The Political Environment

Key Points
  • Government regulations affecting business and marketing are often much more invasive abroad. Regulations on pricing, hiring, production, and environmental regulation will likely differ from those in the US.
  • Most Western countries have entered into regional trading agreements such as NAFTA, or those governing the EU. Companies doing business in these countries should expect to face regulations such as trade barriers, tariffs, etc. depending on where they are trading from and to.
  • Monetary and political stability are also key factors that multinationals should take into consideration. Political instability carries a set of risks, such as expropriation.

 

Terms

Trading bloc: A type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

Expropriation: The act of expropriating; the surrender of a claim to private property; the act of depriving of private property rights.

Tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.

 

The Political Environment

The political environment in countries throughout Europe and Asia is quite different from that of the United States. In the U.S., government intervention in marketing tends to be relatively minimal compared to other countries.

The U.S. is a capitalist society, it operates an economic system where both the government and private enterprise direct the economy. In other words, the U.S. government combines free enterprise with a progressive income tax, and at times, steps in to support and protect American industry from competition from overseas. For example, in the 1980s the government sought to protect the automobile industry by "voluntary" export restrictions from Japan.

Nevertheless, governments outside the U.S. take this involvement one step further by influencing marketing programs within organizations in the following ways: contracts for the supply and delivery of goods and services; the registration and enforcement of trademarks, brand names, and labeling; patents; marketing communications; pricing; product safety; and environmental issues.

 

Political Stability

Business activity tends to grow and thrive when a nation is politically stable. Although multinational firms can still conduct business profitably, political instability within countries negatively affects marketing strategies.

 

Monetary Circumstances

The exchange rate of a particular nation's currency represents the value of that currency in relation to that of another country. Governments set some exchange rates independently of the forces of supply and demand. If a country's exchange rate is low compared to other countries, that country's consumers must pay higher prices on imported goods. Exchange rates fluctuate widely and often create high risks for exporters and importers.

 

Trading Blocs and Agreements

US companies make one-third of their revenues from products marketed to countries in Asia and Latin America. The North American Free Trade Agreement (NAFTA) also boosts export sales by enabling companies to sell goods at lower prices due to reduced tariffs.

Regional trading blocs represent groups of nations that join together and formally agree to reduce trade barriers among themselves. NAFTA is such a bloc. Its members include the US, Canada, and Mexico. No tariffs exist on goods sold between NAFTA member nations. However, a uniform tariff is assessed on products from unaffiliated countries. In addition, NAFTA seeks common standards for labeling requirements, food additives, and package sizes.

One of the results of trade agreements like NAFTA is that many products previously restricted by dumping laws - laws designed to keep out foreign products - can be marketed. Dumping involves a company selling products in overseas markets at very low prices, with the intention to steal business from local competitors. These laws were designed to prevent pricing practices that could seriously harm local competition, as well as block large producers from gaining a monopoly by flooding markets with very low-priced products and raising those prices to very high levels.

Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements (see ). Such agreements are designed to facilitate trade through the establishment of a free trade area customs union or customs market. This eliminates trade barriers between member countries while maintaining trade barriers with non-member countries.


Tariffs

The most common form of restriction of trade is the tariff, a tax placed on imported goods. Customs unions maintain common tariffs and rates for non-member countries. A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not.

Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with strong business ties in a foreign country may support tariffs to discourage entry by other US competitors.

 

Expropriation

Expropriation occurs when a foreign government takes ownership of plants and assets. Many of these facilities end up as private rather than government organizations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable and can change the laws they enforce at any point to meet their needs.

Source: Boundless
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