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Trade Barriers Harm Those Who Set Them

By Murray Weidenbaum. Murray Weidenbaum is director of the Center for the Study of American Business at Washington University in St. Louis. / May 4, 1993



THERE is a different and useful way to look at the global marketplace. Why do businesses use one or another method in establishing a continuing presence in overseas markets? Why do they buy existing firms in one area and enter into joint ventures in another? Why do they build new facilities in some nations and engage in licensing and franchising in others?

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In good measure, that private choice among alternative strategies is often influenced, if not dictated, by government policies. For a variety of political reasons - mainly to protect home industry - governments erect trade barriers such as tariffs and quotas. In a 1991 survey, 45 percent of United States firms reported that such obstacles were the greatest impediments to selling abroad.

Exporters can absorb some of the added costs. In the case of import quotas, companies frequently shift to higher-priced items. Businesses also draw on a variety of alternatives to direct exporting. In Western Europe, US firms set up new manufacturing facilities or buy existing local firms.

On many occasions, firms face sharp limits to foreign ownership of local enterprises. These may be formal investment barriers or tax and regulatory advantages limited to local companies. In the Asian rim, international firms most often respond by entering into joint ventures with local firms.

In the case of defense production, many of the cross-border alliances are involuntary on the part of the foreign partner. In the 1980s, European and Asian governments demanded a greater role in the development of the military aircraft they were buying from the US. As a result, US producers of advanced-weapon systems often enter into agreements with foreign firms to gain governmental customers.

In the case of more standard manufactured goods, other ways around investment limits include entering into agreements with local firms which will produce the item under licensing arrangements. In the case of services, franchising serves a similar purpose.

Especially in less developed nations, governments on occasion restrict repatriation of earnings. Foreign businesses also fear future expropriation of their assets. Global enterprises still interested in doing business in those parts of the world set up affiliate or correspondent relationships with local firms. This minimizes risk and liability - and also profit potential.

In many developed nations, companies face high business taxes and onerous regulatory costs. In some cases, the barriers are informal. When these barriers to business occur in the home country, the enterprise can expand overseas. In more extreme cases, existing business operations move to a more favorable policy environment in another country. When a business operates in several countries, it can shift its high value-added activities to other nations in which it operates, specifically those with lower tax es and less burdensome regulation.

In the years ahead, the combined power of economic incentives and technological change will increasingly have feedback effects on the decisions of voters and government officials as they develop new policies to deal with the global economy. Public-sector decisionmakers will have to understand that they must become internationally competitive in the economic policies they devise.

Governmental activities that impose costs without compensating benefits or that reduce wealth substantially in the process of redistributing income undermine the competitive positions of their domestic enterprises. The result is either the loss of business to firms located in other nations or the movement of the domestic company's resources and operations to more hospitable locations.

Political scientists and economists have long understood that people vote with their feet. They leave localities, regions, and nations with limited opportunity in favor of those that offer a more attractive future. In this era of computers, telephones, and fax machines, enterprises are far more mobile than that. Information - that key resource - can be transferred in a matter of seconds.