Trade barriers in OECD markets can be complex and confusing, but as Trade expert, Todd Winterhalt assures us, they’re rarely impenetrable. Here’s what Todd had to say in our interview about dealing with trade barriers.
Tariff barriers are the most obvious obstacle. Tariffs, which are also called duties, are essentially a local tax on the import of foreign goods. Their main purpose is to generate revenue for the local government, but they can also be used for other purposes, such as restricting the volume of imports or protecting a country’s industries.
The second category is non-tariff barriers. These are conditions or other requirements that make it more difficult for foreign companies to sell into the local market. One example is import quotas, which limit the amount of a product that can be imported into the market. Another is product standards that have to be met before foreign goods can enter the country.
Know the market you’re entering. That’s not new advice by any means, but it’s still extremely important. You have to do your research to be sure that your expected returns will outweigh the extra cost and effort imposed by any barriers that may come up.
Service exporters confront a somewhat different set of barriers from goods exporters. If you export services, tariff barriers won’t likely affect you much, but non-tariff barriers might. The major ones are usually related to regulatory or certification requirements. For example, your service personnel may have to obtain local professional certifications before you can provide your services in the market. So you should research your market closely to make sure you’ll be allowed to deliver the services your customers want.
Service exporters confront a somewhat different set of barriers from goods exporters. If you export services, tariff barriers won’t likely affect you much, but non-tariff barriers might.
The most direct way of dealing with a trade barrier is simply to comply with it. With a tariff, for example, you can adjust your product’s pricing in the market to allow for its effects. Or, if there’s a local standard that affects your product, you can arrange to have the product certified as meeting that standard.
If the compliance approach won’t work, for whatever reasons, there are at least two other strategies you can use.
First, you may be able to bypass a barrier by establishing a local business presence, such as an affiliate, within the market. In most OECD markets, affiliates are treated in exactly the same way as local companies, even though they’re actually owned by Canadian parent firms. Since the affiliates are considered local businesses, they don’t have to deal with the trade barriers that would affect the Canadian parent.
Second, you may find that some trade barriers are reduced or eliminated if you work with a local company. In some markets, in fact, having a partner in the country may be the only way you can do business there. Some governments, for example, don’t allow foreign companies to operate in sensitive economic sectors unless they do so in partnership with a local firm.
Some trade barriers, however, are specifically designed to keep foreign companies out of the local market. Quotas could fall into this category, or discrimination in government procurement. If you face one of these obstacles, it may be pointless to try to overcome it. You may be better off to find a market that’s more import-friendly, such as a country that has a free trade agreement (FTA) with Canada.
This depends on what kind of presence you want and which market you’re entering. Most Canadian exporters prefer the affiliate approach, since it tends to be the most flexible. Your affiliate’s size, for example, is relatively unimportant—you can establish anything from a modest legal presence to a full-scale manufacturing firm.
As an alternative to an affiliate, you could set up a sales or marketing office. This will establish your presence in the market, but local regulations usually limit what these offices can do. If all you need is a facility for doing local market research or taking orders, an office may be the right choice. To do more than that, you’re likely better off with an affiliate.
As for the difficulty of setting up a business presence, it varies from country to country. The World Bank Group has a global Ease of Doing Business web site that will help you find out what you may be facing in any particular market.
A distributor buys your product outright and then handles all the details of importing the goods, such as obtaining permits and paying duties and taxes. Because the distributor is familiar with local customs procedures and is on the spot, this may substantially speed up the clearance process.
Distributors also manage in-market logistics, such as warehousing and distribution. This can shorten delivery time at the local level, which may be an important selling point if the local customs process is prone to delays.
I recommend looking to markets that have FTAs with Canada, especially if your company doesn’t have the resources to navigate complicated obstacles. By reducing or eliminating the tariffs on Canadian goods and services, FTAs can make exporting a lot less expensive. And depending on the agreement, an FTA can also cover non-tariff barriers, such as labour mobility and product standards, which again makes exporting easier.
If you’re still interested in exporting to markets with complex trade barriers, there’s help available. I’d start by connecting with experts at EDC or the Canadian Trade Commissioner Service. They have hands-on knowledge of international markets and an extensive network that can steer you in the right direction.