe,”
IMF Survey
, November 26, 1990,
363–5.
19 “Denmark to Lift Ban on Drinks in Cans,”
San José Mercury News
, January 15, 2002.
20 “Common Past Fuels Drive to Agree Biggest EU Expansion,”
Financial Times
, December 10, 2002.
21 “European Central Bank Plans Reforms to Cope with EU Enlargement,”
IMF Survey
, February 3, 2003,
31–2.
22 C. Michael Aho, “‘Fortress Europe’: Will the EU Isolate Itself from North America and Asia?”
Columbia
Journal of World Business
29 (fall 1994): 33–9.
23 “NAFTA’s Scoreboard: So Far, So Good,”
Business Week
, July 9, 2001, 54–5.
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TRADE THEORIES AND ECONOMIC DEVELOPMENT
52
CHAPTER OUTLINE
Trade is not about warfare but about mutual gains from voluntary exchange.
Alan S. Blinder
■ Protection of local industries
Keeping money at home
Reducing unemployment
Equalizing cost and price
Enhancing national security
Protecting infant industry
■ Government: a contribution to protectionism
■ Marketing barriers: tariffs
Direction: import and export tariffs
Purpose: protective and revenue tariffs
Length: tariff surcharge versus
countervailing duty
Rates: specific, ad valorem, and combined
Distribution point: distribution and
consumption taxes
■ Marketing barriers: nontariff barriers
Government participation in trade
Customs and entry procedures
Product requirements
Quotas
Financial control
■ Private barriers
■ World Trade Organization (WTO)
■ Preferential systems
Generalized system of preferences (GSP)
Caribbean basin initiative (CBI)
Other preferential systems
■ Some remarks on protectionism
■ Conclusion
■ Case 3.1 Global war on drugs or tuna?
Trade distortions and
marketing barriers
Chapter 3
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53
PURPOSE OF CHAPTER
Free trade makes a great deal of sense theoretically because it increases efficiency and economic welfare
for all involved nations and their citizens. South Korea’s trade barriers, however, do not represent an iso-
lated case. In practice, free trade is woefully ignored by virtually all countries. Despite the advantages,
nations are inclined to discourage free trade.
The
National Trade Estimate Report on Foreign Trade Barriers (NTE)
, issued by the US Trade
Representative, defines trade barriers as “government laws, regulations, policies, or practices that either
protect domestic producers from foreign competition or artificially stimulate exports of particular domes-
tic products.” Restrictive business practices and government regulations designed to protect public health
and national security are not considered as trade barriers. The report classifies the trade barriers into ten
categories: (1) import policies (e.g., tariffs, quotas, licensing, and customs barriers); (2) standards, testing,
labeling, and certification; (3) government procurement; (4) export subsidies; (5) lack of intellectual prop-
erty protection; (6) services barriers (e.g., restrictions on the use of foreign data processing); (7) invest-
ment barriers; (8) anticompetitive practices with trade effects tolerated by foreign governments; (9) trade
restrictions affecting electronic commerce (e.g., discriminatory taxation), and (10) other barriers that
encompass more than one category (e.g., bribery and corruption).
1
This chapter catalogs the types and impact of trade and marketing barriers. It examines trade restric-
tions and the rationale, if any, behind them. By understanding these barriers, marketers should be in a better
position to cope with them. It would be impossible to list all marketing barriers because they are simply
too numerous. Furthermore, governments are forever creating new import restrictions or adjusting the ones
currently in use. For purposes of study, marketing barriers may be divided into two basic categories: tariffs
and nontariff barriers. Figure 3.1 on p. 54 provides details of this division. Each category and its
subcategories will be discussed in this chapter.
South Korea is the world’s sixth largest manufacturer
of automobiles, and it exports some 650,000 cars
annually.The country is also the world’s fastest grow-
ing car market. Hyundai Motors and its subsidiary Kia
have 75 percent market share. In 1999, Koreans
bought almost one million new cars. Yet car imports
were so highly restricted that only 2401 imported cars
were sold,amounting to about 0.3 percent of the coun-
try’s domestic car sales (the lowest market penetra-
tion in the world). While GM sold sixty-eight cars
there, Volkswagen managed to sell two.
Foreign carmakers have long complained about
South Korea’s highly protected market. Imported
cars are subject to the 8 percent tariffs as well as the
15 percent acquisition tax on luxury cars. The
government also restricts the number of automobile
showrooms and the exhibition space allowed to
foreign-owned importers and dealers. Other problems
faced by foreign carmakers include restrictions on
credit facilities and the tightly regulated advertising
market. Since most advertising time on TV and radio
is controlled by broadcasting authorities through con-
tracts that may continue indefinitely, large Korean
advertisers are able to lock up virtually all prime-time
TV spots or sponsored programs. In addition, Korean
buyers of high-priced foreign cars can expect special
attention from tax officials.
Consumer durables (e.g.,refrigerators) are prohib-
itively expensive because of tariffs and taxes. Even
dried peas are classified as luxury goods. Foreign
MARKETING ILLUSTRATION THE BEST THINGS IN LIFE ARE (NOT) FREE
TRADE DISTORTIONS AND MARKETING BARRIERS
54
sausages do not necessarily fare any better. Korean
inspectors seized a shipment of American-made
sausages and held it for months. According to the
inspectors, the sausages were incorrectly classified for
years by customs officials as a product with a ninety-
day expiration period. The sausages are supposed to
have only a thirty-day expiration period. Ironically,
that is about the length of time it takes for a shipment
to reach Korea and undergo the lengthy customs
process.
Korea’s foreign citrus-licensing system has kept
out all but the lowest grade oranges from abroad.
When the first shipment of oranges arrived from
California, it was held in the hot sun for three weeks
while awaiting clearance. After finally admitting the
containers, the government then proceeded to reject
the oranges as substandard. California’s almond
growers similarly have to endure customs rules that
keep shipments on Korean docks for weeks.
Sources:
“From Sausages to Autos, US Products Still Face
Trade Hurdles in South Korea,”
Wall Street Journal
, May
31, 1994; “South Korea, After US Pressure, Offers Plan to
Ease Access for Foreign Cars,”
Wall Street Journal
, June
24, 1994; “S. Korean Market Hard to Crack,”
San José
Mercury News
, October 15, 1995; “Now Detroit’s Heavy
Artillery Is Trained on Seoul,”
Business Week
, September
25, 1995, 78; “Korea, Here We Come,”
Business Week
,
February 14, 2000, 8; “Foreign Automakers Set Sights on
S. Korea,”
San José Mercury News
, September 16, 2000.
Import tariffs
Export tariffs
Protective tariffs
Revenue tariffs
Tariff surcharge
Countervailing duties
Special duties
Variable duties
Specific duties
Ad valorem duties
Combined rates
Single-stage
Value-added
Cascade
Excise
Administrative guidance
Subsidies
Government procurement
and state trading
Product classification
Product valuation
Documentation
License or permit
Inspection
Health and safety regulations
Product standards
Packaging, labeling, and marking
Product testing
Product specifications
Absolute
Tariff
Voluntary (OMA and VER)
Exchange control
Multiple exchange rates
Prior import deposits
Credit restrictions
Profit remittance restrictions
Direction
Purpose
Time length
Import restraints
Tariff rates
Production,
distribution, and
consumption
Government
participation
in trade
Customers and
entry procedures
Marketing
barriers
Nontariff
barriers
Product requirements
Tariffs
Quotas
Export quotas
Import quotas
Direction
Figure 3.1
Marketing barriers
Source:
Adapted from Sak
Onkvisit and John J. Shaw,
“Marketing Barriers in
International Trade,”
Business Horizons
31
(May to June 1988):
64–72.
TRADE DISTORTIONS AND MARKETING BARRIERS
PROTECTION OF LOCAL INDUSTRIES
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
Why do nations impede free trade when the inhi-
bition is irrational? One reason why governments
interfere with free marketing is to protect local
industries, often at the expense of local consumers
as well as consumers worldwide. Regulations are
created to keep out or hamper the entry of foreign-
made products. Arguments for the protection of
local industries usually take one of the following
forms: (1) keeping money at home, (2) reducing
unemployment, (3) equalizing cost and price, (4)
enhancing national security, and (5) protecting
infant industry.
Keeping money at home
Trade unions and protectionists often argue that
international trade will lead to an outflow of money,
making foreigners richer and local people poorer.
This argument is based on the fallacy of regarding
money as the sole indicator of wealth. Other assets,
even products, may also be indicators of wealth. For
instance, it does not make sense to say that a man is
poor just because he does not have much cash on
hand when he owns many valuable assets such as
land and jewelry. In addition, this protectionist
argument assumes that foreigners receive money
without having to give something of value in return.
Whether local consumers buy locally made or
foreign products, they will have to have money to
pay for such products. In either case, they receive
something of value for their money.
Reducing unemployment
It is standard practice for trade unions and politi-
cians to attack imports and international trade in the
name of job protection. Figure 3.2 presents this
argument as made by the United Steel workers of
America.The argument is based on the assumption
that import reduction will create more demand for
local products and subsequently create more jobs.
Most economists see this kind of thinking as one-
sided, though not completely without merits.At the
least, import reduction makes foreigners earn fewer
dollars with which they can buy US exports. As
a result, foreign demand for American products
declines. In addition, foreign firms may refuse to
invest in the USA. They are inclined to invest only
when import demand is great enough to justify
building and using local facilities.
Another problem with protectionism is that it
may lead to inflation. Instead of using protective
relief to gain or regain market share and for
competitive investment, local manufacturers often
cannot resist the temptation to increase their prices
for quick profits.
With higher prices at home, consumers become
poorer and buy less, and the economy suffers. To
make matters worse, other countries will often
retaliate by refusing to import products. On a
related subject, note that the establishment of
foreign operations is not necessarily harmful to
employment at home. In fact, jobs are often created
rather than lost.
Equalizing cost and price
Some protectionists attempt to justify their
actions by invoking economic theory. They argue
that foreign goods have lower prices because of
lower production costs. Therefore, trade barriers
are needed to make prices of imported products
less competitive and local items more competi-
tive. This argument is not persuasive to most ana-
lysts for several reasons. First, to determine the
cause of price differentials is unusually difficult.
Is it caused by labor, raw materials, efficiency,
or subsidy? Furthermore, costs and objectives
vary greatly among countries, making it impossi-
ble to determine exactly what costs need to be
equalized.
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TRADE DISTORTIONS AND MARKETING BARRIERS