Methods of Promoting and Restricting Trade

Trade Promotion

Trade Restriction

Subsidies

Tariffs

Export financing

Quotas

Foreign trade zones

Embargoes

Special government agencies

Local content requirements

 

Administrative delays

 

Currency controls

Many nations have special agencies dedicated to helping their domestic companies obtain export financing. For example, a very well-known institution is called the Export-Import Bank of the United States—or Ex-Im Bank for short. The Ex-Im Bank (www.exim.gov) finances the export activities of companies in the United States and offers insurance on foreign accounts receivable. Another U.S. government agency, the Overseas Private Investment Corporation (OPIC), also provides insurance services, but for investors. Through OPIC (www.opic.gov), companies that invest abroad can insure against losses due to: (1) expropriation; (2) currency inconvertibility; and (3) war, revolution, and insurrection.

Receiving financing from government agencies is often crucial to the success of small businesses that are just beginning to export. Taken together, small businesses account for over 80 percent of all transactions handled by the Ex-Im Bank. For instance, the Ex-Im Bank guaranteed to cover a loan of $3.88 million to help fund development of the GI Leisure Amusement Park project in Efua Sutherland Park in Accra, Ghana. The company’s investment in Africa is in response to rising demand for world class amusement parks across West Africa. The park will employ at least 175 local Ghanaians under the supervision of U.S. expatriate managers. For more on how the Ex-Im Bank helps businesses gain export financing, see the Entrepreneur’s Toolkit titled, “Experts in Export Financing.”10

ENTREPRENEUR’S TOOLKIT: Experts in Export Financing

Here are several Ex-Im Bank (www.exim.gov) programs to help businesses obtain financing:

■ City/State Program. This program brings the Ex-Im Bank’s financing services to small and medium-sized U.S. companies that are ready to export. These partnership programs currently exist with 38 state and local government offices and private sector organizations.

■ Working Capital Guarantee Program. This program helps small and medium-sized businesses that have exporting potential but lack the needed funds by encouraging commercial lenders to loan them money. The bank guarantee covers 90 percent of the loan’s principal and accrued interest. The exporter may use the guaranteed financing to purchase finished products for export or pay for raw materials, for example.

■ Credit Information Services. The bank’s repayment records provide credit information to U.S. exporters and commercial lenders. The bank can provide information on a country or specific company abroad. But the bank does not divulge confidential financial data on non-U.S. buyers to whom it has extended credit or confidential information regarding particular conditions in other countries.

■ Credit Insurance. This program helps U.S. exporters develop and expand their overseas sales by protecting them against loss should a non-U.S. buyer or other non-U.S. debtor default for political or commercial reasons. The insurance policy can make obtaining export financing easier because, with approval by the bank, the proceeds of the policy can be used as collateral.

■ Guarantee Program. This program provides repayment protection for private sector loans made to creditworthy buyers of U.S. capital equipment, projects, and services. The bank guarantees that, in the event of default, it will repay the principal and interest on the loan. The non-U.S. buyer must make a cash payment of at least 15 percent. Most guarantees provide comprehensive coverage against political and commercial risks.

■ Loan Program. The bank makes loans directly to non-U.S. buyers of U.S. exports and intermediary loans to creditworthy parties that provide loans to non-U.S. buyers. The program provides fixed-interest-rate financing for export sales of U.S. capital equipment and related services.

Source: Export-Import Bank of the United States Web site (www.exim.gov).

Foreign Trade Zones

Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade. A good example of a foreign trade zone is Turkey’s Aegean Free Zone, in which the Turkish government allows companies to conduct manufacturing operations free from taxes.

foreign trade zone (FTZ)

Designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures.

Customs duties increase the total amount of a good’s production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies’ facilities in such zones is final product assembly. The U.S. Department of Commerce (www.commerce.gov) administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the U.S. market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.

China has established a number of large foreign trade zones to reap the employment advantages they offer. Goods imported into these zones do not require import licenses or other documents nor are they subject to import duties. International companies can also store goods in these zones before shipping them to other countries without incurring taxes in China. Moreover, five of these zones are located within specially designated economic zones in which local governments can offer additional opportunities and tax breaks to international investors.

Another country that has enjoyed the beneficial effects of foreign trade zones is Mexico. Decades ago, Mexico established such a zone along its northern border with the United States. Creation of the zone caused development of companies called maquiladoras along the border inside Mexico. The maquiladoras import materials or parts from the United States duty free, process them to some extent, and export them back to the United States, which charges duties only on the value added to the product in Mexico. The program has expanded rapidly over the five decades since its inception, employing hundreds of thousands of people from all across Mexico who move north looking for work.

Special Government Agencies

The governments of most nations have special agencies responsible for promoting exports. Such agencies can be particularly helpful to small and medium-sized businesses that have limited financial resources. Government trade promotion agencies often organize trips for trade officials and businesspeople to visit other countries to meet potential business partners and generate contacts for new business. They also typically open trade offices in other countries. These offices are designed to promote the home country’s exports and introduce businesses to potential partners in the host nation. Government trade promotion agencies typically do a great deal of advertising in other countries to promote the nation’s exports. For example, Chile’s Trade Commission, ProChile, has commercial offices in 40 countries and a Web site (www.chileinfo.com).

Governments not only promote trade by encouraging exports but also can encourage imports that the nation does not or cannot produce. For example, the Japan External Trade Organization (JETRO) (www.jetro.go.jp) is a trade promotion agency of the Japanese government. The agency coaches small and medium-sized overseas businesses on the protocols of Japanese deal making, arranges meetings with suitable Japanese distributors and partners, and even assists in finding temporary office space.

For all companies, and particularly small ones with fewer resources, learning the government regulations in other countries is a daunting task. A company must know whether its product is subject to a tariff or quota, for instance. Fortunately, it is now possible to get answers to many such questions through the Internet. For some informative Web sites, see the Global Manager’s Briefcase titled, “Surfing the Regulatory Seas.”

GLOBAL MANAGER’S BRIEFCASE Surfing the Regulatory Seas

U.S. Department of Commerce

■ The International Trade Administration (ITA) Web site (www.trade.gov) offers trade data by country, region, and industry sector. It also has information on export assistance centers around the United States, a national export directory, and detailed background information on each trading partner of the United States.

■ The FedWorld Web site (www.fedworld.gov) is a comprehensive central access point for locating and acquiring information on U.S. government activities and trade regulations.

■ The Stat-USA Web site (www.stat-usa.gov) lists databases on trade regulations and documentation requirements on a country-by-country basis.

U.S. Chamber of Commerce

Dun & Bradstreet’s (www.dnb.com) 2,000-page Exporter’s Encyclopedia has been called the “bible of exporting,” and it’s now available online on the U.S. Chamber of Commerce’s International Business Exchange Web site (www.uschamber.org/international). Access to the encyclopedia is offered as part of a chamber membership package, which also includes information on a variety of international trade topics.

U.S. Trade Representative

The Office of the United States Trade Representative Web site (www.ustr.gov) has a wealth of free information on trade policy issues. Up-to-date reports on the site list important barriers that affect U.S. exports to other countries. It is also a source for information on trade negotiations, including a wide range of documents on all subjects relating to trade talk agendas, as well as a helpful section on acronyms to help you get through the entries.

U.S. Export Portal

This is the U.S. government’s online point of entry (www.export.gov) for U.S. exporters. The site organizes exportrelated programs, services, and market research information across 19 federal agencies. The site can be used to search for official trade shows, seminars, missions, and other related activities around the world.

Quick Study

1. How do governments use subsidies to promote trade? Identify the drawbacks of subsidies.

2. How does export financing promote trade? Explain its importance to small and medium-sized firms.

3. Define the term foreign trade zone. How can it be used to promote trade?

4. How can special government agencies help promote trade?

Methods of Restricting Trade

Earlier in this chapter we read about the political, economic, and cultural reasons for governmental intervention in trade. In this section we discuss the methods governments can use to restrict unwanted trade. There are two general categories of trade barrier available to governments. A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers. A nontariff barrier limits the availability of an imported product, which increases its price indirectly and, therefore, reduces its appeal to buyers. Let’s take a closer look at tariffs and the various types of nontariff barriers.

tariff

Government tax levied on a product as it enters or leaves a country.

Tariffs

We can classify a tariff into one of three categories. An export tariff is levied by the government of a country that is exporting a product. Countries can use export tariffs when they believe an export’s price is lower than it should be. Developing nations whose exports consist mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the government of a country that a product is passing through on its way to its final destination. Transit tariffs have been almost entirely eliminated worldwide through international trade agreements. An import tariff is levied by the government of a country that is importing a product. The import tariff is by far the most common tariff used by governments today.

We can further break down the import tariff into three subcategories based on the manner in which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an imported product. A specific tariff is levied as a specific fee for each unit (measured by number, weight, etc.) of an imported product. A compound tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit. Let’s now discuss the two main reasons why countries levy tariffs.