final international marketing

8/4/2019 Final International Marketing

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Q.1 Explain the differences between a) Tariff and non-tariff barriers b) GATT and the

WTO.

Trade barriers include tariff and trade blocks with international trade. The barriers cantake many forms, including the following terms that include many restrictions in

international trade within multiple countries that import and export any items of trade:

y Tariffs

y Non-tariff barriers to trade

All countries are dependent on other countries for some products and services as no

country can ever hope to be self reliant in all respects. There are countries having

abundance of natural resources like minerals and oil but are deficient in

having technology to process them into finished goods. Then there are countries thatare facing shortage of manpower and services. All such shortcomings can be overcome

through international trade. Though it seems easy, in reality, importing goods from

foreign countries at cheap prices hits domestic producers badly. As such, countries

impose taxes on goods coming from abroad to make their cost comparable with

domestic goods. These are called tariff barriers. Then there are non tariff barriers also

that serve as impediments in free international trade. This article will try to find out

differences between tariff and non tariff barriers.

TARIFFS

Tariff refers to the tax imposed on imports. It is a duty or tax imposed on internationally

traded commodities when they cross the national borders. The objectives of Tariffs are

y To protect domestic industries from foreign competition

y To guard against dumping

y To promote indigenous research and development

y To conserve foreign exchange resources of the country

y To make the balance of payments position more favorable and

y To discriminate against certain countries.

IMPACT OF TARIFFS

Tariff affect on economy in different ways. An import duty generally has the following

effects:


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y Protective effect:

An import duty is likely to increase the price of imported goods. This increase in

the price of imports is likely to reduce imports and increase the demand for

domestic goods. Import duties may also enable domestic industries to absorb

higher production costs. Thus, as a result of the protection by tariffs, domestic

industries are able to expand their output.

y Consumption Effect:

The increase in prices resulting from the levy of import duty usually reduces the

consumption capacity of the people.

y Redistribution Effect;

If the import duty causes an increase in the price of domestically produced

goods, it amounts to redistribution of income between the consumers and

producers in favor of the producers. Further a part of the consumer income is

transferred to the exchequer by means of the tariff.

y Revenue Effect:As mentioned above, a tariff means increased revenue for the government.

y Income and Employment Effect;

The tariff may cause a switch over from spending on foreign goods to spending

on domestic goods. This higher spending within the country may cause an

expansion in domestic income and employment.

y Competitive Effect:

The competitive effect on the tariff is, in fact, an anti-competitive effect in the

sense that the protection of domestic industries against foreign competition may

enable the domestic industries to obtain monopoly power with all its associated

evils.

y Terms of trade effect:

In a bid to maintain the precious level of imports to the tariff imposing country, if

the exporter reduces his prices, the tariff importing country is able to get imports

to a lower price.

Tariff Barriers vs. Non Tariff Barriers

Tariffs are taxes that are put in place not only to protect infant industries at home, but

also to prevent unemployment because of shut down of domestic industries. This leads

to unrest among the masses and an unhappy electorate which is not a favorable thingfor any government. Secondly, tariffs provide a source of revenue to the government

though consumers are denied their right to enjoy goods at a cheaper price. There are

specific tariffs that are a onetime tax levied on goods. This is different for goods in

different categories. There are Ad Valorem tariffs that are a ploy to keep imported goods

pricier. This is done to protect domestic producers of similar products.


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Non Tariff Barriers

Placing tariff barriers are not enough to protect domestic industries, countries resort to

non tariff barriers that prevent foreign goods from coming inside the country. One ofthese non tariff barriers is the creation of licenses. Companies are granted licenses so

that they can import goods and services. But enough restrictions are imposed on new

entrants so that there is less competition and very few companies actually are able to

import goods in certain categories. This keeps the amount of goods imported under

check and thus protects domestic producers.

Import Quotas is another trick used by countries to place a barrier to the entry of foreign

goods in certain categories. This allows a government to set a limit on the amount of

goods imported in a particular category. As soon as this limit is crossed, no importer can

import further quantities of the goods.

Non tariff barriers are sometimes retaliatory in nature as when a country is antagonistic

to a particular country and does not wish to allow goods from that country to be

imported. There are instances where restrictions are placed on flimsy grounds such as

when western countries cite reasons of human rights or child labor on goods imported

from third world countries. They also place barriers to trade citing environmental

reasons.

Difference between GATT and WTO

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The General Agreement on Tariff and Trade is a multilateral treaty that lays down

agreedrules for conducting international trade.It came into force in January 1948.

119governments which together account for 90 per cent of the world merchandise

tradesubscribe it to. Its basic aim is to liberalize trade and for the last 45 years it has

beenconcerned with negotiating the reduction of trade barriers and with international

traderelations. The rapid and uninterrupted growth in the volume of international trade

till1992 provides a good testimony for the success of the GATT.Basic Principles of GATT:1.Trade without discrimination:Trade must be conducted on the basis of non-

discrimination.All contracting parties are bound to grant to each other treatmentas

favourable as they would to any country (most favoured nation) in theapplication and


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administration of import and export duties and charges.Expectations to this basic rule

are allowed only in the case of regional tradingarrangements and the developing

countries.2.Protection only through tariff:Protection should be given to domesticindustries only through customs tariffs and not through other commercialmeasures. The aim of this rule is to make the extent of protection clear and to

Make competition possible.Exception is, however, made in the case ofdeveloping

countries where the demand for imports by development may requirethem to maintain

quantitative restrictions in order to prevent an excessive drain ontheir foreign exchange

resources.3.A Stable basis of trade:The binding of the tariff levels negotiated among the

contracting countries provides a stable predictable basis for trade.Binding oftariffs

means that these cannot be increased unilaterally.Although provision ismade for the

renegotiation of bound tariffs, a return tariffs is discouraged by therequirement that any

increase be compensated for.

4. Consultation:A basic principle of GATT is that member-countries shouldconsult one another on trade matters and problems.They can call on GATT for afair settlement of cases in which they feel that their rights under the GATT are

being withheld or compromised by other members.

The agreement consists of four parts:

Part I: Main obligations of the contracting parties;

Part II: A code of fait trade practices to guide members in their commercial policies;

Part III: Conditions for membership and withdrawal; and

Part IV: Expansion of trade of developing countries through special concessions.Trade Negotiations under GATT:Eight major trade negotiations took place under the GATT auspice as follows:1.The first round in 1947 (Geneva) saw creation of the GATT.

2.The second round in 1949 (Annecy, France) involved negotiation with nationsthat desiredGATT membership.The principal emphasis was on tariffnegotiations.3.The third round in 1951 (Torquay, England) continued accession and tariffreduction negotiations.4.The fourth round in 1956 (Geneva) proceeded along the same track as earlierrounds.5.The fifth round in 1960-61 (Geneva, Dillon Round) involved further revisionof the GATTand the addition of more countries.


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6.The sixth round in 1964-67 (Geneva Kennedy Round) was hybrid of earlierproduct by product approach with across the board tariff reductions.

7.The seventh round in 1973-79 (Geneva, Tokya Round) centred on thenegotiation of

additional tariff cuts and developed a series of agreementsgoverning the use of non-

tariff measures.8.The eight round (UruguaryRound ) started in 1986 and was concluded in

April 1994.

As a result of these negotiations, the tariff rates for thousands of items entering into

worldtrade were reduced or bound against increase. The average level of tariffs

onmanufactured goods in industrial countries was bout 3 per cent now as compared to

about

40 percent in the immediate second world was years.Developing countries

weredisappointed with Kennedy round and the Tokyo Round.However, given its

provisionalnature and the limited field of action, the success of GATT in promotion and

securingliberalisation of much of world trade over 47 years was incontestable.WEAKNESS OF GATT:

The weakness of GATT is that its benefits have mainly gone to the

industrializedcountries. Under GATT, Most negotiations and tariff reductions have taken

place inrespect of manufactured goods.So the trade gap for the developing countries

has becomemore unfavourable. A search for a new institutionalarrangement, especially

one whichone would tackle the problems of the global trade of developing countries, led

to theformation of united Nations Committee on Trade and Development in 1946.WORLD TRADE ORGANISATION

Established on January 1, 1995 WTO is the embodiment of the Uruguary Round

resultsand the successor to GATT. T is not a simple extension of GATT; it completely

replacesits predecessor and has a very different character.As on 6th November 2000,

themembership of the WTO stood at 139. 76 Governments became members of the

WTO onits first day.The present membership accounts for more than 90 per cent of

world trade.Many more countries have requested to WTO. The WTO is based in

Geneva,Switzerland.Its essential functions are as follows.1.To administer the trade policy mechanism.2. To achieve greater coherence in global economic-policy making in


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cooperation with World Bank and IMF.3.To provide a forum for negotiations among its members concerning theirmultilateral trade relations in matters dealt with in the agreements.4.To administer the understandings on Rules on Procedures governing thesettlement of disputes.

5.To introduce the idea of 'sustainable development' in relation to the optimaluse of the

world resources and the need to protect and preserve theenvironment in a manner

consistent with the various levels of nationaleconomic development.

The main difference:

(1) the WTO is a permanent international legal personality, and only a temporary GATT

Agreement. But the organizational structure also improved. The WTO is the highest

authority in "the Council of Ministers" (by the members of the Foreign Trade and

Economic Cooperation to attend) (equivalent to shareholders of the General Assembly),

have legislative and judicial powers. The Council of Ministers during the recess,

composed of representatives from all the members of the "General Council" (the Board)

performing the duties of the Council of Ministers, by the Director-General (general

manager) is responsible for handling day-to-day affairs and coordination.

(2) The WTO provisions enacted by the GATT more than legal efficiency, the operation

are more efficient.

(3) The WTO trade-related content more widely than GATT, which has jurisdiction of a

broader. GATT only involve trade in goods, the WTO is not only involved in the trade,

including goods, services and intellectual property rights also include.(4) Members of the WTO obligations of unity. WTO members, regardless of size, to the

jurisdiction of the multilateral agreements must be observed, "package" to accept the

WTO agreement, the agreement cannot be selective in one or a number of agreements,

not its jurisdiction agreement, the agreement of a reservation. However, many of the

GATT agreement, the code is implemented by means of the Parties can accept, cannot

accept.

Timeline of GATT and the WTO is different

1944: At the Bretton Woods Conference, which created the World Bank and

International Monetary Fund (IMF), there is talk of a third organization, the International

Trade Organization (ITO).

1947: As support for another international organization wanes in the U.S. Congress, the

General Agreement on Tariffs and Trade (GATT) is created. The GATT treaty creates a

set of rules to govern trade among 23 member countries rather than a formal institution.


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1950: Formal U.S. withdrawal from the ITO concept as the U.S. administration

abandons efforts to seek congressional ratification of the ITO.

195186: Periodic negotiating rounds occur, with occasional discussions of reforms of

GATT. In the 1980s, serious problems with dispute resolutions arise.

198694: The Uruguay Round, a new round of trade negotiations, is launched. Thisculminates in a 1994 treaty that establishes the World Trade Organization (WTO).

1995: The WTO is created at the end of the Uruguay Round, replacing GATT.

Q.2. What are the differences between domestic and international marketing

research? In your opinion, which is the most difficult step in conducting

international marketing research and why?

Breadth and scope of international marketing research:

A basic difference between domestic and international marketing research is the

broader scope needed for foreign research. Research can be divided into three

types based on information needs:

general information about the country area and or market

information necessary to forecast future marketing requirements by anticipating

social, economic and consumer trends within specific markets or countries, and

Specific market information used to make product, promotion, distribution and pricedecisions and develop marketing plans.

In domestic operations, most emphasis is placed on the third type, gathering specific

market information, because the other data are often available from secondary

sources.

A countrys political stability, cultural attributes and geographical characteristics are

some of the kinds of information not ordinarily gathered by domestic company

marketing research departments but which are required for a sound assessment of aforeign country market. This broader scope of international marketing research

entails collecting and assessing information that includes the following:

y Economic: general data on growth of the economy, inflation, business cycle

trends and the like, profitability analysis for the divisions products, specific


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industry economic studies, analysis of overseas economies and key economic

indicators for the home country and foreign countries.

y Sociological and political climate: a general non-economic review of

conditions affecting the divisions business. In addition to the more obvious

subjects such as cultural differences, it also covers ecology, safety, leisure time

and their potential impact on the divisions business.

y Overview of market conditions: a detailed analysis of market conditions the

division faces, by market segment, including international.

y Summary of the technological environment: a summary of the state-of-the-art

technology as it relates to the divisions business, carefully broken down by

product segments.

y Competitors: a review of competitors market shares, methods of market

segmentation, products and apparent strategies on an international

scale.(Samuel and Craig, 1997)

The marketing research process and the international dimension

y Topic and research problem

y Research design and plan

y Data collection and measurement

y Data analysis and interpretation

y Presentation of the findings and report

The main additional complexities faced by the International marketing

Researcher:

Complexity of research Design:

Designing research for International marketing decisions is more complex than

where a single country is concerned. The conduct of Research in different countries

implies that much greater attention is required to define the relevant unit and level of


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analysis that is, countries versus groups of countries or regions or national markets

versus global market segments as well as the scope of the research. In addition the

definition of the problem needs to be assessed and whether this is similar in

structure and relevant parameters for example, whether products are the same

across countries. (Samuel and Craig, 1997)

While countries are convenient and the most commonly used units of analysis due

to the existence of political and Organizational boundaries, as well as because much

secondary data are available on a country-by-country basis, these may not be the

most appropriate units from a marketing stand point ( Douglas and Craig 1997)

The relevant respondent may differ country to country. Example: the role of women

in financial and insurance decisions or traditional male purchases, such as

automobiles may vary from country to country.

Difficulties in establishing comparability and equivalence

Considerable difficulties are likely to be encountered in establishing equivalence and

comparability of research in different countries, both with secondary and primary

data and with methods of data collection. For example: secondary data on motor

vehicle registration may not provide equivalent data between companies. Similarly

many of the concepts, measurement instruments and procedures for primary data

collection have been developed and tested in the US and Western Europe. Their

relevance and applicability in other countries are far from clear. Concern with

equivalence and comparability as well as accuracy may be particularly critical where

secondary data are collected from the internet. (Wind and Douglas, 1982)

Establishing the comparability of data administration procedures posses further

difficulties. In one country certain method of data collection, for example: mail

questionnaires, may be known to have a given level of reliability, in another country,

personal interview rather than mail questionnaire may have an equivalence level of

reliability.

Complexity of Coordination of research and data collection across countries:

The conduct of research in the international environment adds considerably to the

complexity of research design and data collection. The research instruments and


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data collection procedures also have to be harmonized. This can result in substantial

difficulties and coordination problems. These can add considerably to research costs

and also lead to considerable time delays (Samuel and Craig, 1997).

Complexity of Intra-functional character of international marketing decisions

There are some complexity are likely to be encountered in coordinating intra-

functional research. For example: The accounting or finance department might want

to focus on measures of profitability such as cash flow and return on investment

(ROI) while marketing and sales dept. are more concerned with market share and

sales.

Complexity of Economics of International Investment & Marketing Decisions:

The lack of familiarity with foreign environments and with operations within these

environments implies that much research, especially in the initial entry stages,

should be viewed as an investment rather than a current expense (Samuel and

Craig, 1997).

How International marketing different from Domestic Marketing? (PEST

ANALYSIS)

The process of international marketing research though involves the same

disciplines as domestic research, has some differences compared to its domestic

version.

The major differences are

y The national differences between countries arising out of political, legal,

economic, social and cultural differences and,

y

The comparability of research results due to these differences.

National Differences

The main factors that affect the way in which people from different cultures behave

are:


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A. Cultural Differences: Culture refers to widely shared norms or patterns of

behaviour of a large group of people. It is defined as the values, attitudes, beliefs,

artefacts and other meaningful symbols represented in the pattern of life adopted by

people that help them interpret, evaluate and communicate as members of society.

The need for greater cross cultural awareness is heightened in our global

economies. Cross cultural differences in matters such as language, etiquette, non-

verbal communication, norms and values can lead to cross cultural blunders as

illustrated by the following marketing mix:

Product: A soft drink was introduced into Arab countries with an attractive

label that had six-pointed stars on it. The Arabs interpreted this as pro-Israeli

and refused to buy it. Another label was printed in ten languages, one of

which was in Hebrew again the Arabs did not buy it (Payne, website).

Price: An American firm was trying to get an acceptable price for their product

from a Japanese buyer. The Americans presented a very detailed

presentation and offered what they felt was a reasonable price. After a few

moments of silence, the Americans thought the Japanese were going to reject

the offer so they lowered the price. There was more silence by the Japanese.

The Americans then said they would lower their price one last time and that

this was the lowest they could go. The Japanese accepted this offer after a

brief silence. The Japanese later said the first price was within an acceptable

range, but it was their custom to consider the proposal silently before giving

their decision. The Americans lost a lot of profit by jumping the gun and

believing that Japanese respond just like the Americans

do(InternationalBusinessCommunication,(http://www.cba.uni.edu/buscomm/In

ternationalBusComm/blunders.htm).

Place: A well known drinks company tried to introduce a two litre drinks bottle

into Spain, but found it hard to enter the market they soon discovered this

was because few Spaniards had fridge doors large enough to accommodate

the large size bottle (Payne, website).


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Promotion: When Pepsi co advertised Pepsi in Taiwan with the ad Come

Alive with Pepsi they had no idea that it would be translated into Chinese as

Pepsi brings your ancestors back from the dead.

B. Racial Differences: This would refer to the differences in physical features of

people in different countries. For example, the types of hair care and cosmetic

products needed in U.S would differ from those needed in South East Asia.

C. Climatic Differences: This would include the meteorological conditions like

degree of rain and temperature range in the targeted foreign market. For instance,

Bosch-Siemens had to alter their washing machines with a minimum spin cycle of

1,000 rpm and a maximum of 1,600 rpm in Scandinavia, owing to irregular sunshine.

In Italy and Spain, on the other hand, it is sufficient to have a spin cycle of 500 rpm

as there is abundant sunshine (Stevens & Davis, 1997).

D. Economic Differences: The level of economic development in a market can

affect the desired properties of a product and in this way can inspire a company to

adapt its products in order to meet the needs of the local market. The level of

economic progress in a market can be assessed by a series of indications:

The level of revenue and buying power of local consumers: This will

have an influence on the technical conception and marketing of exportedproducts. In richer countries where the state of economic progress is more

advanced, consumers generally having a higher purchasing power and tend

to prefer purchase of more sophisticated products with advanced functions,

while people in poorer markets would be interested in a simplified version of

the product.

The state of infrastructure in the market: The general level of the quality of

infrastructure in the country consisting of elements such as transport, energy

communication systems, etc. can affect how the product is constituted as it

can bring about different conditions of use. For instance when car

manufacturer Suzuki entered India, it had to reinforce the suspension or the

road clearance level of the cars as the state of the roads were poor.


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E. Religious Differences: Religion has many impacts on products, more particularly

on the ingredients, that constitute them. For example, in Islamic countries,

companies, exporting grocery products based on beef have to furnish a certificate

declaring that the animals have been slaughtered respecting Halal methods.

Alcoholic drinks are equally banned in Middle Eastern countries. Religious

restrictions can therefore require product adaptation (Kumar, 2000).

F. Historical Differences: Historical differences help explain facts such as the

playing of cricket in England, as opposed to game of boules in France. These

differences have slowly evolved over time but have a profound effect on consumer

behaviour. For example, drinking Scotch whiskey is considered prestigious and

trendy in Italy, but old-fashioned and almost boring in Scotland (Kumar, 2000).

G. Language Differences: Language is an important aspect of international

marketing research. Inappropriate use of language could result in loss of market

apart from turning out to be a cross cultural gaffe. For instance, U.S. and British

negotiators found themselves at a standstill when the American company proposed

that they table particular key points. In the U.S. Tabling a motion means to not

discuss it, while the same phrase in Great Britain means to bring it to the table for

discussion (Ricks, 1999).

H. Differences in Actual and Potential Target Groups: In countries like England

and Germany it is possible to do national samples. Small towns and villages can be

included because distances are not great. In Spain, interviews can be conducted

only in cities with populations of over 100,000 people, as the cost of interviewing

people in small towns and villages is prohibitively high (Kumar, 2000).

In addition, the international marketing researcher may also have to deal with other

factors such as differences in the way that products or services are used,

differences in the criteria for assessing products or services across various marketsand differences in market research facilities and capabilities.

The negative aspects of standardization


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Despite the benefits of standardization, there are a number of potential drawbacks

associated with a standardization strategy. As Douglas and Wind (1987) pointed out,

global marketing standardization is feasible only under certain conditions. These

include the existence of a global market segment, potential synergies from

standardization, and availability of a communication and distribution infrastructure to

deliver the firms offerings to target customers worldwide. One key drawback of a

standardization approach is that it implies a product orientation, rather than a

customer and competitor orientation (Douglas and Wind, 1987). A product

orientation is myopic and pres byopic and is likely to lead to failure (Cateora, 1993;

Laughlin et al., 1994). More importantly, cultural differences and competitor strategy

are external factors related to standardization. Marketers must be aware of and

sensitive to the diverse cultures in foreign countries to survive and prosper in

international markets (Cateora, 1993; Ricks, 1983).

Personal Interviews: Tend to be the dominant mode of data collection outside the

United States and Canada (Monk, 1987). Lower wage costs imply that personal

procedures are cheaper than in the United States. In Latin countries, and particularly

in the Middle East, interviewers are regarded with considerable suspicion. In Latin

countries, where tax evasion is more prevalent, interviewers are often suspected of

being tax inspectors. In the Middle East, where interviewers are invariably male,

interviews with housewives often have to be conducted in the evenings whenhusbands are at home.

Mall Intercept Surveys are very popular in the United States and Canada, though

not commonly used either in the European countries or in developing countries.

Telephone Interviews are not as advantageous in international marketing research

as low levels of telephone ownership and poor communications in certain countries

limit the coverage provided by telephone surveys. In countries such as India, which

is predominantly rural, the telephone penetration is only 1 percent, and hence

telephone surveys may not be the ideal method to adopt (Sopariwala, 1987). Evenin relatively affluent societies such as Great Britain, telephone penetration is only 80

percent, and telephone interviewing is not widely used because many practitioners

are still skeptical about it. In Britain and France, there are substantial declines in

telephone response rates in large cities. The Eastern European countries and

countries in the newly formed Commonwealth of Independent States have a poor


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telecommunication system. In such countries, conducting telephone surveys may

not be a good idea.

Conclusion:

In the complex diverse and continually changing international environment

International marketing research assume a vital role in helping management keep

abreast and in touch with development in fluctuating in market throughout the world.

Q.3 What are the pros and cons of direct entry into international markets through joint

ventures, as compared to direct foreign investment?

Whether you're new in the art of business or have been an entrepeneur for some time,

you'll eventually come across the idea of becoming part of a joint venture. It may sound

like a bit of complicated business talk but a joint venture is a variation on the age-old

idea of a business partnership. Though, of course, it's a lot more complicated than that.

Joint ventures are legal entities created when two or more companies pool their

resources for a single goal.

As legal entities, they are similar to corporations, able to operate independently of its

founding companies and has the corresponding rights as a business operation this

means it can acquire properties, has separate liabilities and assets and can sue and be

sued in court. Joint ventures usually come about in the way that all partnerships usuallycome about one party has something that the other wants and the other party is

willing to share its resources to the benefit of both. Joint ventures are formed by small

companies hoping to expand, while global companies usually does them so that they

can enter a particular country's market.

There are several advantages to joining a joint venture. The primary one is that a joint

venture is a shared business liabilities and assets are divided evenly between two or

more partners. This can enable the participants to have higher profit margin for a lower

amount of risk. Usually, when a business enters a new market, the risks involved can be

terrifying for a new company even larger corporations tread lightly when they enter amarket. Going into a joint venture with partners can make sure that the price of failure is

not devastating for the company.

Another advantage is that partnering with someone who already has the infrastructure

ready for your product enables you to deliver the product faster than other businesses.

Trying to build up a distribution channel is a difficult proposition. It costs money and can


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be subject to delays having ready-made distribution points provided by your partner

can make it easier for a company to deliver the product and helps them focus on one

part of the operation. Joint ventures also carry with them the weight of the partners'

reputations having a well-known and trusted brand backing you will often help you sell

your product more.

There are, of course, disadvantages. The primary one is that all of this profitability

depends on your partners' dependability. Having unscrupulous or less-than-stellar

business partners can cost you a whole lot of money. Another one is that a joint venture

often involves integration and this can be difficult for both parties culture clash and

integration problems will crop up, if you're not careful.

It sounds all complicated but the process of going into a joint venture is actually very

easy. The formulation of a joint business plan is almost always the first step; it assures

that all the participants are on the same page and assures them about the efficientdivision of work. After that, legal and binding agreements are signed to confirm the

partnership and it goes forward from there.

Joint ventures are a great way to penetrate a market and I hope this brief introduction

gives you the bare bones of what you need to get into one.

There are just more than enough accounting and business reasons to get into a joint

venture. Your company could truly benefit from partnering with other firms with

complementary resources and abilities like distribution channels, technology, andfinance, among others. It is not surprising that these days, almost all companies are

getting into or at least considering participating into joint ventures. Take note that not all

joint ventures succeed. Experts assert that only about 40% of such business endeavors

last and achieve goals.

Getting into a joint venture is like getting into a give and take relationship. In such a

business effort, you should also contribute to the alliance instead of just reaping benefits

from it. Your contribution could also be in the form of capital or expertise/technical

share. Just like any other business strategies and measures, joint ventures have their

own sets of general advantages and disadvantages.

First on the list of pros, a joint venture could bring about opportunities to gain or learn

new expertise or capacity. Even major or huge companies decide to get into such

initiatives especially when they lack specific technical capability or expertise. Through a

joint venture, they could learn the skills and technical capacity they need by the end of

the partnership.


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Second, a joint venture could enable companies to enter into related business activities,

reach new geographic markets, or attain new technological skills or knowledge. The

businesses could access greater resources, including new technology and specialized

staff.

Of course, a joint venture would force companies to share risks. If your business could

not gather the guts to try out a new initiative or project because of the risks involved,

you could still pursue the endeavor by making it a joint venture with other firms. This

way, the chances of success are made bigger and more achievable. Joint ventures are

naturally flexible. It could exist in a limited, specified period or just cease to operate

once common objectives and business goals are met.

For the list of cons, joint ventures could be taken as mere strategies of opportunistic

partners to gain exposure to a new business segment. In many cases, some companiesalso use the effort just to poach technical experts and professionals from other

companies. Joint ventures could also end up in disaster. According to market analyses,

up to 60% of all joint businesses worldwide end up in failure.

It could take too much effort and time to establish the right and healthy relationship

between joint venture partners. There could be inevitable problems. The joint venture

objectives and goals may not be fully clear and well communicated to all participants.

There could be imbalance in the level of investments, expertise, and assets infused into

the project by the partners. Then, there could be less cooperation and poor integration

because of varying management styles and cultures of joint venture partners.

Remember that is always imperative to review your current business strategies and

objectives prior to committing into any joint venture. It is important that you first choose

the right partners and re-assess your need to actually partner with anyone or any other

business for a project of endeavor.

The Cons Of A Joint Venture

No doubt, more people want to go into a joint venture than go off to a business on theirown. And who can really blame them? A joint venture gives you benefits that you will

not get from having a single proprietorship business. With a joint venture, the risk isless, the work is less and of course, the number of ideas that you can come up with aredoubled, tripled depending on the number of partners that you have in the business.

But as most people who have gone to business with other people have realized, a jointventure is not all sweetness and light. It can turn into a nightmare if you do not take careit. Here are some of the downsides of getting into a joint venture and how to avoid orprevent it:


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1. Slow management of businessDecision-making will be slower because the opinions of the other partners are neededbefore one can make a decision. This can slow down the operations and may result tolost opportunity. If all the opinions are not sought, discord among the partners can start.

How to solve: One can avoid this by making sure that one or two member of thecompany will be given the power of attorney to make decisions for the group. That way,the company can keep up with suppliers and the operations. Only the big decisions thatcan affect the company long term will be consulted with each partner.

2. Too many ideas, no agreementAlthough it is good to have more than one thinking heads, it can also be a problemwhen no agreements are reached. Just imagine having a lot of ideas on the table butnothing concrete to work on. Too many people who want to get their voices heard cancreate problems within the company.

How to solve: The best thing to do about this is to devise a system wherein partnerswill have limit on the number of ideas that they will come up with and to have a deadlinefor narrowing down the ideas into something that everyone can work on and deal with.

3. Inequality with the brunt of work Knowing that there are partners who can take overfor them, some people slack off and do not do the job. They pass their responsibilities totheir partners and just give a variety of excuse. Also, in any kind of group, there will bepeople who will be doing most of the work while others will just be sitting on thesidelines. Its natural for a group to have inequality of workload even when there is aclear division of labor.

How to solve: To make sure that at the very least you will have more or less the sameworkload, you need to define the job of each one and to make it clear from the start thatslacking off is not to be tolerated and if they dont take care of their end of the business,they can lose some percentage in the final profit sharing.


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The Pros Of A Joint Venture

A joint venture refers to a partnership between two or more people for a business. It

differs from the word partnership in the sense that it is more formal and in more legal

terms. In a joint venture, the two parties sign a legal agreement that they will be sharing

the tasks and the risks of the business or the new venture.

Most start-up businesspeople opt for a joint venture as opposed to single proprietorship

or multi-partners or corporation. Here is a brief rundown of the reasons why a joint

venture is a good choice.

y Less risk

For people who are just starting their business or are virtually novices in the

business arena, it can be frightening to just plunge head first and not have someone

with you to cushion the risk. Having a partner or partners will make your investment

smaller and therefore, lesser risk for you should the business fail. This is ideal for

young entrepreneurs who are just testing the market and are not yet sure of their

business ideas yet or those who are going into a field they do not know.

y Having a go-to guy

When you have partners, there will be division of labor. Thus, you dont need to do

all the work yourself. You can divide the work among the partners where each one

will handle one aspect of the business. This set-up is ideal for those who are doing

the business part-time and would not be able to look into the business 24/7. If you

cant make it for instance to look at materials or check the quality control, at least,

you have someone who can take over the reins for you. This does not meanhowever that you have the right to slack off.

Single proprietors hire people to this for them but sometimes, it is better to have

someone who you can trust. Employees are also seen as not having the same kind

of passion and commitment to the business as perhaps a partner because they do

not have a personal stake on it. Thus, they cannot be relied on the same way as you

can rely on a partner.

y Having someone by your sideFor some people, they do not really care about the investment or the risk, they just

want someone to be there should the business fail or have problems. Having

somebody to rely on in times of trouble is vastly reassuring. Besides, although you

can hire people to be there for you, there is nothing better than having a friend or

someone you trust by your side.


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More ideas

Two heads are better than one or so the saying goes. Having many partners means that

you will also have a lot of ideas to choose from. These can be good for the business

especially when you are strategizing on marketing your products or thinking of a product

idea or an additional service. The more people you have on your side, thinking for the

business, the better.

Q.4 Select a currently existing product in the Indian market to be

launched in the US market. Explain three aspects of marketing strategy

that need to be adapted for the US market.

Kraft Foods' recent move to launch its Oreo biscuit brand into India has drawn

attention to what is a growing sector in the country. India's biscuit market is

attracting growing multinational interest but powerful domestic players already

dominate the market and the jury is out over whether foreign companies can

easily grab market share.

India's US$2.4bn biscuit market is drawing multinational companies to its shores.

According to Euromonitor data, the sector is growing at 14% annually, so the channel

holds much promise, but will the world's food giants have the nous to turn this local

demand into significant profits?

Oreo, from US giant Kraft Foods, is the most recent international arrival to this multi-billion dollar biscuit party.

Last year, GlaxoSmithKline Consumer Healthcare launched high-end cookies and

cream biscuits under its Horlicks brand, to join its existing value lines and a Junior

Horlicks biscuit for young children. The UK's United Biscuits, meanwhile, brought its

McVitie's digestive biscuits to India. PepsiCo is set to soon follow up its 2009 offering of

Aliva, a baked-savoury cracker, with a healthy oat-based cookie. And there have also

been rumours that Hindustan Unilever is developing plans to re-enter the Indian biscuit

market it left in 2005.

Methods of entry.:With rare exceptions, products just dont emerge in foreign markets

overnighta firm has to build up a market over time. Several strategies, which differ in

aggressiveness, risk, and the amount of control that the firm is able to maintain, are

available:


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y Exporting is a relatively low risk strategy in which few investments are made in

the new country. A drawback is that, because the firm makes few if any

marketing investments in the new country, market share may be below potential.

Further, the firm, by not operating in the country, learns less about the market

(What do consumers really want? Which kinds of advertising campaigns are

most successful? What are the most effective methods of distribution?) If an

importer is willing to do a good job of marketing, this arrangement may represent

a "win-win" situation, but it may be more difficult for the firm to enter on its own

later if it decides that larger profits can be made within the country.

y Licensing and franchising are also low exposure methods of entryyou allow

someone else to use your trademarks and accumulated expertise. Your partner

puts up the money and assumes the risk. Problems here involve the fact that you

are training a potential competitor and that you have little control over how the

business is operated. For example, American fast food restaurants have found

that foreign franchisers often fail to maintain American standards of cleanliness.

Similarly, a foreign manufacturer may use lower quality ingredients in

manufacturing a brand based on premium contents in the home country.

y Turnkey Projects. A firm uses knowledge and expertise it has gained in one or

more markets to provide a working projecte.g., a factory, building, bridge, or

other structureto a buyer in a new country. The firm can take advantage of

investments already made in technology and/or development and may be able to

receive greater profits since these investments do not have to be started from

scratch again. However, getting the technology to work in a new country may bechallenging for a firm that does not have experience with the infrastructure,

culture, and legal environment.

y Management Contracts. A firm agrees to manage a facilitye.g., a factory, port,

or airportin a foreign country, using knowledge gained in other markets. Again,

one thing is to be able to transfer technologyanother is to be able to work in a

new country with a different infrastructure, culture, and political/legal

environment.

y Contract manufacturing involves having someone else manufacture products

while you take on some of the marketing efforts yourself. This saves investment,

but again you may be training a competitor.

y Direct entry strategies, where the firm either acquires a firm or builds operations

"from scratch" involve the highest exposure, but also the greatest opportunities

for profits. The firm gains more knowledge about the local market and maintains

greater control, but now has a huge investment. In some countries, the


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government may expropriate assets without compensation, so direct investment

entails an additional risk. A variation involves a joint venture, where a local firm

puts up some of the money and knowledge about the local market.

Product Issues in International Marketing

Products and Services.: Some marketing scholars and professionals tend to draw a

strong distinction between conventional products and services, emphasizing service

characteristics such as heterogeneity (variation in standards among providers,

frequently even among different locations of the same firm), inseparability from

consumption, intangibility, and, in some cases, perish abilitythe idea that a service

cannot generally be created during times of slack and be stored for use later.

However, almost all products have at least some service componente.g., a warranty,

documentation, and distributionand this service component is an integral part of the

product and its positioning. Thus, it may be more useful to look at the product-service

continuum as one between very low and very high levels of tangibility of the service.

Income tax preparation, for example, is almost entirely intangiblethe client may

receive a few printouts, but most of the value is in the service. On the other hand, a

customer who picks up rocks for construction from a landowner gets a tangible product

with very little value added for service. Firms that offer highly tangible products often

seek to add an intangible component to improve perception. Conversely, adding a

tangible element to a servicee.g., a binder with informationmay address many

consumers psychological need to get something to show for their money.

On the topic of services, cultural issues may be even more prominent than they are for

tangible goods. There are large variations in willingness to pay for quality, and often

very large differences in expectations. In some countries, it may be more difficult to

entice employees to embrace a firms customer service philosophy. Labor regulations

in some countries make it difficult to terminate employees whose treatment of

customers is substandard. Speed of service is typically important in the U.S. and

western countries but personal interaction may seem more important in other countries.

Product Need Satisfaction: We often take for granted the obvious need thatproducts seem to fill in our own culture; however, functions served may be very different

in othersfor example, while cars have a large transportation role in the U.S., they are

impractical to drive in Japan, and thus cars there serve more of a role of being a status

symbol or providing for individual indulgence. In the U.S., fast food and instant drinks

such as Tang are intended for convenience; elsewhere, they may represent more of a


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treat. Thus, it is important to examine through marketing research consumers true

motives, desires, and expectations in buying a product.

Approaches to Product Introduction: Firms face a choice of alternatives in marketing

their products across markets. An extreme strategy involves customization, whereby

the firm introduces a unique product in each country, usually with the belief tastes differso much between countries that it is necessary more or less to start from scratch in

creating a product for each market. On the other extreme, standardization involves

making one global product in the belief the same product can be sold across markets

without significant modificatione.g., Intel microprocessors are the same regardless of

the country in which they are sold. Finally, in most cases firms will resort to some kind

ofadaptation, whereby a common product is modified to some extent when moved

between some marketse.g., in the United States, where fuel is relatively less

expensive, many cars have larger engines than their comparable models in Europe and

Asia; however, much of the design is similar or identical, so some economies areachieved. Similarly, while Kentucky Fried Chicken serves much the same chicken with

the eleven herbs and spices in Japan, a lesser amount of sugar is used in the potato

salad, and fries are substituted for mashed potatoes.

There are certain benefits to standardization. Firms that produce a global product can

obtain economies of scale in manufacturing, and higher quantities produced also lead

to a faster advancement along the experience curve. Further, it is more feasible to

establish a global brandas less confusion will occur when consumers travel across

countries and see the same product. On the down side, there may be significant

differences in desires between cultures and physical environmentse.g., software soldin the U.S. and Europe will often utter a beep to alert the user when a mistake has

been made; however, in Asia, where office workers are often seated closely together,

this could cause embarrassment.

Adaptations come in several forms. Mandatoryadaptations involve changes that have

to be made before the product can be usede.g., appliances made for the U.S. and

Europe must run on different voltages, and a major problem was experienced in the

European Union when hoses for restaurant frying machines could not simultaneously

meet the legal requirements of different countries. Discretionary changes are changes

that do not have to be made before a product can be introduced (e.g., there is nothingto prevent an American firm from introducing an overly sweet soft drink into the

Japanese market), although products may face poor sales if such changes are not

made. Discretionary changes may also involve cultural adaptationse.g., in Sesame

Street, the Big Bird became the Big Camel in Saudi Arabia.


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Another distinction involvesphysical productvs. communication adaptations. In order

for gasoline to be effective in high altitude regions, its octane must be higher, but it can

be promoted much the same way. On the other hand, while the same bicycle might be

sold in China and the U.S., it might be positioned as a serious means of transportationin the former and as a recreational tool in the latter. In some cases, products may not

need to be adapted in either way (e.g., industrial equipment), while in other cases, it

might have to be adapted in both (e.g., greeting cards, where the occasions, language,

and motivations for sending differ). Finally, a market may exist abroad for a product

which has no analogue at homee.g., hand-powered washing machines.

Branding: While Americans seem to be comfortable with category specific brands, this

is not the case for Asian consumers. American firms observed that their products would

be closely examined by Japanese consumers who could not find a major brand name

on the packages, which was required as a sign of quality. Note thatJapanese keiretsus span and use their brand name across multiple industriese.g.,

Mitsubishi, among other things, sells food, automobiles, electronics, and heavy

construction equipment.


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Q.5 what are the essential elements of an international marketing plan that distinguish it from a

domestic marketing plan? Why is it important to update the international marketing plan

regularly?

In today's global economy, international marketing becomes more and more important.

Companies may export products from the country of origin, or they may enter into joint

ventures with foreign companies. They may license to companies abroad, or they may establish

a manufacturing plant in another country. In any case, they will need to develop a marketing

plan that targets people in foreign markets.

International Marketing

o While some businesses get into the international marketplace as a result of

unsolicited orders from consumers in a foreign country, many businesses choose

to market internationally. They may want to establish new markets when

domestic markets are saturated, or they may see an opportunity to turn a quickprofit. In an economic downturn, some companies may want to spread their

corporate risk and minimize the impact of a recession at home. Successful

international marketing involves adapting, managing and coordinating a

marketing plan in a foreign environment.

Cultural Values

o One of the essential elements of international marketing is to understand the

culture of the target audience. Iconic multinational corporations like Coca-Cola,

IBM and McDonald's were successful in selling their brands to worldwide

markets by taking a universal approach based on the American model of

assimilation. Going forward, companies may feel the need to target culturally

diverse markets with marketing directed toward specific cultures. To accomplish

this goal, the marketing plan must take into consideration the language of the

native population, the educational level of the populace, the prevailing religions

and other social conditions that determine how people will react to the product

and its advertising.

Branding

o Companies use branding as a key element of their marketing strategy to positiontheir businesses in relation to the competition. This is a valid strategy when

marketing domestically, and it is also valid for international marketing.

Consistency in the branding message informs the customer of the quality they

can expect from a company's products and services. Branding is achieved by

using logos, color, graphics and taglines that reflect the product. To use branding

as an international marketing strategy, a template can be useful. Templates are


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easy to control and resize, and they can be modified into different languages for

different countries.

Localization of Websites

o Localizing your website by translating the text into the language of the targetmarket and registering the website in appropriate local directories is another

important element of international marketing. You may have to modify icons,

date and time formats, photographs and local holidays to fit the local culture,

and make an international user feel comfortable using your website. While

search engines such as Google are popular in the United States, there may be

other search engine options that are more suitable for foreign countries. You

might have the best possible website, but if it is hard to find, it is ineffective.

There should never be 'one marketing plan' in a company. The difference is between the target

markets. There should never be a cookie cutter style marketing campaign. Any successful firm

internationally, should first obtain success locally. Coca Cola does well at being a global brand.

Proctor and Gamble is a global company - but one wouldn't know it per say. It's difficult to even

judge which P&G products you have in your home currently.

For a global/foreign market you could have a few approaches:

y Advertise as a foreign product - there is novelty in such for some countries. For example

by default, many would assume a French wine has better quality. If it is something that

the country perceives Americans to do better - stick with that approach.

y Joint Partnership with a Local Firm - that way it can be considered a 'local product' and

try to find a firm that has already established credibility

y Licensing - you could just sell the rights to your product to a foreign firm. The problem

lies that they aren't obligated to maintain the quality standards that you may perceive

necessary, and therefore hurt brand image.

Consider your market - Can they afford it? Do they want it? Do they need it?

One of the important thing that we need to take care of when we are marketing our product in

the international market is the detailed redesign of your 4 ps in accordance with the global

market.

As we know from the contributions of G. Hofstede, the cultures of world differ on broadly

defined five (5) dimensions

1. Individualism and collectivism.

2. Power distance.


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3. Masculinity and Feminity.

4. Uncertainty avoidance.

5. Long term orientation and short term orientation.

During marketing of a product in the global context, we should take into consideration these

dimensions to respond positively to the opportunities in the foreign markets. to devise the 4pswe first concentrate on the PRODUCT. the product design should take various things into

consideration like for example quality which you are going to offer, it should withstand the

global competition of highly sophisticated goods of any public interest. Now a days the

packaging and labeling of the products is one of the opportunity as well as threat to the

exporting companies. the P&L is threat in the sense that various countries have and are still

barring the products from entering their markets on packagging issues(Japan), it is also of the

major tangible part of a product which it offers at the very begining of the customer-producer

encounter, in this context it is going to be an opportunity for a producer to grab.

PRICE, the pricing policy in the global context is another important thing which needs the

maximum care, when we break the global market into fragments based on cultures we often

face this situation that some low priced products are referred as of mediocre quality.

PROMOTION, this part of the marketing strategy is the critical one. The ways and means of the

promotion strategy should be acceptable in the global markets. This is a kind of promotion

customization according to the markets of the world. Language is one of the important things in

the promotion of any brand. Some countries often leave certain thing without even noticing

because of the language. The product descriptions should be written on the product in the

language of the country to which the product is dispatched or produced to suffice the needs.

The English language has lost its grip on the minds of people now.

PLACE, the product should be placed at a place in such a situation that people should feel that

this product belongs to them. Find out the similarities in cultures and target them and where

dissimilarities arise avoid them from cropping into your product otherwise it will lose theacceptance which no producer can afford.

Your marketing plan is an essential part of your overall business plan. When you start a

business or introduce new products or concepts, the plan will help you:

y Assess the needs of your customers and develop a product or service to meet those

needs

y Communicate the attributes of the product or service to the customer

y

Establish distribution channels to get the products/services to the customer

Developing your marketing plan will, first and foremost, help you think of all aspects of

marketing; aspects which you could otherwise overlook. To produce a sound business plan you

will need to outline things such as the nature of your customers, and how and why they will buy

your product or hire your services. Secondly, your banker or lender will want to see the

marketing section of your business plan before considering lending you money.


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You can purchase software to help you write your marketing plan and your business plan as a

whole. Such software may include sample plans, marketing scenarios, and the ability to

perform calculations. Equally, you can choose to write your plan in any word processor; even a

pencil and paper can suffice for your first draft.

Styles, markets, and goals change and so should your plan. Your marketing plan should bereadily accessible to consult, revise, and update. You should update your plan regularly,

adjusting it according to business activities and predictions of new trends.

Q.6 Your Company is importing fertilizer in bulk. On arrival there is a shortage compared

to the Bill ofLading quantity. How would you deal with this situation for future consignments

before shipment, on arrival of the vessel, at time of discharge and thereafter?

Eliminating Trade Distortion Policies in the United States

The corn bounty, it is to be observed, as well as every other bounty upon exportation, imposes

two different taxes upon the people; first, the tax which they are obliged to contribute, in order

to pay the bounty; and secondly, the tax which arises from the advanced price of the

commodity in the home-market, and which, as the whole body of the people are purchasers of

corn, must, in this particular commodity, be paid by the whole body of the people.

Introduction

The export subsidy, or bounty as it is referred by Adam Smith, has existed for many centuries.

Created to augment an industry in need of assistance to the market, the export subsidy has

become an outdatedtradeentity in the developed world. As stated above, export subsidies

impose a greater hindrance to the exporting nation that must be compensated by their

consumer population. As the United States prepares to host the next global round ofnegotiations for the World Trade Organization (WTO) in Seattle, Washington, it establishes the

perfect opportunity to initiate the abolition of all export subsidies from domestic policy books

worldwide by eliminating our own trade distorting programs.

Export subsidies are tools used to supplement the producers profits from selling a commodity.

They are efficient and positive when used to initiate commerce in a developing society. Adam


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Smith realized their intentions by mentioning that, "bounties were given for the encouragement

either of some beginning manufactures, or of such sorts of industry of other kinds as were

supposed to deserve particular favor" (Smith, 1776: 450). However, their purpose of origin did

not legitimize their existence to Smith.

The problem begins when the society grows dependent upon these additional payments

because the market has been so thoroughly distorted that prices are inflated beyond normally

affordable means. Producers in other nations can no longer compete with the sale price of the

commodity from the subsidized nations. The competition is thereby artificially defeated.

Export subsidies have reached their expiration. It is time for world markets to convince their

users of their inherent inefficiency and to proceed into the next millennium with an agenda

calling for freer global trading practices.

This process of opening markets and eliminating barriers to trade has already caused quite a

stir throughout the WTOs member nations. In particular, the United States and the European

Union (EU) will be at the forefront of the chopping block when it comes the time for discussions

regarding agricultural trade.

The U.S. position to the WTO expresses the desire to succeed to a world of freer trade and

open markets. A communication from the United States to the WTO, regarding objectives for

the 1999 agricultural negotiations, specifies the U.S. commitment to "completely eliminate, andprohibit in the future, all remaining export subsidies" (USTR, Preparations for 1999 Ministerial

Conference). The United States cannot expect our competitors to remove their established

policies, benefiting their agricultural sector, until we eliminate our own.

History

The battle over export subsidies has its roots in EU-United States history. The EU and the

United States were originally two of the highest users of export subsidies on products such as

grains, oilseeds and dairy products. The EU fell dependent upon these subsidies due to inflatedinternal pricing. The United States was obliged to retaliate against their policies with the

subsidy war of 1985.


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Export Enhancement Program

The United States began a policy of retaliation by using the Export Enhancement Program

(EEP) as a deterrent towards the European Unions (EU) exaggerated levels of export

subsidies. The war began with the United States Department of Agriculture (USDA)development of the EEP on May 15, 1985, under the authority provided by the Commodity

Credit Corporation (CCC) Charter Act of 1948. It was later specifically authorized by the Food

Security Act of 1985 (Epstein, 1991: 1). The EEP utilized government-owned surplus

agricultural commodities as bonuses to U.S. exporters to reduce the prices of U.S. agricultural

commodities in order to compete with foreign subsidized commodities. The program was

initiated as a negotiating tool to coerce our competitors, especially the EU, that their practices

were distorting markets throughout the world (GAO, 1990: 2).

The EEP meets it target by focusing upon nations which discriminate against U.S. sales with

the use of export subsidies for their domestic commodities. The EEP does not promote any

commodity that would not have a fair market-share without the use of export promotion. This

keeps the lines of trade open although the United States is promoting a policy of exporter

assistance. An exporter must apply to the USDA for payment in cash to be received upon

approval of their bid for the exporting bonus. Although the CCC allocates final payments, all

sales are performed by the private sector before addressing the U.S. government (FAS, 1997).

Smith would have been in favor of the U.S. development of a combat policy to the EUs exportsubsidies. Smith was a supporter of trade retaliation. He believed that there had to be a limit to

the allowance of a foreign nations distorting practices. When speaking of importations he

mentioned that "revenge in this case naturally dictates retaliation, and that we should impose

the like duties and prohibitions upon the importation of some or all of their manufactures into

ours" (Smith, 1776: 467).

The initial EEP program was continually expanding. It continued as a tool to determine the

outcome of the approaching round of WTO negotiations. The Uruguay Round was launched

under the auspices of the General Agreement on Tariffs and Trade (GATT) in September 1986.Major players in world trade all submitted proposals for the further liberalization of agricultural

trade policies (GAO, 1990: 35).


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End the Export Enhancement Program

In 1989, the USDA produced an unpublished study of actual effectiveness of export subsidy

programs. This study found that a program such as the EEP was likely to increase commodity

sales because altered commodity prices would increase import demand (Epstein, 1991: 4). In1991, leading economists Robert Chambers and Philip Paarlberg argued that export

enhancement programs actually produce a negative affect upon real farm incomes. They found

that

If the excess demand for the agricultural commodity is inelastic, then farm income in the

subsidizing country falls. Further, they contend that the presence of a nonrecourse loan

program dampens any impacts either in-kind or cash subsidies might have (Chambers, 1991).

Advocates of export subsidies see the benefits incurred by a theoretical targeted export

assistance program. In a market free from outside pressures, bonuses may contribute to

enhanced profitability by displacing program costs to the rest of the world. In a world filled with

retaliatory measures, export subsidies run the risk of inflating all commodity prices thereby

forcing the level of the subsidy well above the stages needed "to exploit differences between

the substitution effects and the income effects" (Seitzinger, 1989).

The Export Enhancement Program has run its course. The first objective of the EEP, as listed

in the Federal Register on June 7, 1991, was "to discourage unfair trade practices by othercountries" (Epstein, 1991: 2). This discouragement has not been successful. Other countries,

especially the EU, continue to practice export enhancement programs of their own, assisting

their producers to a much greater extreme than any U.S. domestic agricultural program. The

United States must develop a new program that does not follow the same form of a policy the

nation is trying to eliminate. Supporters may argue that the program is necessary in order to

allow our farmers and exporters to compete with our global trading partners, who support their

agricultural industry with export subsidy programs. There must be a limit to how far retaliation

can continue.

The EEP, originally created as a deterrent to the EUs domestic subsidy programs, has not

accomplished its goal of export subsidy elimination. Adam Smith noted that even retaliatory

measures sometimes run their course unsuccessfully. The enforcing nation must realize a

failure of purpose and move to a different strategy to accomplish original goals. In continuing

distorting trade practices, the U.S. only sustains the animosity felt between the competitor


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nations. Smith noted that

When there is no probability that any such repeal can be procured, it seems a bad method of

compensating the injury done to certain classes of our people, to do another injury ourselves,

not only to those classes, but to almost all the other classes of them (Smith, 1776: 468).

The only manner in which to repair U.S. EU relations over trade policy is to negotiate on

equal terms. Criteria for the EEP to review initiative proposals includes a clause which targets

the initial purpose of the EEP, to counter competitors subsidies by displacing such countries

subsidized exports in targeted countries (FAS, 1998: 1). This clause completely misses its aim

of furthering freer trade policy and opening the worlds markets towards U.S. exports. The only

thing it accomplishes is a tighter protectionist policy which inflames producers from abroad,

heightening trade tensions. The United States cannot expect the EU to remove a policy which

the U.S. follows; albeit in microscopic form.

Uruguay Round Commitments

The previous round of WTO negotiations produced the Uruguay Round Agreement on

Agriculture (URAA) which included provisions for the gradual reduction in volume and value of

all export subsidies for agricultural commodities over the years 1995 to 2000 (Leetmaa, 1999).Flexibility exists within the URAA, allowing subsidy averaging over the period of

implementation. If one year commodity prices escalate, causing a greater dependency upon

export subsidy programs, the nation must use the other of the five years to reduce levels of

allocations, equaling full compliance reduction averages for the realization period (Leetmaa,

1998: 23).

During the last decade, both the EU and the United States have reduced their export subsidy

levels though the EU continues to use this method at an exorbitant rate. The EUs Agenda

2000 addresses several concerns developed by the URAA. Finalized in March 1999, Agenda2000 touches upon, but does not atone for, thedistortion created by their domestic subsidies.

The program will reduce support prices on certain commodities while moving towards a policy

of direct payments to compensate the producers for price declines (Kelch, 1999: 12). The EUs

Agenda 2000 gives more priority to the upcoming WTO negotiations. The EU insists that the

plan in final form will be their compromise toward the upcoming agricultural negotiations. They


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believe that "any discussion about further cuts in export subsidies must also involve disciplining

U.S. export credit guarantees" (Blumenthal, 1999: 1). Agenda 2000 gives the EU opportunity

for bargaining over sensitive agricultural trade issues.

The United States is prepared to meet its commitments within the WTO by the year 2000.Since 1985, the United States has progressively shifted its farm policy towards a stronger

market orientated system that naturally reduced subsidy levels. The URAA outlined provisions

for restricted domestic support practices, assisting the United States in developing policies

independent of agricultural subsidies. The URAA defined export subsidies subject to reductions

as

Direct export payments by governments to firms, industries or producers of agricultural

products contingent on export performance

Sales or gifts of government stocks at prices lower than acquisition prices

Export payments financed through government action, including payments financed by levies

on producers

Subsidies to reduce export marketing costs, and

Subsidies on goods incorporated into export products (Leetmaa, 1998: 23).

The United States was able to comply with these measures without much difficulty.

There are contributing factors to the successful compliance of the United States. First, base

levels set between the years 1986-88 were exceptionally inflated. Achieving a twenty- percentreduction in these rates was a reasonable objective. The gradual averaging took the brunt of

the possible results from immediate support reductions (Nelson, 1997: 27). The Federal

Agriculture Improvement and Reform Act of 1996 (FARM Act) further promoted the market-

oriented agricultural policies.

1996 FARM Act

The 1996 Act did make significant policy changes directed at filtering existing programs into

those that more closely adhered to the global marketplace. The Act redesigned programs whichdealt with income support and supply management for commodities such as wheat, corn, grain

sorghum, barley, oats, rice and upland cotton (Young, 1996: 1).

The FARM act modified the Agricultural Trade Act of 1978 by altering two main goals of

agricultural trade strategy. Instead of


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(1) Ensuring U.S. agricultural export growth, (2) efficiently using Federal agricultural export

programs, (3) providing food aid and improving the commercial market potential for U.S.

agricultural exports in developing countries, and (4) maintaining traditional U.S. markets;

(Ackerman, 1996: 37).

the goals now read

Increasing the value of U.S. agricultural exports, (2) increasing the U.S. world market share for

agricultural products, (3) increasing the value of U.S. exports of high-value and value-added

agricultural products, (4) boosting the U.S. world market share of high-value and value-added

products, (5) ensuring to the extent practicable that the United States implements all of its

commitments under current trade agreements to increase access for U.S. agricultural

commodities, and (6) requiring that, to the extent practicable, the United States use all

applicable laws to secure U.S. rights under the Uruguay Round Agreement on Agriculture

(Ackerman, 1996: 37).

The United States will be unable to attain goals such as (1) and (2) of the revised act if endless

trade disputes continue over principle facts. The more the EU wishes to hinder agricultural

profitability in the United States, they are given more reason with programs mirroring their own.

Less government intervention was visualized by downsizing budget allocations towards exportsubsidy programs, including the EEP. Funding levels allocated towards the EEP through 2002

are as follows: FY 1999, $550 million; FY 2000, $579 million; FY 2001, $478 million; and FY

2002, $478 million (FAS, 1999: 4). Although almost non-existent compared with the EUs

expenditures of approximately $6.4 billion in 1995 towards export subsidies, EEP allocations

still comprise a percentage of the U.S. yearly agricultural budget. The United States must

realize that a small market-distortion is still a market-distortion. The important stake export

subsidies claim in global trade disputes magnifies the minimal levels of U.S. funding.

The United States began to move in the right direction but stopped without realizing their fullpurpose. The FARM Act attempted to direct domestic farming towards the price-competitive

market. The USDA acknowledged that initially, producers may feel the brunt of restructured

programs, but eventually the market would take to evening out profits. The United States had

confidence in a strong agricultural commodity market to compensate for reductions in support

programs.


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Farmers were left more volatile to market conditions and took precautionary measures to insure

their stocks. They moved towards methods such as

Expanded use of futures and options markets, possibly using new instruments such as yieldcontracts, or will contract in advance for future sale of their commodities. Other alternatives to

manage increased risk include diversification of production, integrated ownership, and crop

insurance (Young, 1996: 2).

U.S. agriculture was able to absorb market-oriented changes. It might be better policy to

adhere completely to a market strategy rather than partially restructuring while maintaining

certain market-distorting practices. The U.S. should have used the 1996 FARM Act to develop

a U.S. agricultural policy void of trade-disputing methods such as the export subsidy program.

While the United States is in compliance with WTO standards set by the URAA, we still practice

unfair trading policies at a lesser extent. The only completely fair-trade agenda would include a

phase out period for distortions such as export subsidies. Reduction is the key, but if the U.S.

pledges total abolition, than elimination will accomplish the broader goal. Although the United

States takes such a small percentage of total world export subsidies, the policy still remains. In

principle, if the U.S. feels it needs to continue programs such as the EEP, it purges any

incentive for the EU to eliminate their export subsidy programs.

Preparations for the New Round

The United States of America

The United States Trade Representative, Charlene Barshefsky, is preparing for negotiations to

begin at the end of 1999. The launching of the new round in Seattle, Washington will be a

window into the future of liberalizing global trade policies. Communication failure during thenext month will negatively foreshadow any accomplishments, which the United States feels

need to be met.

There are conflicts arising from the manner in which countries want to approach the Seattle

agenda. Too many specifics cannot hinder the progress of trade. There must be a compromise


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in order to move forward towards broader goals. Agricultural discussion will prove to lend a

directional force to the proceedings.

The United States outlines sentiment against WTO members who have not achieved their

reduction commitments. A communication addresses the issue of circumventing export subsidycommitments to avoid compliance with accepted measures. It expresses a complimentary view

to Smiths opinion that export subsidies should only be used legitimately to enhance

government revenue, not "restrict the availability of agricultural products on world markets,

particularly in times of short supply" (USTR, Preparations for 1999 Ministerial Conference).

Smith felt that remarkable levels of exportation, although profitable in the short run, would

eventually return to injure the domestic economy. Upon expression of possible injury to the

home, he remarked that,

The extraordinary exportation of corn, therefore, occasioned by the bounty, not only, in every

particular year, diminishes the home, just as much as it extends the foreign market and

consumption, but, by restraining the population and industry of the country, its final tendency is

to stunt and restrain the gradual extension of the home-market; and thereby, in the long run,

rather to diminish, than to augment, the whole market and consumption of corn (Smith, 1776:

509).

The United States continues to establish that export subsidies are not helping either the countrywho imposes them, or the country they are imposed upon. Prices created from market

distortions must be compensated at some level. This coincides exactly with Smiths idea that,

You do not increase the real wealth, the real revenue eit

final international marketing

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