Protectionism Never Pays

Courtesy sqrpix

There is a tendency today towards domestic protectionism and while it is not surprising, it is also not wise. Using the U.S. as an example, those with global marketing experience know that a “buy American” attitude will cost the U.S. and the world billions of dollars and reduce the number of jobs. Continue reading

Retailers “Scream” Discrimination

This little story from 2002 illustrates the harms of trade restrictions:

For years, retailers from Wal-Mart and Target to tiny fancy-goods outlets have counted on low-cost imports from China to scare up sales at Halloween. A cheap polyester ghoul robe, along with a “Scream” mask retails for less than $20.  Classed as “flimsy festive articles,” party-goods suppliers imported them duty free — until U.S. Halloween giant, Rubie’s Costume Company, got them reclassified as “fancy dress apparel.”
This ruling puts ghoul robes in the same tariffs-and-quotas basket as classy theatrical robes, evening gowns, and even wedding tuxedos.  Hit with a whopping 32 percent in duties that could double the price of Halloween costumes at retail, importers are effectively squeezed out of the Halloween market.  Worse still, the difficulty and expense involved with quota visas from China threatens to wipe out the estimated $250 million market for imported costumes.

New York-based Rubie’s stands to gain from the reclassifcation.  Rubie’s buys its Halloween goodies from Mexico rather than China — and under NAFTA, imports from Mexico are exempt from the tariffs.  For Rubie’s, which has been in the Halloween business for 50 years, it’s payback time.  Before NAFTA, the company, which manufactures in North America, struggled to match its prices with floods of cheap imports.

As you can see the various loopholes in trade laws can be manipulated to benefit companies even if they may not be the most efficient producer.  The same effect is seen in almost any industry and can induce tariff wars and protectionist counter-measures.  A seemingly harmless tariff law on wedding attire can turn into a drastic shift in the Halloween apparel industry.  Go figure.

Sources: Neil King Jr., “Costume Drama: Is a ‘Scream’ Robe Really as Fancy as a Tux?” WSJ, March 15, 2002; “Reciept of Domestic Interested Party Petition Concerning Tariff Classification of Textile Costumes,” US Customs Service, http://www.american.edu

What Does the WTO do?

The World Trade Organization (WTO) is the only international body dealing with the rules of trade between nations.  At the core of the WTO are agreements, negotiated and signed by most of the world’s trading nations.  These documents provide legal ground rules for international commerce.  Their goal is to help the producers of goods and services, exporters, and importers conduct business in the global marketplace.

The WTO supplanted the General Agreement on Tariffs and Trade (GATT) in early 1995.  The WTO has three main purposes:
1. To help trade flow as freely as possible as long as there are no undesirable side effects.  In part, this means removing obstacles to trade.  It also means making rules transparent and predictable so that individuals, companies, and governments know their scope of influence.

2. To serve as a forum for trade negotiations among the community of trading nations.

3. To settle trade disputes among member nations.

The GATT and now the WTO have made significant contributions to improved trade and investment flows around the world.  Their successes have resulted in improvements in the economic well-being of nations around the world.

I have written before about the importance of free trade in economic development and recovery. Tariffs, quotas, and restrictions adversely effect the world economy.  During this current economic crisis we are seeing a return to protectionism that endangers the economic recovery we need.  Organizations like the WTO need to make sure that the global economy does not suffer from this new trend.

Related international organizations:

U.S. Leadership Is Essential

This is a preview of my new book, Global Business: Positioning Ventures Ahead to appear with Taylor and Francis in early 2011. I will be posting little snippets from the book every once in a while. I encourage you to read, comment, share, and your thoughts to the comment section. And look for the book in June.

As we write this, governments worldwide are working to counteract the 2009 economic crisis by developing stimulus plans. The efforts of any one nation will have an impact globally because national economies are intertwined, but economic activity is highly concentrated among a few players – the U.S., European Union, Japan, China and Canada – who account for more than 75 percent of the world’s economy. That clout makes it critical for U.S. companies to become more involved in international marketing, whether it is export-import trade, licensing, joint ventures, wholly-owned subsidiaries, turnkey operations, or management contracts.

Please Comment:  Do you think the protectionist measures that are being enacted as a part of the stimulus plans will help or hurt domestic economic recovery?  What is the best way for governments to react to the recession?  Do you think that a global outlook is key to recovery?