616 The Marketing Book
To a marketer in his or her own country, these
are background factors which influence the
business climate, but in the international con-
text become unknown factors which could
assume important proportions, particularly
when combined with historical, cultural and
linguistic differences.
Political risk
To illustrate this, the Middle East may perhaps
be popularly perceived as an area of political
uncertainty, yet many British companies can
claim punctual payment for supplies and that
expropriation has not taken place in recent
years. Instead, the various oil states who were
previously only oil producers have engaged in
forward vertical integration to control refining,
shipping and, to some degree, retail distribution
within Europe. On the other hand, a quite differ-
ent form of political risk emerged in calm, politi-
cally stable France, when a socialist government
under Mitterand started to create widespread
uncertainty when it embarked on a nationaliza-
tion policy. The greatest risks may not arise from
within the most unstable economies.
International trade sanctions and embar-
goes may be found in place against specific
countries. Important also to consider are the
Voluntary Export Restraints (VERs) whereby
exporting nations, most notably Japan, agree to
curb exports to importing nations beyond a
certain amount on pain of unspecified sanc-
tions. Another quite different form of govern-
ment intervention is through a countervailing
duty. By introducing a countervailing duty, a
government increases the selling price of the
cheapest imported good to the level of the
cheapest domestic competitor by means of a
specific tax. In this way, governments may
discriminate against cheap imports and effec-
tively price them out of the market by instantly
removing their price competitiveness.
The World Trade Organization (WTO) has
now taken over the role of arbiter of free trade
from GATT, the General Agreement on Tariffs
and Trade, that was created to facilitate free
trade in the aftermath of the Second World War.
GATT had been created in different times when
sovereign nations existed. Today, the move is
towards the formation of economic trading
blocs and so a new organization had to be
created. China is the one major trading country
that is not yet a member, but China will have to
meet some rather stringent demands relating to
freeing controls on its foreign trade before
being able to join this organization.Economic/financial risk
Similarly, there are economic risks where there
are difficulties in repatriating capital due to
host government exchange controls, high taxa-
tion or a rapidly devaluing currency. However,
this may be surmounted by resorting to devices
such as management fees, royalties and repay-
ments on loans and/or interest, leasing, or
intra-corporate transfers, known also as ‘trans-
fer pricing’. As it is entirely the responsibility of
the individual company to price final goods,
intermediate goods, such as assemblies and
components, that are transferred within the
company also provide an opportunity to move
money out of one country into another where
levels of taxation may also be lower.
Transfer pricing then may become a polit-
ical issue when foreign subsidiaries are seen to
be exporting but are recording losses. The price
at which goods are to be transferred remains at
all times a company issue over which the
national customs services have no control.
Given a situation where multinational cor-
porations control more than two-thirds of
world trade, transfer pricing is viewed by
politicians as an ever-constant threat to the
nation state. To counter this, many large com-
panies such as Exxon take the trouble to
produce a code of ethics in which they publish
the basis on which they transfer goods between
company subsidiaries. Most commonly, this is
found to be ‘arms length’ pricing, which means
setting a market price as though to an outsider.
However, the basis of this pricing has never
been fully defined to the satisfaction of all.