International Pricing Issues: Gray Market, Counter Trade, Dumping, Transfer Pricing
by Setting prices for international markets is not an easy task. Decisions with regards to product, price, and distribution for international markets are unique to each country and will inevitably differ from those in the domestic market.
Furthermore, other factors such as: the rate of return, market stabilization, demand and competition-led pricing, market penetration, early cash recovery, prevention of competitive entry, company and product factors, market and environmental factors are all important in the decision-making process.
When pricing for international markets, one has to take into consideration local culture, language, geography, climate, education, religion, attitudes and values. Firms need to examine carefully target market country’s characteristics and purchasing behaviours, to select an appropriate pricing strategy.
Gray Market
A grey market or dark market (sometimes confused with the similar term “parallel market”) is the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market products (grey goods) are products traded outside the authorized manufacturer’s channel.
Manufacturers of computers, telecom, and technology equipment often sell these products through distributors. Most distribution agreements require the distributor to resell the products strictly to end users. However, some distributors choose to resell products to other resellers. In the late 1980s, manufacturers labelled the resold products as the “grey market”.
The legality of selling “Grey market” products depends on a number of factors. Courts in the United States and in the EU make a number of assessments, including an examination of the physical and non-physical differences between the “Grey market” and authorized products to determine whether there are material differences. The legality of the products oftentimes turns on this examination.
In November 2016, the Court of Appeal of England and Wales confirmed a ruling in the case of R v C and Others that the sale of grey goods can be met by criminal sanctions under section 92 of the UK Trade Marks Act 1994, with a potential penalty of up to 10 years in prison.
It is worth mentioning that the goods sold in this case were, in fact, counterfeit and infringed on trademarks; as such, people would consider this to be black market goods, rather than grey. The simple fact is that selling or reselling any products one has bought is not generally considered a crime, and most traders rely on their right to resale and thus trade.
The parties most opposed to the grey market are usually the authorised agents or importers, or the retailers of the item in the target market. Often this is the national subsidiary of the manufacturer, or a related company. In response to the resultant damage to their profits and reputation, manufacturers and their official distribution chain will often seek to restrict the grey market. Such responses can breach competition law, particularly in the European Union. Manufacturers or their licensees often seek to enforce trademark or other intellectual-property laws against the grey market. Such rights may be exercised against the import, sale and/or advertisement of grey imports. In 2002, Levi Strauss, after a 4-year legal case, prevented the UK supermarket Tesco from selling grey market jeans. However, such rights can be limited. Examples of such limitations include the first-sale doctrine in the United States and the doctrine of the exhaustion of rights in the European Union.
When grey-market products are advertised on Google, eBay or other legitimate web sites, it is possible to petition for removal of any advertisements that violate trademark or copyright laws. This can be done directly, without the involvement of legal professionals. For example, eBay will remove listings of such products even in countries where their purchase and use is not against the law. Manufacturers may refuse to supply distributors and retailers (and with commercial products, customers) that trade in grey market goods. They may also more broadly limit supplies in markets where prices are low. Manufacturers may refuse to honour the warranty of an item purchased from grey market sources, on the grounds that the higher price on the non-grey market reflects a higher level of service even though the manufacturer does of course control their own prices to distributors. Alternatively, they may provide the warranty service only from the manufacturer’s subsidiary in the intended country of import, not the diverted third country where the grey-market goods are ultimately sold by the distributor or retailer. This response to the grey market is especially evident in electronics goods. Local laws (or customer demand) concerning distribution and packaging (for example, the language on labels, units of measurement, and nutritional disclosure on foodstuffs) can be brought into play, as can national standards certifications for certain goods.
Manufacturers may give the same item different model numbers in different countries, even though the functions of the item are identical, so that they can identify grey imports. Manufacturers can also use supplier codes to enable similar tracing of grey imports. Parallel market importers often decode the product in order to avoid the identification of the supplier. In the United States, courts have ruled decoding is legal, however manufacturers and brand owners may have rights if they can prove that the decoding has materially altered the product where certain trademarks have been defaced or the decoding has removed the ability of the manufacturer from enforcing quality-control measures. For example, if the decoding defaces the logo of the product or brand or if the batch code is removed preventing the manufacturer from re-calling defective batches.
The development of DVD region codes, and equivalent regional-lockout techniques in other media, are examples of technological features designed to limit the flow of goods between national markets, effectively fighting the grey market that would otherwise develop. This enables movie studios and other content creators to charge more for the same product in one market than in another, or alternatively withhold the product from some markets for a particular time.
Counter Trade
Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in countertrade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used.
Types of countertrade
Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment.
Barter is the direct exchange of goods between two parties in a transaction. The principal exports are paid for with goods or services supplied from the importing market. A single contract covers both flows, in its simplest form involves no cash. In practice, supply of the principal exports is often held up until sufficient revenues have been earned from the sale of bartered goods. One of the largest barter deals to date involved Occidental Petroleum Corporation’s agreement to ship sulphuric acid to the former Soviet Union for ammonia urea and potash under a 2-year deal which was worth 18 billion euros. Furthermore, during negotiation stage of a barter deal, the seller must know the market price for items offered in trade. Bartered goods can range from hams to iron pellets, mineral water, furniture or olive-oil all somewhat more difficult to price and market when potential customers must be sought.
- Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.
- Counter purchase: Sale of goods and services to one company in other country by a company that promises to make a future purchase of a specific product from the same company in that country.
- Buyback: occurs when a firm builds a plant in a country – or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant’s output as partial payment for the contract.
- Offset: Agreement that a company will offset a hard – currency purchase of an unspecified product from that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation.
- Compensation trade: Compensation trade is a form of barter in which one of the flows is partly in goods and partly in hard currency.
Dumping
Dumping, in economics, is a kind of injuring pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect. The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product.
A standard technical definition of dumping is the act of charging a lower price for the like product in a foreign market than the normal value of the product, for example the price of the same product in a domestic market of the exporter or in a third country market. This is often referred to as selling at less than “normal value” on the same level of trade in the ordinary course of trade. Under the World Trade Organization’s Antidumping Agreement, full name Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, dumping is not prohibited unless it causes or threatens to cause material injury to a domestic industry in the importing country. Dumping is also prohibited when it causes “material retardation” in the establishment of an industry in the domestic market.
Anti-dumping actions
Legal issues
If a company exports a product at a price that is lower than the price it normally charges in its own home market, or sells at a price that does not meet its full cost of production, it is said to be “dumping” the product. It is a sub part of the various forms of price discrimination and is classified as third-degree price discrimination. Opinions differ as to whether or not such practice constitutes unfair competition, but many governments take action against dumping to protect domestic industry. The WTO agreement does not pass judgment. Its focus is on how governments can or cannot react to dumping it disciplines anti-dumping actions, and it is often called the “anti-dumping agreement”. (This focus only on the reaction to dumping contrasts with the approach of the subsidies and countervailing measures agreement.)
The legal definitions are more precise, but broadly speaking, the WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. To do so, the government has to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to cause injury.
Definitions and extent
While permitted by the WTO, General Agreement on Tariffs and Trade (GATT) (Article VI) allows countries the option of taking action against dumping. The Anti-Dumping Agreement clarifies and expands Article VI, and the two operate together. They allow countries to act in a way that would normally break the GATT principles of binding a tariff and not discriminating between trading partners typically anti-dumping action means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the “normal value” or to remove the injury to domestic industry in the importing country.
There are many different ways of calculating whether a particular product is being dumped heavily or only lightly. The agreement narrows down the range of possible options. It provides three methods to calculate a product’s “normal value”. The main one is based on the price in the exporter’s domestic market. When this cannot be used, two alternatives are available the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins. And the agreement also specifies how a fair comparison can be made between the export price and what would be a normal price.
Five-percent rule
According to footnote 2 of the Anti-Dumping Agreement, domestic sales of the like product are sufficient to base normal value on if they account for 5 percent or more of the sales of the product under consideration to the importing country market. This is often called the five-percent or home-market-viability test. This test is applied globally by comparing the quantity sold of a like product on the domestic market with the quantity sold to the importing market.
Normal value cannot be based on the price in the exporter’s domestic market when there are no domestic sales. For example, if the products are only sold on the foreign market, the normal value will have to be determined on another basis. Additionally, some products may be sold on both markets but the quantity sold on the domestic market may be small compared to quantity sold on foreign market. This situation happens often in countries with small domestic markets like Hong Kong and Singapore, though similar circumstances may also happen in larger markets. This is because of differences in factors like consumer taste and maintenance.
Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the act of dumping is hurting the industry in the importing country. Therefore, a detailed investigation must first be conducted according to specified rules. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question; if it is revealed that dumping is taking place and hurting domestic industry, the exporting company can raise its price to an agreed level in order to avoid anti-dumping import duties.
Procedures in investigation and litigation
Detailed procedures are set out on how anti-dumping cases are to be initiated, how the investigations are to be conducted, and the conditions for ensuring that all interested parties are given an opportunity to present evidence. Anti-dumping measures must expire five years after the date of imposition, unless a review shows that ending the measure would lead to injury.
Generally speaking, an anti-dumping investigation usually develops along the following steps: domestic producers make a request to the relevant authority to initiate an anti-dumping investigation. Then investigation to the foreign producer is conducted to determine if the allegation is valid. It uses questionnaires completed by the interested parties to compare the foreign producer’s (or producers’) export price to the normal value (the price in the exporter’s domestic market, the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins). If the foreign producer’s export price is lower than the normal price and the investigating body proves a causal link between the alleged dumping and the injury suffered by the domestic industry, it comes to a conclusion that the foreign producer is dumping its products. According to Article VI of GATT, dumping investigations shall, except in special circumstances, be concluded within one year, and in no case more than 18 months after initiation. Anti-dumping measures must expire five years after the date of imposition, unless a review shows that ending the measure would lead to injury.
Anti-dumping investigations are to end immediately in cases where the authorities determine that the margin of dumping is, de minimis, or insignificantly small (defined as less than 2% of the export price of the product). Other conditions are also set. For example, the investigations also have to end if the volume of dumped imports is negligible (i.e., if the volume from one country is less than 3% of total imports of that product although investigations can proceed if several countries, each supplying less than 3% of the imports, together account for 7% or more of total imports).
The agreement says member countries must inform the Committee on Anti-Dumping Practices about all preliminary and final anti-dumping actions, promptly and in detail. They must also report on all investigations twice a year. When differences arise, members are encouraged to consult each other. They can also use the WTO’s dispute settlement procedure.
Actions in India
The current set of anti-dumping laws in India is defined by Section 9A and 9B of Customs and Tariffs Act, 1975 (Amended 1995) and The Anti-dumping rules such as (Identification, Assessment and Collection of Anti-dumping Duty on Dumped Articles and for Determination of Injury) Rules of 1995, Section 9A of customs and tariffs Act 1975 states that “If any article is exported from any country or territory to India at less than its normal value, then, upon the importation of such article into India, the central government may by notification in the official gazette, impose an anti-dumping duty not exceeding the margin of dumping in relation to such article.” As of November 28, 2016, 353 anti-dumping cases has been initiated by Directorate General of Anti-Dumping and Allied Duties (DGAD) out of which in one hundred and thirty cases, anti-dumping measures are in force. In January 2017, the Indian government imposed anti-dumping duty on colour coated steel products imported from the European Union and China for 6 months.
Though, the move was applauded by Essar Steel India Commercial Director, H Shivram Krishnan but, importers expressed their concern regarding protective measures like minimum import price and anti-dumping duty especially when domestic is narrowing and imports are falling.
On July, 2015, the government imposed anti-dumping duty on fibreboard imported from Indonesia and Vietnam. This came after CEO and joint-Managing Director of Greenply Industries, Shobhan Mittal filed an application for anti-dumping probe initiation. The primary reason behind the probe was that the price differential between domestic and imported MDF stood at 5–6 percent and net MDF imports was at around 30–35 percent, majority of which came from Indonesia and Vietnam.
On 8 March 2017, government of India imposed anti-dumping duty ranging from US$6.30 to US$351.72 per tonne on imports of jute and its products from Bangladesh and Nepal. Later the government of India withdrew the anti-dumping duty in case of Nepal.
On 26 October 2017, India imposes anti-dumping duty on stainless steel from US, EU and China.
India has imposed anti-dumping duty on certain stainless steel products from the European Union and other nations including China and Korea, in order to protect the domestic industry from cheap imports.
The duty was imposed by the Revenue department following the recommendation by the Directorate General of Anti-Dumping and Allied Duties (DGAD).
- The levied duty will range between 4.58 per cent and 57.39 per cent of the landed value of cold-rolled flat products of stainless steel.
- The anti-dumping duty will be in effect until 10 December 2020.
- The direction however, exempts certain grades of stainless steel from the duty.
- The duty will be levied on the imports of stainless steel products from China, Taiwan, South Korea, South Africa, Thailand, the United States and the European Union.
Transfer Pricing
Transfer pricing involves what one subsidiary will charge another for products or components supplied for use in another country. Firms will often try to charge high prices to subsidiaries in countries with high taxes so that the income earned there will be minimised.
Transactions may include the trade of supplies or labour between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.
Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance.
