Improving Economic Activity Through Tariff Reductions

Trade is at the root of economic development. The easy movement of products and services across borders helps create an interconnected world where opportunities for international goods and companies abound. A paper by Dzerniek-Hanouze & Doherty (2013) discussed the significant advantages that can be found by opening trade routes at a national and regional level to ensure that products and services move smoothly to their destinations. 

All trade is based on selling products from one entity to the next. According to Black’s Law Dictionary Trade is ,”The act or business of exchanging commodities by barter; or the business of buying and selling for money; traffic; barter.” A value laden product must transfer hands from one person to the next while a reciprocal value laden item (i.e. money) is exchanged in return. 

Before revenue can be earned through the selling of products these products must be available and present for purchase. This means that the product is available on store shelves, online, or in the locality for customers to purchase. The buyer and seller must be connected together in some way through virtual or physical means to exchange information, items, or financial value. 

The same process must occur when products and services are built. Available items are used to construct higher level products to earn more on the market. Unnecessary tariffs, restrictions, and levies between suppliers and creators directly reduce the possibilities of further growth and development. This means fewer products are shipped out and less revenue gained. 

The supply chain is the vine that is used to move products and services. When tariffs by importing countries are high it impacts the cost and quantity of those products being moved. As costs increase the likelihood that they will be purchased by locals is reduced; it is a customer equity choice. Tariffs are a direct attempt to damage the supply chain mechanisms. 

Improving the flow of products and services is important in speeding up the economy. For example, improving upon inspections, security technology, communications, and transport can also improve upon the costs of moving these products. Lower costs can often result in improved revenue for companies that rely on imported supplies. 

The concept of economic hubs doesn’t make it exclusively into the paper but the author does indicate that reduced borders increase the spillover effects in management, technological know-how, and access to new technologies that move beyond the goods themselves. The production of products and services enhances the skill and abilities of multiple sectors within the economy. 

The authors offered some interesting statistics. For example, the World Economic Forum, The World Bank and Bain & Co. in 2012 indicated that reducing trade barriers could increase global gross domestic product by $2.6 trillion or 5%.  Ebay also indicated in a study that removing virtual barriers improved small business growth by 60-80%. The end result of their analysis is that if countries moved half-way to best practice there would be a 4.7% GDP increase, a moderate reduction of restrictions would improve GDP 2.6%, and a removal of tariffs would result in a .7% increase in GDP. 

Drzeniek-Hanouz, M. & Doherty, S. (2013). Trade facilitation, international supply chains and SME competitiveness. International Trade Forum, 4

International Sales as Factors of Distance and Knowledge

Organizations that work together naturally share information to maintain their business operations. Keller and Yeaple (2013) discuss the transactional costs associated with embodied (traded intermediates) and disembodied information (direct communication). Their research has implications for multinational firms that require efficient use of information and product transferrence to compete on the global market. Their model provides two ways of analyzing how increased distance reduces sales and why changing technology may influence the dynamics of trade. 

Modern advances in telecommunications have positively affected the ability to maintain homeostasis with market trends. Those organizations that engage in research-intensive products rely on  information transference to develop quality products that are well received in the market. The ease of information transference in either embodied or disembodied form impact the strength of operations of multinational firms.

For example, the farther away the sales outlet from the manufacturing organization, the less sales made. This trend appears to have similarities with the information transference throughout the economic chain and the inefficiencies created by increased spatial distance. As improvements in logics and communication capabilities increase there is likely to be a reduction in cost and decision lag time. 

As all decisions are from knowledge, all products are built on knowledge, all sales are based on knowledge and therefore the distance between two entities and the method of information transference will naturally have an impact on sales and profits. Just as the communication level between executives, managers, employees, and customers is important for proper business development the strength of communication across geographically dispersed areas is also important. 

The researchers used firm-level data of the international structure of U.S. multinational operations from the Bureau of Economic Analysis. A multinational firm was considered a U.S. legal entity that made direct investment in at least one foreign business. The total survey included 1,000 U.S. multinationals and 3,000 affiliates from 48 distinct industries.  They observed total R&D expenditures by year and by industry. This helped them determine a ratio of R&D expenditures to sales. 

Their analysis found that cost of transfer varied with the knowledge intensity and the destination. For each leg, and organizations gravitated toward those methods that reduced costs as much as possible. As disembodied knowledge costs are fixed, firms choose this method to maximize efficiency. As distance between entities grows, so does the knowledge intensity and the general costs associated with that knowledge.  

The research is important in the sense that distance and trade costs should not be viewed only in physical terms. Such trade costs should also take into account the general cost of knowledge transference between countries and cultures. As the distance between the home country and the subsidiary increases so does the general costs on multiple fronts. Likewise, as international shipping costs and information costs decline, economic activity is likely to increase due to improved sales opportunities. Those companies that integrate new communication technologies and knowledge are likely to have longer reaches for products/services and sales. 

Kellery, W. & Yeapler, S. (2013). The gravity of knowledge.  American Economic Review, 103 (4).