A tariff is a tax on imports which raise the price of imported goods compared to local goods. The imported goods are therefore less preferred and it becomes less profitable to continue importing thus discouraging it (Anderson 2004). The case in question presents a 100 percent ad valorem tariff as the trade barrier which the U.S adopts as a retaliatory measure against Thailand which has put in place administrative trade barriers aimed at limiting imports from U.S. As a U.S firm producing from Thailand this is going to affect operations in that it is going to be expensive to import raw materials from U.S which increases the cost of production. The finished goods are also going to be subject to the punitive 100% ad valorem tariff on exportation to the U.S market which will lower the profit margins. Nevertheless, the company still has chances to continue importing, producing and exporting profitably if a good plan is adopted.
The firm can adopt a local raw material sourcing strategy where all materials needed to manufacture the computer products are sourced internally. This will help reduce the cost of production thus increasing the profit margin by escaping charges which might be imposed by Thai government on importation from U.S. The firm may also think of exporting the finished goods to other markets where there are no barriers thus avoiding the U.S extreme tariffs. The firm also has an alternative to vacate operations to the motherland, U.S, and produce and sell locally if the production efficiency at Thailand cancels out with the tariff imposed by U.S on export.
Pros and Cons for the Alternatives
Purchasing raw materials internally from Thailand may be expensive as there are no mass producers of computer components and this might make the cost of production even higher. Vacating operation back to U.S may also be expensive due to cost of reconstruction although this may be a good idea since this is where the market is and the firm still has an option of importing labor from Thailand. Seeking for alternative market may require formulation of a new marketing strategy and at first the firm may experience reduction in sales (Anderson 2004). However, this might emerge the best alternative in due cause as most developing countries relies on imported computers and electronic goods. The world market is growing and the company will eventually continue operating profitably even without U.S and its punitive ad valorem tariffs.
List of steps to take
- Redesign the marketing strategies
- Carry out market research
- Evaluate the firm’s competitive advantage.
The efficiency is expected to increase if the firm succeeds to evade the trade barriers put in place by U.S and Thailand. The firm is going to develop better relationship with Thai government if it stops trading with the U.S and it will be treated like any other local industry thus likely to enjoy protection from the government. Expanding to new markets is expected to lead to discovery of new market niche with less competition and the firm will eventually increase its sales and raise its profits (Anderson 2004). This will consequently lead to growth and development of the firm.
Targeted barriers are discriminative and retrogressive to the economy. They hamper the efficiency of companies since company cannot source raw materials alt lowest price or sell the final products at the best places. They encourage trade wars which decreases economic activities of the nations involved. They interrupt the forces of demand and supply thus discouraging fair competition which is the driving force to innovation and efficiency (Irwin 2012). Targeted barriers should therefore be discouraged and government should avoid enacting protectionist policies.
Anderson, K. (2004). The challenge of reducing subsidies and trade barriers. Washington: The World Bank, Development Research Group, Trade Team.
Irwin, D. A. (2012). Trade policy disaster: Lessons from the 1930s. Cambridge, Mass: MIT Press.