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

By Kehoe, William J.; Bass, Lucien L.,, III | Journal of International Business Research, July 2004 | Go to article overview

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


Kehoe, William J., Bass, Lucien L.,, III, Journal of International Business Research


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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