Overcoming Barriers to Trade Restrictions

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  • 0:03 Time to Expand
  • 0:33 International Trade Barriers
  • 1:37 Buying into the Market
  • 3:18 Non-Equity Modes
  • 6:03 Lesson Summary
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Lesson Transcript
Instructor: Nick Chandler
Trade barriers can prevent businesses from doing business abroad. So what can a business do if it wants to expand its operations and sell products in other countries? This lesson will provide some answers.

Time to Expand

Imagine you are the owner of a company that has been in business a few years. Sales are growing year on year, and you have built up a good reputation for your brand. It's time to start looking at markets in other countries for your products. You find out that it is not simply a case of transporting goods to another country. You have to pay taxes on exports, arrange export licenses, and so on. These are trade barriers and there are many more. So what types of trade barriers are there and what can companies do to avoid them?

International Trade Barriers

When a country's government wants to protect or give an advantage to local producers, it may impose trade barriers. Trade barriers are usually categorized into two groups: tariff and non-tariff barriers. Tariff barriers are taxes imposed on foreign organizations trying to import into the country. Non-tariff barriers mean anything that is a barrier to trade and not classed as a tax. Non-tariff barriers include technical regulations and standards, subsidies for local producers, anti-dumping actions, tax discounts in favor of local producers, embargoes and ad hoc bans on imports, red tape (e.g., licensing and customs procedures), and quantitative limits (or quotas).

A lot of the work that can be done to remove obstacles to trade can only be done at a governmental level, but that doesn't mean that organizations have been inactive - quite the opposite. Here are some strategies that can and have been used to overcome barriers to trade.

Buying into the Market

Buying shares in companies abroad is often referred to as an equity mode. If a company buys out a manufacturer abroad, then it is no longer exporting but manufacturing in the country itself. Setting up new manufacturing facilities in the host nation is called greenfield operations. This is not a new strategy - way back in 1956, Deere & Company bought a German tractor manufacturer in order to set up production facilities in Europe and avoid the 18% tariff.

Having production facilities abroad may remove barriers in many other countries too, as with Honda, which is not allowed to directly export cars to South Korea and finds a way around this barrier by exporting Honda cars from production facilities in Ohio. With greenfield investments, a company can choose to buy an existing company or establish a new one abroad.

Companies don't have to opt for buying production facilities in the host nation. A company may choose to buy a distribution network or single company in the host country and have them sell the goods/services produced in the home market. Buying a single company for manufacturing or selling goods or services is called a wholly owned subsidiary. This method is preferred to direct exporting by multi-national companies for countries where there are high trade barriers.

Another strategy may be to establish an alliance. Two or more companies agree to work together - one in the home market and the other in the host country. Both have something to gain from the alliance. An alliance may be formed with a contract or by setting up a joint venture, which involves sharing ownership between the two companies. Buying shares in the other company shows a greater commitment and builds trust for both companies.

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