Tariffs, Taxes and Channel Costs /International Marketing 10th/


When products are transported across national borders, tariffs may have to be paid. Tariffs are usually levied on the landed costs of a product, which include shipping costs to the importing country. Tariffs are normally assessed as a percentage of the landed value. The World Trade Organization (WTO), like its predecessor, the General Agreement on Tariffs and Trade (GATT), has gone a long way in reducing tariffs. However, they can still prove significant for certain products in certain markets. Tariff costs can have a ripple effect and increase prices considerably for the end user. Intermediaries, whether they are sales subsidiaries or independent distributors, tend to include any tariff costs in their costs of goods sold and to calculate operating margins on the basis of this amount. As a result, the impact on the final end-user price can be substantial whenever tariff rates are high.


A variety of local taxes also affect the final cost of products.

Value-added tax (VAT) a tax that is levied at each stage in the production and distribution of a product or service based on the value added by that stage; the tax is ultimately passed on to the buyer

One of the most common is the value-added tax (VAT) used by member countries of the European Union (EU). This tax is similar to the sales tax collected by state governments in the United States but involves more complicated assessment and collection procedures based on the value added to the product at any given stage.

Each EU country sets its own VAT structure. However, common to all is a zero tax rate (or exemption) on exported goods. A company exporting from the Netherlands to Belgium does not have to pay any tax on the value added in the Netherlands. However, Belgian authorities do collect a tax, at the Belgium rate, on products shipped from the Netherlands. Merchandise shipped to any EU member country from a nonmember country, such as the United States or Japan, is assessed the VAT rate on landed costs, in addition to any customs duties that may be applied to those products.

Sin taxes taxes assessed on products that are legal but discouraged by society

Different countries also assess different sin taxes. These are taxes assessed on products that are legal but are discouraged by the society. Cigarettes and alcoholic beverages commonly fall into this category.

Local Production Costs

Up to this point, we have assumed that a company has only one producing location, from which it exports to all other markets. However, most international firms manufacture products in several countries. In such cases, operating costs for raw materials, wages, energy, and/or financing may differ widely from country to country, allowing a firm to ship from a particularly advantageous location in order to reduce prices by taking advantage of lower costs. Companies increasingly choose production locations that give them advantages in production costs as well as freight, tariffs, or other transfer costs.

Consequently, judicious management of sourcing points may reduce product costs and result in added pricing flexibility.

Channel Costs

Channel costs are a function of channel length, distribution margins, and logistics. Many countries operate with longer distribution channels than those in the United States, causing higher total costs and end-user prices because of additional layers of intermediaries. Also, gross margins at the retail level tend to be higher outside the United States. Because the logistics system in a large number of countries is also less developed than that in the United States, logistics costs, too, are higher on a per-unit basis. All these factors add extra costs to a product that is marketed internationally.

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