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. …

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