International Pricing Issues— “Parallel Imports” Parallel Imports—Non-domestic products bought by an importer from a distributor in one country and resold to distributors in other countries that are not part of the manufacturer’s regular distribution network Examples—pharmaceuticals, designer shoes and clothing, athletic shoes, watches, luggage and leather goods, movies, software, Levi’s jeans

Conditions Favorable to Parallel Importing When there are wide margin differences charged by the manufacturer for the same products in different countries Whenever price differences between two markets are greater than the cost of transportation between the two markets When the import partner is under established import quotas or very high tariffs When exclusive distribution contracts make it impossible for a large number of dealers in one country to carry the product

To Control Parallel Importing: Ban the import of copyrighted materials from any source other than a licensed distributor or the copyright holder Restrict all imports to come through “authorized importers” only Use a single currency (e.g. Euro) in all trade-bloc member countries

International Pricing Approaches Full-Cost Pricing: no unit of a similar product is different from any other unit in terms of cost, each unit must bear its full share of the total fixed and variable costs Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit; a practical approach to pricing when a company has high fixed costs and unused production capacity Skimming Pricing: a high price is used to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for a product Penetration Pricing: a low price is used to stimulate market growth and capture market share by deliberately offering products at low prices; used to acquire and hold market share

“Dumping” One approach classifies international shipments as dumped if the products are sold below their cost of production Another approach characterizes dumping as selling goods in a foreign market below the price of the same goods in the home market World Trade Organization (WTO) rules allow for the imposition of a countervailing duty when goods are dumped A countervailing duty or minimum access volume (MAV), which restricts the amount a country will import, may be imposed on foreign goods benefiting from subsidies whether in production, export, or transportation

Price Escalation Price escalation is a phenomenon linked to the additional costs incurred as a result of exporting products from one country to another CAUSES: Taxes, Tariffs, Administrative Costs/Overheads, Inflation, Exchange Rate Fluctuations, Longer Distribution Channels, Middlemen Margins, Transportation Costs, Special Fees or Licenses

Examples of Price Escalation Foreign Example 1:Example 2: Example 3: Assuming the Importer and same channels with same margins Domestic wholesaler import- and channels Example ing directly Manufacturing net$ 5.00$ 5.00$ 5.00 Transport, c.i.f.n.a Tariff (20% c.i.f. value)n.a Importer paysn.a.n.a.7.32 Importer margin when sold to wholesaler (25%) on costn.a.n.a.1.83 Wholesaler pays landed cost Wholesaler margin (33 1 / 3 % on cost) Retailer pays Retail margin (50% on cost) Retail price

Approaches to Containing Price Escalation Lower Cost of Goods  Lower Labor Costs  Eliminate Costly Functional Features  Lower Quality Lower Tariffs  Tariff Reclassification  Product Modification  Partial Assembly  Repack aging Lower Distribution Costs  Shorten Channels of Distribution  Lower Shipping Costs Take advantage of ‘Foreign Trade Zones’ whenever possible

Benefits of a Foreign-Trade Zone (FTZ) If labor costs are lower in the importing country, substantial savings may be realized in the final product costs Tariffs may be lower because duties are typically assessed at a lower rate for unassembled versus assembled goods Ocean transportation rates are affected by weight and volume; thus, unassembled goods may qualify for lower freight rates If local content, such as packaging or component parts, can be used in the final assembly, there may be further reduction of tariffs

Leasing in International Markets Leasing opens the door to a large segment of foreign firms that can afford to lease but might be unable to buy for cash Leasing can ease the problems of selling new, experimental equipment, since less risk is involved for users Leasing helps guarantee better maintenance and service on overseas equipment Equipment leased and in use helps to sell other companies in that country Lease revenue tends to be more stable over a period of time than direct sales would be

Why engage in countertrade? To Preserve Hard Currency—countries that lack hard currency may pay with goods instead To Improve Balance of Trade—in order to improve their ratio of exports to imports, poor nations will pay for imports with exports To Gain Access to New Markets—developing countries often impose countertrade demands to open up the markets for their exports To Upgrade Manufacturing Capabilities—Western companies often provide plant and equipment and agree to buy back a portion of the output in order to open a factory in a developing country

Transfer Pricing & Benefits  “The process of determining what price to charge for goods transferred from or sold by a division of a company in one country to a division of the same company in another country”  Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and final duty are low  Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries  Facilitating dividends when dividend repatriation is curtailed by government policy. Invisible income may be taken out in the form of high prices for products or components shipped to units in a country where no dividends can be paid