Page 104 - Business Principles and Management

Chapter 4 • International Environment of Business

Government Policies

Because international business takes place between two or more countries, the
policies, rules, and laws of more than one national government affect trade and
investment. Although economists consider free trade desirable for a society,
on occasion governments impose tariffs. These are taxes on foreign goods to
protect domestic industries and to earn revenue. For instance, assume that the
U.S. government sets a tariff of 10 percent on a pair of jeans made in Colombia,
South America. If the jeans are valued at $30, the American customs department
will collect a tax of $3 ($30 x 0.10), and the price per pair will rise to $33.
Governments also impose tariffs when a foreign supplier is guilty of “dump-
ing” its products. Dumping refers to the practice of selling goods in a foreign
market at a price that is below cost or below what it charges in its home coun-
try. When a company dumps, it is trying to win more customers by driving do-
mestic producers out of the market. The government prevents dumping by
setting tariffs that increase the price of goods being dumped. For example, if
Brazilian firms tried dumping steel in the United States, a tariff might be levied
to sufficiently raise the price of that steel to permit domestic producers to com-
pete successfully.
Another way by which governments restrict the availability of foreign goods
is to create quotas. A quota limits the quantity or value of units permitted to
enter a country. For instance, the U.S. government may allow only 10,000 tons
of salmon to enter the country annually from Chile, although much more
salmon could be sold. Alternatively, the government could allow salmon worth
up to $100 million into the United States from Chile annually. In either case,
quotas limit the number or dollar value of foreign goods that can be sold in a
country. Quotas are designed to protect the market share of domestic produc-
ers. However, both tariffs and quotas increase the price of foreign goods to
consumers.
In addition to tariffs and quotas, it may be difficult to sell goods and services
abroad because of nontariff barriers. These are nontax methods of discouraging
trade. In many cases, such barriers do not target specific foreign companies or

Many of the clothes you buy
are made in foreign countries.
PHOTO: © DIGITAL VISION. less than similar clothes made
Do they generally cost more or
in the United States? What
factors affect the pricing of
foreign-made clothing?

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