International Marketing, 5th Edition

It is impossible to abolish governments so as to avoid trade distortion. Assuming that it is possible to eliminate all forms of government, it is still probably not desirable to do so. Without governments, there is no rule of trade, and chaos and confusion will result. It must also be remembered that governments are created by the peoples. Governments' rules and conducts, after all, are supposed to represent the ideas of the citizens.

Although governments may create trade distortion, they still perform a useful function in making known to exporters and importers what to expect in terms of the rules of the game. Whether these rules are fair is another matter altogether.

Tariffs are straightforward and are thus relatively easy to eliminate as evidenced by the success of the early rounds of GATT's negotiations. The difficulty encountered by GATT in removing nontariff barriers, however, indicates that nontariff barriers, not tariffs, have been a major issue in the 1990s because such barriers are illusive and can be manipulated with subtlety. The next battleground, however, will involve ‘private barriers’ rather than government-sanctioned barriers. Corporate groups, for example, may simply refuse to do business with firms that are not affiliated with a particular corporate group.

The techniques which can be used to overcome the financial control include: switch trading, moving up the priority queue, currency swaps, netting, and parallel loans, and negotiating for a higher value of an investment than the investment's actual worth (invoicing, royalties, management fees, and engineering fees).

The WTO has served a useful purpose in promoting free trade. Without the WTO (and GATT), it is unlikely that Japan would have opened up its market for American beef and oranges. Whether the WTO should have accomplished more is a matter of debate. Just like the United Nations and other international agencies, the WTO has many members with diverse viewpoints and interests. As a result, it is difficult to have a consensus. What is fair or equitable is subject to varying interpretations. The WTO thus must walk a fine line in removing trade barriers while considering a member nation's sovereign rights.

Although poverty exists in the United States, an average U.S. citizen is unlikely to fully appreciate poverty and hunger until one sees how people in the least developed countries struggle to survive. As a prosperous nation which cannot exist in isolation, the United States can and should play an important role in helping poor nations. Toward this end, the GSP system is a critical tool.

The question is not whether the United States should continue the GSP system but rather in what form the system should be. For example, such countries as South Korea and Taiwan have become largely industrialized, and their need for the GSP status has lessened. Therefore, it is appropriate to have permanently graduated them from the program. As certain countries approach the same degree of industrialization, their eligibility should also be adjusted accordingly to make sure that the more needy nations can likewise benefit from the GSP system as intended.

Because of the numerous trade barriers coupled with the barrier variations from country to country, it is difficult, if not impossible, to list all strategies to deal with each and every trade barrier. Suffice it to say that the most fundamental way for MNCs to cope with trade restrictions is to understand the trade barriers in terms of what they are and the logic behind them.

Also MNCs can gain flexibility by moving certain activities to a country which presents more opportunities while reducing potential threats. Although it may have some negative connotations, loopholes must be investigated and exploited. For example, due to the impending loss of their GSP status, several Korean and Taiwan firms shifted some of their production facilities to Thailand in order to use Thailand's GSP status to facilitate their products' entry into the United States. These firms have also gained other investment incentives and tax benefits from Thailand's Board of Investment. It is important to keep in mind that, with or without trade barriers, MNCs still must do their part to conquer the market.

According to ‘IMF Study Surveys Policy and Administrative phpects of Value-Added Tax’, IMF Survey, 2 March 1992, 69-71, there are three main reasons to adopt the VAT system: revenue, neutrality, and efficiency. In terms of revenue, the VAT typically contributes 12-30 percent of revenue in most countries, making it a reliable revenue source. In terms of neutrality, the tax is nondistortionary if there are few exemptions. In terms of efficiency, the system has often replaced inefficient, distortionary, or badly administered taxes (e.g., taxes on capital goods, exports, or imports), those taxes that reduce the tax base, and those taxes that involve a cumbersome and sometimes corrupt administration.

VAT has been criticized for its regressivity nature. Compared to higher-income households, lower-income households are taxed more heavily, relative to income and expenditure.

Regarding exports, VAT is fully rebated on exports while some other sales taxes and direct taxes are not. However, it is uncertain whether exports would improve or worsen. The answer depends on the previous sales tax, tax rebate, and subsidy regimes. One argument is that, since VAT is rebated on exports but corporate income taxes are not, VAT should help exporters. But this outcome is based on the assumption that corporate income taxes are reflected in higher export prices and that exporters will reduce their prices if the profits tax is reduced. Furthermore, if other countries also substitute a VAT for other direct taxes, there is no net advantage to anyone.

It has been argued also that VAT, by leaving a paper trail, will make it more difficult for companies to evade their tax obligations. But the VAT process is cumbersome. A single-stage sales tax may be easier to monitor for full compliance. Furthermore, some firms have been known to file false VAT claims with the governments in order to seek tax refunds on the sales that never took place.

Regarding the fairness issue, the predominant feeling in the United States is that the other nations could not have made significant gains in the world market without subsidies. The EU’s farm subsidy policy is a prime example. The U.S. government, organized labor, and management all have expressed their dismay and displeasure because of what they perceive to be foreign firms' unfair advantage.

The U.S. notion of ‘fair play,’ however, may be unknowingly biased. While accusing others of playing the game by different rules, U.S. firms have failed to critically examine whether their proposed rules are relevant. As explained by Clyde Prestowitz, Jr. in his book, Trading Places, when the two sides play different games, it is immaterial to talk about rules. Uniform rules are relevant only when all parties are largely equal and when they all will be affected in the same manner by such rules. In reality, nations do not have parity, and a certain set of rules is bound to affect the various parties unevenly.

Americans should not be surprised to learn that foreigners often feel that the rules proposed by the U.S. government are inherently unfair. Such rules favor the built-in advantages of the United States such as head start, well-endowed capital, and market size. Take the area of services as an example. Given its lead, the United States has been pushing the other countries to open their markets. On the other hand, given its high costs in textiles, the United States and other developed countries have effectively blocked developing nations from freely exporting their labor-intensive textile products and utilizing their resource endowment. It thus seems strange for the United States to exploit its strength but to discourage the others from doing the same. It is unfair for the United States to insist on exporting its strength but to change the rule when that strength is shifted to others.

An analogy should make the point clear. A better-built person may feel that it is not manly for his smaller opponent to use a knife or gun rather than to engage in a straight fist fight. Yet this same person, if in the right frame of mind, will see absolutely nothing wrong in using a high-powered rifle to neutralize the natural advantage of a beast (e.g., gorilla, bear, or tiger). The use of firearms is not unlike the use of subsidies, and the United States is in essence the better-built man who advocates fair play — so long as it fits his purpose.

Now let's consider the issue of whether foreign subsidies are indeed harmful to the United States. While it is true that foreign nations have used subsidies to enable them to offer low prices to their trading partners, those nations are actually doing American consumers a big favor at the expense of their own consumers. Contrary to the popular belief, the United States is the beneficiary — not the injured party — of the practice.

Foreign subsidies, by lowering the prices of both American and foreign products, subsidize the high standard of living of American consumers. It is illogical to contend that paying more is better than paying less. If an American buyer is offered a product worth $2 for $1, it is foolish for the buyer to insist on paying a higher price.

Some may argue that the purchase of subsidized products is myopic because the United States will suffer more in the long run. More layoffs and higher unemployment will follow, and, in the end, U.S. production facilities may deteriorate to the point that the United States may become overly dependent on the production facilities within other countries. Will foreign subsidies harm certain U.S. industries? Probably. Will the United States overall be worse off? Not necessarily. Any harmful effect of subsidies on one industrial sector should be offset by the gains made in other sectors.

The smart thing for the United States and its citizens to do is to take the money (i.e., subsidy) and run. That money can be used to stockpile those subsidized products (based on simple technologies) as well as to be reinvested in a new and more advanced technology. By using foreign nations’ subsidies to subsidize the United States’ new scientific frontiers, this strategy would enable the United States to stay ahead of the pack.

This philosophy of thinking that the country can only benefit from higher wages and prices should be re-examined. It is difficult to believe that the society benefits or that more employment will result when consumers pay more. It is beyond comprehension that the United States can become more prosperous by insisting on paying more than foreigners ask for and thus transferring wealth to foreigners in the process.

It is time to put the geographic frontier behind and look forward to the technological frontier. Foreign subsidies, instead of being harmful, actually allow the United States to experiment with how a mature industrial nation can adapt to changing environment. By investing the subsidies received wisely, the United States can play a key role in a new type of industrialization that maximizes world welfare.

Although the U.S. government has campaigned to reduce or stop cigarette consumption in the United States, it has pushed Japan, South Korea, and Taiwan to dismantle their government-sanctioned tobacco monopolies and open their lucrative markets. To its defense, the U.S. government has argued that consumers abroad are going to smoke anyway and that the superior American tobacco should be among the choices offered. As mentioned by a former U.S. Trade Representative, “we are not pushing cigarettes on other countries, but where they allow cigarette consumption, we say they ought not to ban ours.”

It is also illogical for foreign governments to cite health reasons in banning foreign cigarettes while producing and marketing their own tobacco products to their citizens. American cigarette companies have also claimed that they are not trying to recruit new smokers and that they are trying only to get smokers to switch brands. Yet their advertisements often feature teenagers and women.

The position of the U.S. government has been heavily criticized. While there is nothing wrong with the U.S. government's desire to promote American products overseas, the choice of product being promoted in this case is the problem — given the fact that tobacco is a harmful product. Should trade disputes be decided on the basis of commercial regulations or on the basis of health standards? Perhaps, the United States should exert moral leadership instead of trade leadership.

In the case of Thailand, it initially fought back. The Thai government relied on help from an alliance of local and international antismoking activists. These antismoking groups have been working to create opposition to smoking throughout Asia. In the end, Thailand had to bow to heavy pressure from the United States. However, Thailand has also imposed high import duties, a cumbersome customs-clearance procedure, and a ban on cigarette advertising. On the one hand, these regulations have made it difficult for American tobacco companies to effectively market their products. On the other hand, it is difficult to see why this trade dispute existed in the first place since American cigarettes, in spite of the previous restrictions, were pretty much freely smuggled in and widely available anyway.