Pricing and control of goods in international trade

Pricing and control of goods in international trade

When a country has a surplus of a product or commodity after meeting its domestic demand, it sells that surplus product or commodity to another country. This process is called export in international trade. And when there is a shortage of a product or commodity in its own country, it is purchased from abroad. This is called import. Basically, international trade is created by the combination of export and import activities.

No country in the world is self-sufficient in the production of all commodities. Some commodities are produced at a higher rate, and some commodities are produced at a lower rate. Therefore, each country depends on other countries for certain commodities to meet its demand. Basically, each country meets its demand for its products through international trade.

In international trade, the price of any commodity is considered with great importance. Therefore, several factors are kept in mind in determining the price. Apart from this, some important issues in controlling this market system will be informed today.

Pricing strategies

Exporters adopt various strategies in determining the price of any product before it reaches the final consumers. An exporter can keep the same price in different markets of the world, or can increase or decrease the price considering the prevailing situation in the market. Basically, different pricing strategies are seen to be adopted in the international market. Let us discuss some pricing strategies.

Skimming Pricing Strategy: This is a pricing strategy where the exporter spends extra on promotion expenses, research and development etc. This activity is mainly done to attract consumers towards the product and highlight all the positive aspects of the product in their minds. And to recover this extra money spent, the price is initially set at a very high level, which is known as skimming pricing strategy. After exploiting the market of the upper class consumers of the society, the exporter can gradually reduce the price to increase its market share.

Penetration Pricing Strategy: This is the opposite of skimming pricing strategy. In this strategy, an exporter initially sets a very low price to retain its market share and drive out competitors. This strategy is known as penetration pricing strategy. This strategy is also known as dumping. Basically, the producer of a product sets such a price with the aim of establishing its dominance in a market and capturing the market. This strategy is suitable for mass consumption products.

Marginal Cost Pricing: Marginal cost is the cost of producing an additional unit of the product. Under this method, an exporter considers variable costs or direct costs while setting the price in the international market, and fully recovers the fixed costs from the domestic market.

Market-based Pricing: This is a very flexible method of pricing, as it takes into account the changing conditions of the market. The price charged can be higher when the demand conditions are favorable and lower when the demand conditions are unfavorable. This method is sometimes referred to as the traffic method. It is a very flexible and realistic method of pricing.

Competitor Pricing: In this method, the pricing strategy of dominant competitors is considered. The price of the dominant company or firm influences the market price. If the pricing policy of the competitor is flawed, the followers will also set the wrong price.

Advance Pricing: The objective of advance pricing is to set the price low to discourage competition. In this case, the price is close to the total cost per unit. As a result of the lower cost from the increased volume, the lower price is quoted to the buyers. If necessary, the price is also temporarily set below the total cost to discourage potential competition. It is assumed that there will be long-term profits through market dominance.

Extinction Pricing: The objective of extinction pricing is to eliminate existing competitors from the international market. It can be adopted by the producers as a conscious way to drive out the weak, marginal producers from the market. However, especially for new and small industries and developing countries, it can slow down economic progress, and thus hinder market development. Both advance and extinction pricing strategies are closely related to ‘dumping’ in international markets. In fact, they are simply variations of the dumping process. Although they can initially capture a foreign market and keep or drive out competitors, they should be used with caution. This is because they will result in the foreign government imposing arbitrary restrictions on the import and sale of the product. As a result, producers risk having the market completely closed to them. More importantly, once consumers become accustomed to buying at lower prices, it is difficult to raise their profits later.

Pricing Regulators

Some factors are given importance in determining prices in the international market. Changes or additions to these factors have a positive or negative impact on the price of the product. Let’s find out about these factors.

Cost of the product

Price cannot be determined in international trade without considering the cost of making the product. Fixed and variable costs of production, marketing and transportation costs are included in the cost of production. Sometimes a company sells at a price lower than the cost and increases its market share. Price depends on the cost of production. Therefore, price analysis and fixed and variable costs are considered while determining the price. But price cannot be determined only on the basis of cost. It is true that price cannot be fixed below cost for a long time. Again, if the demand in the market increases, the price of the product also increases.

Product Type and Differentiation

This factor plays an important role in pricing. When a product is unique (i.e., the product offers more benefits than other products) or is completely different from its competitors, the company gets an additional advantage in pricing that product. Usually, the price of such products is kept higher than others up to a certain amount.

Reputation or prestige

The reputation or prestige of the manufacturer, company, and country also affects the price of the product. Reputable companies set high prices for their products. But even if the product is good, less developed countries cannot set high prices compared to developed countries.

Demand

The demand for the product in the international market is another important factor in determining the price. However, demand in the international market is affected by many factors, which are different from the domestic market. The habits, tastes, and preferences of foreign customers may be greatly different from those in the domestic market. Elasticity of demand is another factor that affects the price. If the demand for the product is elastic (i.e., a small change in price causes a large change in demand), reducing the price of that product will increase the sales volume. On the other hand, if demand is inelastic and supply is limited, high prices can be set.

Business Competition

Competition in foreign markets is also an important issue. This competition can be so intense that the exporter has no choice but to sell the product at the market price. But in a monopolistic market (where there is only one seller), an exporter can set a high price for his product. On the other hand, in a highly competitive market, there is no freedom to set prices as desired. Therefore, prices cannot be set without considering the strategies of competitors.

Market Characteristics

In addition to competition in the market, there are some other factors that affect prices: demand trends, consumer income, importance of the product to the consumer and profits. In addition, markets can also differ depending on the national culture.

Governmental Factors

Government policies and laws affect pricing in international trade. Some of the regulatory measures taken by the government are discussed below:

(i) Maximum and Minimum Prices: Some countries set the maximum and minimum prices for their products. When the government controls prices, the prices have to be kept within these limits. Generally, such policies are implemented for national development, the position of the industry, the stock of goods and the protection of the industry.

(ii) Profit Control: Sometimes the government fixes the profit percentage for the producer or exporter. As a result, the producer loses the freedom to set the price.

(iii) Taxes: While determining the price of exportable goods, duties and other taxes have to be considered. When import duties are imposed, an exporter has to reduce its price. Due to such taxes, the price of the goods has to be kept high in the foreign market.

(iv) Tax exemptions, concessions and subsidies: To increase exports, many countries give tax exemptions or exemptions. In that case, the goods can be exported at a lower price. Again, to encourage exports, the government also gives financial subsidies. Such subsidies also affect the price setting in the export market.

(v) Other Incentives: The government gives many incentives to increase exports. Among these, the main incentives are the supply of raw materials, supply of electricity and water at low prices, assistance in sales, etc. These factors are taken into consideration while determining the price of the export goods.

(vi) Government Competition: Sometimes the government enters the market to control the international price. For example, the American government sells aluminum from its stock to American companies at a fixed price. In such a situation, companies are not able to increase the price. Therefore, government competition should also be considered while setting prices.

(vii) International Agreements: The prices of some products are regulated by various international agreements, such as buffer stock agreements, bilateral or multilateral agreements. In the context of such agreements, companies have to set prices in the international market.

Geopolitical situation

The geopolitical situation of a country has a huge impact on the imports and exports of that country. For example, the oil trade in the Middle East can be seen to have domestic and in some cases foreign political influences.

Economic growth

In countries where economic growth is high or countries that are economically strong, the market prices of goods in those countries are relatively high. Basically, since the income limit of the people is high, it has an impact on the goods, which is also observed in the international market.

Price control strategies

In international trade, several policies are resorted to to control the prices of goods or to prevent the free import and export of goods. Let’s find out about them.

1. Tariffs and protectionism policy

In international trade, protectionism generally refers to the actions of government policies, which are used to protect domestic industries from foreign competition. Various government policies are included in international trade to protect and support domestic industries, so that industries do not have to compete with foreign importers. According to protectionism, the four main protective measures are subsidies to domestic producers, taxes on imported goods, import bans, and state trading. However, taxes on imports have historically served as the main weapon. These taxes are usually called tariffs, although sometimes other terms, such as import surcharges or similar duties, are used. The application of these taxes increases domestic revenue, protects domestic production, reduces the use of protected goods, and reduces the import of certain goods. However, such tariffs are imposed at higher rates to protect new or infant industries in the country.

2. Export Subsidies and Dumping

If a subsidy is given on exports, the price of the exported product decreases compared to the domestic price. As a result, the people of the importing country can buy that product at a lower price. This increases the demand for that product in the market of the exporting country in the importing country. Because it is available at a lower price in that country compared to other countries. However, such subsidies are usually given for a new industry. In special cases, such subsidies are also given to the products of a specific industry to gain recognition in other countries.

A related but deeper word is ‘dumping’. In international trade, dumping means selling products abroad at a price lower than the domestic price. Dumping is usually a strategy of deliberately reducing the price in order to capture the market of a country and selling or exporting those products to that country. Its main purpose is to capture the market. Although in this system the producer has to face losses for a short time, still this loss has to be accepted by giving priority to the issue of capturing the market.

3. Quantitative Restrictions and Quotas

Quantitative restrictions on goods represent one of several policy instruments to deal with international trade and payment problems. Other instruments include tariffs on exports and imports, exchange rate fluctuations, and monetary and fiscal policies.

Policy restrictions can include restrictions on both current and capital transactions between countries. A common example of a restriction is the control of capital transfers. A notable example of quantitative restrictions is the quantitative restriction on the entry of a country’s current goods into international markets.

Quantitative restrictions are considered a method for controlling foreign trade. They are implemented through quantitative restrictions on permissible imports or exports. Quantitative trade restrictions can be imposed on both exports and imports. Therefore, these restrictions are different from tariffs, which aim to directly affect the price of goods. Quotas are also imposed on imports.

4. Trade Agreements

Trade agreements are agreements between two countries on the import and export of goods. These agreements provide for concessions or lower prices for certain goods. As a result, foreign goods are promoted in the domestic market, and domestic goods are also glutted abroad.

In addition, these agreements reduce tariffs on goods, which increases the flow of domestic goods abroad. Trade agreements can be bilateral or multilateral. However, the reader should be warned that the term ‘bilateral trade agreement’ is often used to refer to import quota agreements, which usually provide for a bilateral balance of trade through import and export quotas.

5. Exchange rate control

The price of international trade can be controlled through exchange rate control. In this case, the government of a country can do so if it wants. For example, if the government of a country buys dollars from the country’s commercial banks, then there will be a shortage of dollars in the market. As a result, the dollar will strengthen against that country’s currency. Due to this, exports will increase and imports will decrease. On the contrary, if the government of that country releases dollars from the reserve into the market, then the flow of dollars in the market will increase and the dollar will depreciate. As a result, the value of that country’s currency will strengthen against the dollar. This will reduce exports and increase imports. In addition, the government can also cause this exchange rate to fluctuate by changing the interest rate.

Basically, since the internal affairs of each country are integrated with the affairs of other countries in the international market system, setting prices in this market and above all controlling them is very sensitive. Therefore, transactions in this market make a significant contribution to the economy of each country.

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