Tariffs in Global Business: Concept, Processes, and Case Examples

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ABSTRACT

This manuscript examines the concept and processes of tariffs in global business. In the flowing sections is a review of the market-entry literature, an examination of purposes and types of tariffs, a critical analysis of four case examples of tariffs in global business involving the steel, lumber, automobile, and textile industries, and a discussion of the use of foreign trade zones in managing a firm's tariff exposure. The manuscript features a comprehensive literature review that may be of value to global business practitioners and researchers.

INTRODUCTION

After a month at sea in a container aboard a cargo ship, a product lands at a port in a host country. Then begins the process of moving the product through the various host-country governmental offices related to country entry and customs. Priced conservatively on export from its home country, the product must be competitive in the host-country market. A recent market research study indicates that the host-country promises to be a profitable market for the exporting firm, but it is a price-sensitive market and the product's price, therefore, must be competitive with local products.

The market-entry process moves smoothly at the port. The firm's host-country distributor adroitly handles the documentation for country entry. All is going well with the processing activities at the port until the host-country government levies a tariff of 60% on the specific product type and country-of-origin locale of the product imported to the host country. At the imposition of the tariff, the landed cost of the product increases from (X) in host-country currency to [(X) + 0.60(X)]. At a tariff-imputed landed cost of [(X) + 0.60(X)], the product likely will not be competitive, particularly in the host country's price-sensitive market.

MARKET-ENTRY LITERATURE

The opening vignette typifies an unfortunate experience of some managers in international market-entry transactions. A foreign market is selected, a product is shipped, and upon arrival a higher than anticipated tariff is levied. While it is possible to request "advanced tariff classification" from a country to which a product is being exported to know the likely amount of tariff beforehand, tariff schedules in a host country sometimes will change without prior notification. The change more often than not is an increase in tariff. This results in the landed cost of a product increasing significantly as the result of an increase in tariff, thereby affecting a product's price competitiveness within a host-country market.

Nations affect market-entry behaviors of home-country firms seeking entry to host-country markets through trade policies, the mix of national customs, laws, procedures, rules, and tariffs that govern international trade (Strange, 1988; Behrman & Grosse, 1990; Brewer, 1993; Shleifer & Vishny, 1994; Aswicahyono & Hill, 1995; Loree & Guisinger, 1995; Markusen, 1995; Braunerhjelm & Svensson, 1996; Barrell & Paine, 1997; Kehoe, 1998, Rugman & Verbeke, 1998; Globerman & Shapiro, 1999; Editorial, 2003; Cellich & Jain, 2004; Kahn, 2004; Kehoe, 2004, Griffin & Pustay, 2005). In addition to trade policies, market-entry behavior is influenced by variables such as the market-entry decision processes and managerial motivations at work in a firm, a firm's level of export intensity, the interplay of host-country culture and market-entry processes, and the international experiences of a firm's management.

The actions of governmental and non-governmental institutions impact the market-entry decision processes and affect a firm's market-entry strategies. For example, market-entry policies and rules (e.g., tariffs and quotas) within a host country drive decisions whether to ship a product in complete form to a host county or to ship in component parts for assembly within the country.

Similarly, country-of-origin policies of a host country affect decisions whether or not to ship directly from home to a host country or to transship through another country. Literature describing and modeling these and other considerations in the market-entry decision process is complex and robust. Among the more interesting research about managing market-entry decision processes of multinational firms are articles and books by Tookey (1964), Kindleberger (1969), Horst, (1972), Stopford and Wells (1972), Hymer (1976), Johanson and Vahlne (1977), Killing (1983), Root (1983) Thomas and Araujo (1985), Beamish and Banks, 1987; Gomes-Casseres (1987), Roehl and Truitt (1987), Kogut (1988), Anderson and Narus (1990), Kim and Hwang (1992), Lei and Slocum (1992), Erramilli and Rao (1993), Haverman (1993), Parkhe (1993), Smith and Zeithaml (1993), Inkpen and Birkenshaw (1994), Dalli (1995), Li (1995), Buckley (1996), Duffy (1996), Quelch and Klein (1996), Gomes-Casseres (1997), Buckley and Casson (1998a), Buckley and Casson (1998b), Davis, Desai and Francis (2000), Pan and Tse (2000), Meyer and Estrin (2001), Leonidou, Katsikeas and Samiee (2002), Muralidharan (2003), Harris (2004), Oum, Park, Kim and Yu (2004).

Market-Entry Decision Processes and Managerial Motivations

While describing and modeling market-entry decision processes is interesting, at a deeper level of abstraction is a need to understand the motivations of managers for entering the international business arena. Horst (1972), Grubaugh (1987), Zitta and Powers (2003) and Samli (2004) suggest that managers enter host-country markets seeking growth, profits, technology enhancement, and to satisfy a desire for a global presence. Doukas and Lang (2003) posit a need for diversification as a managerial driver of foreign direct investment, while Hejazi and Pauly (2003) argue that domestic capital formation is a significant motivator of international market entry. Muralidharan (2003) suggests the exploitation of "arbitrage opportunities in product, financial and other resources markets that may exist across various country operations" motivates international market entry decisions. Claggett and Stutzman (2003) posit managers move to international diversification in order to increase revenues and to lower volatility, thereby enhancing overall firm performance. Bruner (2004) says managers seek to increase returns, reduce risks, or both in entering foreign markets. Tyson (2004) suggests managers seek "low-wage production platforms" to serve domestic and global markets as a motivation for international-market entry. Wilson (1980), Yip (1982), Woodcock, Beamish and Makino (1994), and Uhlenbruck (2004) explore international market entry through a lens of acquired foreign subsidiaries. Knight and Cavusgil (2004) argue that managers in some firms aspire to be a "born-global firm" by entering foreign markets at or near to a firm's founding.

In addition to understanding managerial motivations for engaging in international business, another interesting area of literature focuses on describing the control of an international-market entry. Initially of a descriptive nature, but of late more empirically based, the control-related literature is rich in content and managerially relevant. It includes research by scholars such as Kindleberger (1969), Dunning (1981), Davidson (1982), Root (1983), Jain (1989), Yip (1992), Dunning (1993), Root (1994), Bengtsson (1998), Cheng and Kwan (2000), Keegan and Green (2000), Dunning (2003), Kim, Park and Prescott (2003); Safarian (2003), Sundaramurthy and Lewis (2003), Choi and Beamish (2004), and Samli (2004). Particularly managerially relevant is an Import Handbook by Feinschreiber and Crowley (1997). Focusing primarily on importing to the United States, the book is a useful resource about importing to any country as well as exporting.

Market-Entry and Export Intensity

A subset of studying reasons for market entry involves developing an understanding of the drivers of export intensity. Among determinants of export intensity are such factors as the relationship of export intensity to firm size and governance structure (Kaynak & Kothari, 1984; Beamish & Munro, 1986; Miesenbock, 1988; Namiki, 1988; Cuplan, 1989; Holzmuller & Kasper, 1991; Bonaccorsi, 1992; Chetty & Hamilton, 1993; Filatotchev, Dyomina, Wright & Buck, 2001; Samli, 2004). A desire to achieve first mover advantages (Lieberman & Montgomery, 1988; Quelch & Deshpande, 2004; Samli, 2004; Griffin & Pustay, 2005) also affects export intensity, as does a manager's ability to marshal the appropriate resources required for market entry (Madsen, 1989; Louter, Ouwerkerk & Bakker, 1991; Chang, 1995; Aulakh, Kotabe & Teegen, 2000; Samli, 2004). Likewise affecting export intensity are prior international experiences, motivation, orientation and skills of management (Johnston & Czinkota, 1982; Levitt, 1983; Welsh & Luostarinen, 1988; Aaby & Slater, 1989; Dichtl, Koeglmayr & Mueller, 1990; Andersson & Svensson, 1994; Leonidou, Katsikeas & Piercy, 1998; Quelch & Deshpande, 2004; Samli, 2004).

Characteristics of a product, a brand's global reputation, and the channels of distribution in use all impact export intensity (McGuinness & Little, 1981; Anderson & Coughlan, 1987; Peng & Ilinitch, 1998; Anderson & Narus, 1990; Steenkamp, Batra & Alden, 2003; Johansson & Ronkainen, 2004; Quelch & Deshpande, 2004). Home-country location relative to host-country markets (Davidson, 1980; Caves & Mehra, 1986; Agarwal & Ramaswamy, 1991; Aulakh, Kotabe & Sahay, 1996; Gwin & Kehoe, 1999; Jeannet & Hennessey, 2004; Samli, 2004) affects export intensity through the availability and quality of global logistics resources. Finally, such micro managerial aspect as pricing in international markets (Piercy, 1981a; Samiee & Anckar, 1998; Griffin& Pustay, 2005), buyer and seller relationships (Egan & Mody, 1992; Dyer, 1996; Piercy, Katsikeas & Cravens, 1997; Peng & Ilinitch, 1998; Peng & York, 2001), and transaction cost (Anderson & Gatigon, 1986; Erramilli & Rao, 1993; Kahn, 2004) affect export intensity.

Culture and Market Entry

An interesting and well-conceptualized literature concerns culture and market entry. Part of the literature is descriptive in nature as typified by the work of Kluckhohn and Strodtbeck, 1961; Converse, 1972; Hofstede, 1980; Redding, 1980; Hamilton and Biggart, 1988; Kogut and Singh, 1988; Clark, 1990; Kanungo, 1990; Kale and McIntyre, 1991; Shane, 1992; Shane, 1994; Barkema, Bell and Pennings, 1996; Meschi, 1997; Thomas and Mueller, 2000; Gannon, 2001; and Ferraro, 2002. Another aspect of the literature is pragmatic and perhaps more managerially relevant. That literature seeks to analyze the impact of cultural distance in the market-entry decision. Evidence suggests that as perceptions of country risk and cultural distance increase, managers are less likely to use wholly-owned approaches to market entry, rather instead to use strategic alliances and joint ventures so as to dampen the country risk and cultural distance factors (Agarwal, 1994; Sutcliffe and Zaheer, 1998; Brouthers and Brouthers, 2001; Oum, Park, Kim and Yu, 2004).

International Experiences

The depth and variety of international experiences of management arguably influence a firm's approach to international market entry …