Taking it personally: rethinking the effectiveness of tariffs

On September 16, 2013, an article from the Wall Street Journal, reports and discusses the new 6.5% tariff imposed by China on U.S. solar-panel materials. This is thought to be China’s retaliation for a tariff imposed last year on Chinese-made solar cells.

Washington enacted the tariffs after determining that the Chinese manufacturers were dumping the goods in the U.S., and had received illegal subsidies. China claims that the tariff is a result of the U.S. dumping of polysilicon in the Chinese market, which accounted for 36% of Chinese polysilicon imports in the first half of 2013. Although China fell short of  earlier threats of imposing tariffs as high as 57%, the new tariff could be detrimental to U.S. manufacturers, especially since China is currently the world’s largest producer of solar panels and has announced plans to increase production for the next three years.

My thinking goes to the motivation and effectiveness of tariffs. Including this case, it seems that in many instances when tariffs are imposed, the result is political tension and retaliation. Thus, it seems the motivation of imposing tariffs is not fully derived from an economic sense, but also increasingly from a pride/power perspective. The goal of the tariffs has deviated from a regulatory role, to a tool of political chess. In this China-U.S. case, China has allowed for its national solar panel business to take a hit by raising the input prices of polysilicon, albeit exempting three U.S. manufacturers who they cited as only having received minimal subsidies. With countries, especially China, quite willing to participate in tariff wars, perhaps this classic regulatory tool is losing its value in the face of the exponentially interconnected global economy.

This text was written and presented by Mr. Sho Shino, Student at the McDonough School of Business of Georgetown University in the course on International Business (STRT-261-01) on September 18th, 2013. You can contact the author here.

News from the USTR: US-Japan Trade Talks

Trade talks between the US and Japan continue today marking the strategic importance of concluding the TPP negotiations before the end of the year. US Trade Representative Michael Froman’s visit to Japan is an attempt for the two nations to jointly commit to the proposed TPP rulings without succumbing to the pressure from local lobbyists.

The Japanese government has vowed to protect tariffs on certain farm products while USTR Froman maintains the US’s goal of the elimination of tariffs.

Due to Japan’s tensions with China and Europe, exports to the US rose 18.4% this past year signifying the vital importance of strong cooperation between the US and Japan.

The Rising Cost of Freedom

We are finding that the cost of freedom seems to be increasing lately. Terms like free trade or free choice have been misleading since they all come with a price, which international marketers pay in terms of preparing their shipments, scrutinizing their customers, and conforming to government regulations of tariffs or taxes. They pay ofr it when subsidies are reduced and markets are opened further, resulting in more intense competition.

Now prices are going up when international marketers have to file special paperwork or comply with security guidelines, which slow down the flow of merchandise. Every time a shipment is delayed, international transactions are less profitable and the subsequent business dealings become less competitive. Customers talk about unmet expectations and domestic firms point to the vagaries of itnernational markets.

We are all paying a higher price due to global terrorism, which has permeated the global marketplace. In most instances, terrorism is not an outgrowth of choice but rather the lack of it. Terrorists may succeed in reducing the freedom of others but not in increasing their own. The prinicpal choices played out between those exercising terrorism and those exposed to it are those consistent with economic theory of return on investment. When terrorists select targets in response to governmental implementation of anti-terrorism policies, the harder targets are likely to motivate them to go for easier ones. Increased protection of past targets may result in attacks on new and unexpected targets that are more likely to succeed. Similarly, if terrorists can no longer enter a country, they may attack that country’s symbols and representatives abroad. If embassies are then more secured and fortified, terrorists may attack that nation’s individuals and companies.

Who is typically most affected by terrorist acts? Attacks aimed at business, such as the infamous bombings of U.S. franchises abroad do not bring MNCs to their knees. The local participants, the local employees, the local investors and the local customers are affected most. Who can protect tehmselves against such attacks and who can afford to protect targets? Only the more wealthy countries and companies can. They have the choice of where to place etheir funds, with whom to trade, and whether to hold the enemy at bay through a security bubble created via exports, a franchise, or a wholly owned subsidiary. The poor players do not have any choices and ther alternatives are not improved by any gruesome act. The local firms, the nations with economies in development, and the poor customers continue to be out there, exposed to further acts of terrorism without the ability to influence events.

But international marketing can enable the disenfranchised to develop alternatives. As suggested by Prahalad and Hammond (2002), multinational firms can invest in the world’s poorest markets and increase their own revenue while reducing poverty. With support from shareholders and the benefit of good governance, marketers can, and should continue in their role as social change agents. It should be kept in mind that international marketing has value maximization at its heart. If it is worthwhile to fulfill the needs of large segments of people even at low margins, then it will be done.


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: