Confronting foreign competition by overcoming trade barriers.

• Author: Weidenbaum, Murray L.

In a global economy, American firms are learning how to circumvent trade and investment roadblocks of nations seeking to protect their industries.

For a variety of political reasons - mainly to "protect" home industry owners, managers, and employees, but sometimes on ostensibly national security grounds - governments erect barriers to international commerce. The most notable are tariffs, quotas, domestic content restrictions, and reciprocity rules. In a 1991 survey, 45% of U.S. firms reported that trade barriers imposed by other countries presented the greatest impediment to selling abroad.

Exporters can absorb the added costs imposed by governments to some extent. In the case of quotas imposed by the importing nations, companies frequently shift to higher-priced items on which unit profits also are greater. This was the response of Korean and Taiwanese shoe producers in the late 1970s to numerical limits on the imports into the U.S. of shoes from those two countries.

In the early 1980s, American purchasers of Japanese-made automobiles often found that they were required to buy all sorts of high-priced extras and that they were paying as much as $2,000 above the sticker price for the reduced supply of Toyotas, Nissans, and other imported models. In that way, the Japanese producers actually benefited from the "voluntary" restrictions on their exports to the U.S. They increased their profits substantially in the face of quantitative limits. While Japanese car-makers exported about 30% of their auto production to the U.S. during that period, they earned approximately one-half of their profits from American sales.

When faced with more onerous obstacles to international trade, businesses draw on a variety of alternatives to direct exporting. They set up new manufacturing facilities (so-called greenfield operations) in the host nation. John Deere was one of many companies to establish production facilities in Europe during the 1950s in order to avoid the 18% tariff enacted following the formation of the European Common Market.

This type of response continues today. In 1991, Monsanto's low-calorie sweetener NutraSweet was hit with a very high duty in response to a charge of dumping in the European Community. In 1992, Monsanto entered into a joint venture with Ajinomoto, a Japanese food and pharmaceutical company, to build a plant in France to produce for the European market. One senior NutraSweet official described the situation very directly: "Although there may be evidence to the contrary, our experience only tells me that you have to be in Europe if you want to do business in Europe. . . . You can't sit offshore somewhere and ship your product in."

Many Japanese manufacturers moved the production of such items as textiles, watches, television sets, cameras, and calculators to facilities in Malaysia, Indonesia, Thailand, Singapore, and the Philippines in response to the restrictive trade practices of some of their major markets. Japanese automakers also are producing cars in the U.S. on a large scale. This approach provides the Japanese firms direct access to the markets of the local economies in which they produce and minimizes their exposure to adverse policies by the host government. It also permits them to export to markets in other nations that maintain barriers against products made in their home territory. For instance, Honda sells cars to Taiwan, South Korea, and Israel from its manufacturing plant in Ohio. Those three countries traditionally have prohibited the importation of automobiles directly from Japan.

Similarly, Northern Telecom, a Canadian telecommunications company, conducts business with Japan through its American subsidiaries, since Japanese firms are considered to favor U.S. over Canadian telecommunications entities. According to a Northern Telecom official: "The reality is that we probably could not have penetrated Japan out of Canada."

Businesses also respond by acquiring existing local companies. This has been a particularly important strategy for foreign firms positioning themselves in response to the integration of the European market. Many American and Japanese companies fear that the removal of internal regulatory and economic barriers in Europe will result in an increase in reciprocity requirements and local content restrictions. Thus, acquisitions increased steadily during the mid to late 1980s as firms sought to gain a foothold there. In 1990, for example, Emerson Electric purchased the French firm Leroy-Somer; General Electric acquired the United Kingdom's Burton Group Financial Services; American Brands bought out Scotland's Whyte & Mackay Distillers Ltd.; and Scott Paper purchased the Tungram Company of Germany.

Other alternatives that businesses frequently rely upon to develop positions in the markets of other nations include subcontracting production, purchasing locally, and developing products jointly with local firms.

To overcome political objections to goods coming from other countries, some...