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Beware of Non-Tariff Barriers in Global Markets

On: August 27, 2006    |    By: Prema Nakra Prema Nakra    |    10 min. read

plane_landing_with_closed_signSignificant progress has been made over the past half century in lowering tariff barriers to international trade. The U.S. and Europe have successfully knocked down tariff barriers while harmonizing business rules between their own markets. However, as countries and regions have made efforts to reduce tariffs, the importance of non-tariff barriers in countries around the world has increased. For international businesses these barriers negatively affect market access, profitability and the market position.

The traditional and non-traditional media love to talk about the love-hate relationship between China and the United States of America. Viewed from the eyes of the global automobile industry, China looks like a picture of paradise. Production, sales and profits are rising, and the forecast is that China will continue to demonstrate strong growth in the years to come. However, as sales explode new draft regulations by the Peoples Republic of China are already making the multinational automakers lose their sleep.

A new government policy paper for this industry in China includes plans to restrict the number of ports where foreign-made cars can be imported. Multinational car makers fear that the clause demanding separate sales outlets for imported and Chinese-made cars will make it much more expensive to introduce new brands. As the locals build their distribution networks for China-made cars, foreign companies had hoped that they would also be the backbone for distributing imports. These hopes are beginning to shatter.

This article is not about the automobile industry nor is it about China; it is about non-tariff barriers (NTB) in the world markets. In this article I will identify some of the NTBs that are likely to exist in most countries, even though the nature and extent of such barriers varies from country to country. Some barriers are easy to deal with while others may prove to be insurmountable. It is important for you to be fully aware of these barriers since overcoming these barriers can be cost prohibitive, especially when you are caught off-guard.

Non-Tariff Barriers

Significant progress has been made over the past half century in lowering tariff barriers to international trade. The U.S. and Europe have successfully knocked down tariff barriers while harmonizing business rules between their own markets. According to one EU estimate, the U.S. and Europe currently have tariff levels averaging about 4% of the price of imported industrial goods, compared with an average of 27.5% imposed by developing countries. However, as countries and regions have made efforts to reduce tariffs, the importance of non-tariff barriers in countries around the world has increased. For international businesses these barriers negatively affect market access, profitability and the market position.

For our purpose, I define non-tariff barriers to trade as government laws, regulations, policies or practices that either protect domestic industry or products from foreign competition or artificially stimulate export of particular domestic products. Quantitative restrictions, tariff quotas, voluntary export restraints, orderly marketing arrangements, export subsidies, government procurements, import licensing, antidumping/countervailing duties and technical barriers to trade are some examples of such non-tariff barriers.

Non-tariff barriers also include a wide variety of operating practices ranging from bureaucratic delays in processing request for permits, political squabbles, “buy national” campaigns, infrastructure headaches and unethical business practices. Such measures constitute non-tariff barriers and are often justified from the perspective of public policy, i.e., the need to protect human health and safety, to protect infant (domestic) industries and the environment.

Non-tariff barriers normally include the following:

  • Import policy barriers
  • Standards, testing, labeling and certification requirements
  • Anti-dumping & countervailing measures
  • Export subsidies and domestic support
  • Government procurement
  • Services barriers
  • Lack of adequate protection to intellectual property rights
  • Other barriers

These barriers are viewed in the context of multiple roadblocks in international markets and are explored in conjunction with examples of such barriers from across the globe. This discussion includes regulatory roadblocks, as well as strategic and operational roadblocks.

Regulatory Roadblocks

To achieve their respective fiscal and monetary objectives, governments often provide trade consultations and administrative guidance to business. In some countries the government provides guidance, coordination and arbitration acting, in effect, as a caretaker, coordinator and leader for businesses. Tactics used by governments to achieve their national goals include licensing, foreign exchange allocations, quotas, local content requirements, minimum import price limitations and embargos. The protection of local industry is facilitated through government procurement policies, export subsidies, countervailing duties and domestic assistance programs.

Many countries use import licensing schemes to implement a wide variety of regulations relating to national security, protection of health, safety, the environment, morality, religion, intellectual property and compliance with international obligations. The most common justification given for this practice is to enable the country to speed up the development of new industries by the use of protective measures at early stages of development.

For example, Sanitary and Phyto-Sanitary measures are one form of the non-tariff international trade barrier that has been developed to protect the consumer against unsafe products and deceptive marketing practices. Product related requirements include, but are not limited to, detailed labeling requirements with extensive product content description. Such labeling requirements become a hindrance especially when the product is being exported to different countries each with dissimilar regulations.

Strategic and Operational Roadblocks

Lack of access to the latest manufacturing technologies, territorial restrictions to trade, collusion among competing firms, and close ties between transacting partners often conspire to restrict the timely availability of component parts and raw material blocking access to efficient distribution channels. Access to a country’s distribution or commercial infrastructure is, at times, impossible because of the close ties between local manufacturers, wholesalers and retailers. Distributors may refuse to carry foreign products lest they alienate their domestic manufacturers or suppliers.

Customs and Market Entry Practices—Every nation has its customs and entry procedures. In many countries existing border procedures are unnecessarily cumbersome. These procedures become barriers to market entry if their use is arbitrary and left to the judgment of customs officers. Voluminous and complicated document requirements and excessive delays in customs clearance due to human and technical factors serve as non-tariff barriers. For many companies, requirements to provide the same documentation to numerous agencies in one country significantly contribute to the costs.

Technical Barriers—Technical barriers to trade (TBT) refer to technical regulations and voluntary standards that set out specific characteristics of a product, such as its size, shape, design, functions and performance, or the way a product is labelled or packaged before it enters the marketplace. Included in this set of measures are also the technical procedures that confirm that products fulfill the requirements laid down in regulations and standards. Product specifications are often written in such detail that a fair chance of winning a contract might mandate extensive product modification. The product testing process might take several months to several years. Such tactics become market entry barriers especially when they are not required of domestic firms.

Competitive Barriers—Competition among several differentiated brands is a natural barrier in the market since it allows a strong brand name company to charge a premium price and capture a large share of a profitable market segment. If competition from a well known global or local brand is intense, novice international marketers with quality products need to make a heavy investment in marketing communication and brand building.

Financial Infrastructure Barriers—Many countries require prior import deposits or charge prohibitive administrative fees and higher taxes for foreign companies. Multiple exchange rates are also used to encourage trading on some product categories while discouraging import or export of others. Many governments around the globe have developed opaque financial systems where it is hard to know where the state ends and the corporation begins.

Physical Infrastructure Barriers—Local administrative bodies and physical infrastructure built to protect local interests pose difficulties for road transportation, private and commercial trucking, and inter-provincial or interstate purchasing and distribution. Conditions of roads, harbors, airports and telecommunication limit the market potential and results in market barriers. For example, road construction in Thailand has not kept up with traffic growth. In this country, as well as many of its neighboring countries, cars and trucks must compete with bicycles and motorcycles for space in the movement of people and products.

Socio-Cultural and Ethical Norms and Practices—International marketers must be aware of the socio-cultural practices since it adds to the cost of doing business while challenging the ethical values and legal responsibility of the exporter. Smuggling, counterfeiting and bribery are more prevalent in some countries and regions than others. These practices create barriers to market access. You may refer to my article on counterfeit goods for its impact on marketers of genuine products. Bribes take many forms ranging from money, to favors, to trips to other countries.

Examples of Non-Tariff Barriers from Across the Globe

The office of the Unites States Trade Representatives (USTR) publishes the national Trade Estimate Report on global foreign trade barriers (FTB) every year. Most countries around the world, including the United Stated and Europe, have multiple non-tariff barriers according to the USTR report on FTB. Examples provided below are but a sampling of non-tariff barriers:

Angola—Angola is officially open to foreign investment, but its regulatory and legal infrastructure is inadequate to facilitate direct investment and provide sufficient protection

Argentina—Since 2002 Argentina has prohibited the import of beef and beef products from the United States due to concerns about what is commonly referred to as “Mad Cow Disease.” Argentina also banned the import of chicken products from the United States.

Australia—The government of Australia maintains restrictions and prohibitions on some agricultural imports through quarantine and health restrictions. These include restriction on chicken, pork, California table grapes, Florida citrus, stone fruit, apples and corn.

Canada—Canada prohibits import of fresh or processed foods and vegetables in packages exceeding certain standard package sizes unless the Government of Canada grants a ministerial easement or exemption.

China—China's current banking, finance, insurance and taxation structures are bureaucratic and cumbersome. The goal of any supply chain or logistics manager is to create a seamless flow of product going one way and payment going the other way. Regional fragmentation of finance regulation, tax laws and other institutions has the same effect on the payment side of the supply chain as regional protectionism has on the transport and distribution side. For instance, a company with joint ventures in several locations supplied by one supplier may have to make a separate payment from each venture to the supplier.

Egypt—Egypt continues to block imports of U.S. turkey and chicken parts based on reported concerns that the U.S. industry cannot verify it meets Egyptian Halal requirements.

European Union (EU)—The EU has adopted a series of directives that establish essential requirements for a whole variety of equipment including telecommunications equipment. Equipment must be labeled with the CE mark to indicate that it has complied with all relevant directives. Other countries including U.S. and Japan have their own standards for telecommunications and equipment. The purpose of such regulations include electrical safety, electromagnetic compatibility, user safety and quality of communications.

Japan—Access to Japan’s value chain network creates market barriers since there are tight corporate and cultural ties among original Equipment manufacturers (OEM), wholesaler and retailers. Keiretsu are large groups of Japanese companies linked together often through one main affiliated bank.

Malaysia—Malaysia’s import-licensing system, according to critics, inflates the price of imported vehicles and benefits a few privileged license holders. Under the system, licensees are granted so-called Approved Permits (AP), which every car manufactured or assembled outside the country must secure before it can be imported and sold locally. The Ministry of International Trade and Industry issues AP’s to companies controlled by ethnic Malay investors and endorsed by the ministry as qualified importers. No open bidding is involved in the process, and the APs are awarded at no cost to the recipient. Similar systems also prevail in other industries.

Thailand—In Thailand, farmers complain they can't compete with the low-cost Chinese onions and garlic flooding into the country. And Thai exporters grumble that China uses non-tariff barriers such as long delays in customs clearance to keep out perishable Thai tropical fruit such as mangoes and papayas, which rot before they reach their destination due to delays in customs clearance.

United States—Industrial alcohol made in Canada and shipped to the U.S. must be tested at a U.S. facility before it can be sold because the U.S. doesn't recognize Canadian test standards for the product. Without the testing, the exporter would pay an excise tax.

Regulatory Recourse

The World Trade Organization (WTO) Agreement on non-tariff barriers to trade contains rules specifically aimed at preventing these measures from becoming unnecessary barriers. But making a rule is not sufficient to eliminate non-tariff barriers.

In the past decades opening markets was relatively simple. Measuring the tariffs and judging whether or not they were too high allowed negotiating international agreements to reduce them if they were deemed too high. The General Agreement on Trade and Tariffs (GATT), predecessor to WTO, was quite successful at lowering the tariffs on manufactured goods. In the new world order and global market environment, no independent multinational trade organization including WTO is set up to deal with this new form of protectionism we refer to as non-tariff barriers.

Here are some practical recommendations for global marketers:

  • Develop a thorough understanding of the nature and intensity of non-tariff barriers to determine how you can best leverage the market opportunity by knocking down some of the roadblocks.
  • Form strategic alliances with local businesses to gain access to the distribution channels.
  • Explore the possibility of forming alliances with the governments in countries where government actively participates in business.
  • Reexamine the value chain and determine if some of the integrated activities in your value chain must be broken down and outsourced to the local businesses.
  • Price your products strategically and base the same on customers’ ability and willingness to pay.
  • Help develop the legal and physical infrastructure; become a change agent by acting as a good corporate citizen in every society in which you do business.

Final Words

It is important to strategically develop a continuous environment monitoring the process to assess market opportunities around the world. This process must include assessment of social, economic, ecological, technological and political; legal and regulatory (STEEP) factors. This monitoring process must include a detailed analysis of the non-tariff barriers discussed in this article.

Prema Nakra

About the Author: Prema Nakra

Prema Nakra, Ph.D. is an educator, economist and a marketing consultant. Dr. Nakra is a professor of marketingand International Business and MBA Program Director at the School of Management, Marist College. Her academic qualifications include a Ph.D. in economics, MA in economics, and MBA in marketing management.

Prior to joining Marist, Dr. Nakra worked for international organizations including the International Cooperative Alliance for South East Asia, Ellington Duval Inc, Worldwide Marketing Group, and the New School for Social Research. An active member of American Marketing Association, American Economic Association, and Balanced Scorecard Technology Council, she is frequently invited to presents papers and at international business conferences.

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