GMS 522- CLASS 3---Global Marketing: Trade and Protectionism

Course Structure Overview

  • First Half: Focuses on the external environment – factors marketers cannot control:

    • Culture

    • Trade

    • Economic environment

    • Political environment

  • Second Half: Focuses on controllable factors:

    • Entry mode into a country

    • Strategy within the host country

  • Labs: Expected to start soon, with announcements and Zoom links posted on D12.

The Significance of International Trade

  • Access to a Wider Range of Products: Allows consumers access to goods not produced domestically (e.g., bananas year-round in Canada, while maple syrup is exported).

  • Source of Government Revenue: Tariffs (taxes on imports/exports) provide funds for public services like schools and hospitals.

Key Trade Definitions

  • Exports: Products produced in the home country and sold abroad.

  • Imports: Products brought into the home country from abroad.

  • Trade Surplus: Occurs when exports are greater than imports (a positive number).

  • Trade Deficit: Occurs when imports are greater than exports (a negative number).

National Dependence on International Trade

  • Canada: Approximately 51\% of its Gross Domestic Product (GDP) comes from international trade.

  • Germany: Approximately 67\% of its GDP comes from international trade.

  • United States: Only 9\% of its GDP comes from international trade, indicating far less dependence on other countries compared to Canada or Germany.

Canadian Export Reliance on the United States

  • Significant Concentration: 79\% of all Canadian exports go to the United States.

  • Implications: This high reliance creates vulnerability if the relationship deteriorates.

  • Counter-Argument: Canada benefits from proximity to the "richest, most powerful country on the planet."

  • Reasons for Reliance (Decades-long trend):

    • Geographic Proximity: Easy and inexpensive transportation (e.g., driving trucks from Toronto south).

    • Economic Attraction: The US is a rich and attractive market for consumers and businesses.

    • Similar Political Systems: Generally similar governmental structures, despite recent "wonkiness."

The US-Canada-Mexico Trade Relationship under Trump 1.0/2.0

  • NAFTA Renegotiation: Former President Trump declared NAFTA (North American Free Trade Agreement) the "worst trade agreement ever" and threatened to withdraw.

  • USMCA (United States-Canada-Mexico Agreement): Replaced NAFTA after renegotiations during Trump's first term. However, upon returning to the White House (hypothetical Trump 2.0), he again deemed USMCA "bad" and "unfair."

  • Trump's Reciprocal Tariffs (Initial Phase):

    • Threatened a 25\% tariff on all products not compliant with specified USMCA rules.

    • USMCA Compliance Rules: To be compliant, a product must be:

      • Wholly manufactured in Canada, the US, or Mexico.

      • Use raw materials sourced from these three countries.

      • Involve substantial manufacturing or value-add within a USMCA country if raw materials are from outside.

    • Additional proposed tariffs:

      • 35\% on all non-compliant products.

      • 10\% on energy and critical materials.

      • 50\% on steel and aluminum imports into the US.

  • Unilateral Action: These tariffs were imposed on Canada unilaterally, despite USMCA technically still being in effect, effectively "ripping up the agreement."

"Liberation Day" and the International Emergency Economic Powers Act (IEPA)

  • Announcement: In April, Trump announced reciprocal tariffs on nearly every country, citing Section 232 of the Trade Expansion Act of 1962 (implied by the "national emergency" claim) for national security reasons.

  • Presidential Authority Challenge: Traditionally, Congress holds the authority to impose tariffs, not the President.

  • IEPA Justification: Trump claimed a "national emergency" based on:

    • The US trade deficit.

    • Drug (fentanyl) smuggling into the US.

    • Critique of Justification: This claim was deemed "bogus" as drug smuggling has always existed, and fentanyl from Canada is only a small fraction (1\%) of all fentanyl entering the US.

Flaws in the Reciprocal Tariff Structure

  • Inflated Numbers: The White House presented inaccurate tariff rates supposedly charged by other countries (e.g., claimed EU charged US 39\% when actual was 3\%).

  • Exclusion of Services: The trade deficit calculation only included physical products, not services. If services were included, the US often has a trade surplus with many countries.

  • Non-Reciprocal Formula: The proposed formula was not truly reciprocal. It linked tariffs to the magnitude of a country's trade deficit with the US:

    • A wider trade deficit with the US meant higher tariffs imposed by the US on that country.

    • The actual tariffs charged by those countries to the US were not a factor in the calculation.

  • Ethical/Practical Implications: Such actions, based on distorted data, create global trade instability and mistrust.

International Reactions and Outcomes

  • Global Response: Most countries, according to the speaker, resorted to "begging" the Trump administration to avoid tariffs.

  • China's Hardball Strategy:

    • Did not send representatives to "beg."

    • Engaged in a "war of tariffs," leading to:

      • US tariffs of 145\% on Chinese goods.

      • Chinese tariffs of 125\% on US goods.

      • Outcome: Trade effectively ceased at these levels, as profitability became impossible.

    • Domestic Pressure: Major US retailers (Walmart, Costco) warned Trump of empty shelves by Christmas, given the reliance on "Made in China" products.

    • Negotiation Venue: China insisted on meeting in a neutral third country (e.g., Switzerland, Spain), refusing to be "humiliated" in Washington.

    • Lack of Agreement: Despite US announcements of an agreement (with proposed baseline tariffs of US 30\% on China, China 10\% on US), China denied a full agreement, stating it was merely a "framework to continue discussing."

  • Canada's Retaliation:

    • One of the few countries to "fight back," understanding US dependence on Canadian exports (energy, steel, aluminum).

    • Threatened 25\% tariffs on 30 \text{ billion dollars} of selected US imports (targeting products important to Republican states that voted for Trump).

    • Further threat of 25\% tariffs on 155 \text{ billion dollars} of US imports if the dispute wasn't settled.

    • Synchronized Tariffs: Canada's retaliatory tariffs went into effect on the same day as the US tariffs against Canada.

  • Canadian Public Sentiment:

    • Trump's "51st state" rhetoric and disrespectful comments towards Canadian former Prime Minister Trudeau were "very disturbing."

    • Evoked "economic patriotism" and a desire for sovereignty.

    • Led to boycotts of American products (e.g., at LCBO), reduced travel to the US, and general anger among Canadians.

    • Concerns about the US becoming "more and more authoritarian" (e.g., ICE agents).

Legal Challenges to Trump's Tariffs

  • Illegality: Judicial challenges argued that presidential tariffs were illegal, as tariff authority rests with Congress.

  • Court Rulings: Washington D.C. District Court ruled tariffs illegal and that IEPA was not designed for trade/tariff issues.

  • Supreme Court Appeal: Trump appealed to the Supreme Court, seeking an expedited decision (expected by November/December).

  • Predicted Outcome: The speaker predicts Trump will lose due to insufficient justification (e.g., fentanyl being 1\% from Canada).

  • Financial Ramifications: If courts rule against the administration, an estimated 500 \text{ billion to } 700 \text{ billion dollars} in tariff money (plus interest) would have to be repaid to importers, which the administration would "fight like hell" to avoid.

Governance of International Trade

  • Two Levels:

    • National Governments: Implement their own trade policies.

    • Supranational Organizations: (e.g., WTO - World Trade Organization) involved in managing international trade globally.

Protectionism: Definition and Examples

  • Definition: Measures adopted by national governments to unduly restrict trade and investment.

    • Key Distinction: The restriction must be "undue," meaning without a legitimate cause.

  • Non-Examples of Protectionism (Legitimate Restrictions):

    • Chinese Toys with Lead Paint: US ban and recall due to severe health risks (e.g., brain damage in children). This is legitimate protection of citizens' health.

    • US Spinach with E. Coli: Canadian ban due to contamination causing illness and deaths. This is a legitimate health safety measure.

  • Debatable Example: Google in China:

    • Google sought to enter the massive Chinese internet market (billion users), requiring local servers due to China's "Great Firewall."

    • Chinese government demanded censorship of search results (e.g., no content on overthrowing the CCP).

    • Google refused and was forced to leave.

    • Argument against Protectionism: The Chinese government applies censorship to all firms (foreign and domestic, e.g., Tencent, Baidu), monitoring and removing content deemed harmful. They also harass and close down domestic ride-share, online education, and casino companies. Therefore, it's not targeting foreigners but a general stance against private sector players and perceived threats.

  • Controversial Example: TikTok in the US:

    • Concern: TikTok (owned by a Chinese company) was deemed a national security risk due to concerns about user data being sent to the Chinese Communist Party.

    • Response: Trump attempted to force a sale of TikTok to an American firm (e.g., Oracle, Walmart, Meta, Google, Apple).

    • Congressional Hearing: TikTok CEO testified in March '23, facing harsh scrutiny regarding content differences between North America (silly dances) and China (educational/aspirational) and data security.

    • Government Bans: Canada and the US banned TikTok from government-issued devices. Many US universities also ban it.
      Recent Developments: Trump Administration (hypothetically 2.0) announced a "framework agreement" for ownership transfer to an American firm, with details to be announced. Questions remain about data storage and algorithm transfer.

    • Debate: Whether this constitutes protectionism is open to different opinions.

Tools of Protectionism

1. Tariffs

  • Definition: A tax on a product that is traded internationally.

  • Burden: Ultimately paid by the consumer.

    • Importer pays the tariff (30\% extra on market value).

    • Cost is passed to the consumer (even if manufacturer reduces margin slightly).

    • (e.g., 35\% tariff on Canadian goods means US consumers pay more, with revenue going to the US government).

  • Types of Tariffs:

    • Export Tariff: Tax on products leaving a country.

    • Transit Tariff: Tax on products passing through a country (e.g., Canadian goods to Mexico via US).

    • Import Tariff: Tax on products entering a country (most common).

  • Calculation Methods:

    • Ad Valorem Tariff: A percentage of the product's value (e.g., 10\%).

    • Specific Tariff: A fixed dollar amount per unit (e.g., 10 \text{ dollars per ton}).

    • Compound Tariff: A combination of ad valorem and specific tariffs (e.g., 10\% on the first 100,000 \text{ tons} and then 2 \text{ dollars per ton} over that amount).

  • Impact of Tariffs (Negative):

    • Higher Consumer Prices: Importers pass costs to consumers.

    • Reduced Purchasing Power: Consumers have less disposable income (e.g., higher car prices from steel/aluminum tariffs mean less money for vacations).

    • Reduced Manufacturer Profits: Higher raw material costs cut into profits, leading to falling stock prices.

    • Negative Labor Market Impact: Reduced profits lead to layoffs, difficulty finding jobs for young people, and reduced consumer spending, causing further layoffs.

    • Supply Chain Disruption: Forces companies to reconfigure efficient, long-established supply chains (e.g., Apple moving from China to India).

    • Business Uncertainty: Lack of clarity on raw material costs and consumer prices deters investment and reduces economic activity.

    • Retaliation: Trading partners impose their own tariffs, creating a cycle of trade wars.

  • Historical Context: Efforts since the 1940s (GATT, WTO) focused on reducing tariffs globally; current trend is a reversal.

2. Quotas

  • Definition: A quantitative restriction or limit on the amount of a foreign product that can enter a country.

  • Purpose: Protect domestic firms by ensuring they have a larger market share.

  • Classification: Considered a non-tariff barrier.

  • Types of Quotas:

    • Absolute Quota: A strict limit imposed by the importing government on how much of a product can enter.

      • An embargo is an absolute quota set to zero (no product can enter).

    • Voluntary Export Restriction (VER) / Voluntary Export Restraint: The exporting country voluntarily limits its exports to another country, often to avoid harsher mandatory restrictions (e.g., China limiting textile exports to the EU to prevent EU-imposed quotas).

3. Exchange Controls

  • Definition: Government measures to limit the amount of foreign exchange available to importers.

  • Mechanism: Since exporters prefer to be paid in hard currencies (e.g., USD, not pesos), limiting access to foreign exchange effectively restricts a country's ability to import products, thus acting as a protectionist barrier.

4. Market Entry Barriers (e.g., Japan's Keiretsu System)

  • Description: A system of tightly networked corporations (retailers, distributors, banks, wholesalers) that are interconnected through ownership and board memberships.

  • Impact: Makes it very difficult for foreign products to enter the Japanese market unless the Keiretsu system explicitly allows it.

5. Product Standards

  • Description: Governments impose strict, often discriminatory, standards on imported products.

  • Example: Taiwan subjecting imported fruit juices to over 100 purity tests, while not applying the same rigorous testing to local juices, effectively frustrating and discouraging foreign suppliers.

6. Investment Barriers

  • Description: Government policies that limit or ban foreign investment in certain sectors.

  • Example: Canada, despite being open, restricts foreign ownership in critical sectors such as telecommunications, financial services (e.g., Royal Bank of Canada), and energy, protecting them from foreign acquisition.

Arguments for Protectionism

  • Infant Industry Argument: Governments should protect newly developing domestic industries from foreign competition to allow them to grow and become globally competitive. (Counter-argument: competition often strengthens companies).

  • Employment Argument: Protecting domestic industries saves jobs, which is a powerful political argument, especially since employees are also voters.

  • National Security Argument: Restricting foreign products or firms to protect national security. This argument gained significant traction after events like 9/11.

International Trade Theories (Brief Overview)

  • Heckscher-Ohlin (H-O) Theory: International trade is driven by differences in factor endowments (e.g., labor, capital) among countries.

    • Main Idea: A country will export products that intensely use its most abundant factor of production and import products that intensely use its least abundant factor of production.

    • Examples: India (abundant labor) exports labor-intensive products like handmade carpets; Germany (abundant capital) exports capital-intensive products.

  • Product Life Cycle Theory (Vernon): A straightforward theory found in textbooks, suggesting products evolve through stages impacting international trade patterns.