Barriers to entry new markets

Barriers to market entry refer to all kinds of policies and practices that affect the normal course of international trade, arising from tariffs, non-tariff measures, and other administrative practices. Practices that constitute barriers to entry to the market are generally practices that violate the rules in multilateral trade agreements such as the World Trade Organization (WTO)/Tariffs, regional trade agreements, or other bilateral agreements.

Trade barriers mainly arise from the idea of a country protecting the domestic market by imposing customs duties, additional taxes, quotas, and restrictions on imported products to reduce imports, increasing the cost of imports, and reducing the import margin. Economists often warn that trade barriers are harmful to countries that implement them, that domestic firms are cut off from global competition and reduce overall economic productivity. This view is based on the theory of comparative advantage.

Accordingly, countries should concentrate on the production and export of profitable products in terms of production resources and price competition, should not complicate the entry of non-competitive products into their own market, and thus ensure the low-cost Import of products that will be produced expensively.

Closure to international trade and competition may bring short-term benefits to the country doing so. But if the use of trade barriers becomes widespread and frequent, this will lead to a decrease in trade between those countries and a general contraction in international trade around the world.

The graph above shows world GDP growth between 2000 and 2017 with a blue arrow and the change in the volume of international goods trade with a red arrow. The correlation between these two variables is exceptionally high. (The correlation coefficient is 0.89.) This graph shows us the positive relationship between the increase in welfare in the world and the increase in international trade.

We can divide barriers to entry into a foreign market into three main groups:

1- Barriers to Trade Due to the Structure of the Market

2- Trade Blocks

3 - Protectionism

1- Barriers to Trade Due to the Structure of the Market

In the first group, natural reasons arise from the structure of the market, such as competition, brand structure and differences in the supply chain, language and cultural differences, distance. These are the conditions that complicate the exporter's job rather than an obstacle.

Entering a highly competitive foreign market requires a lower profit margin and a higher marketing budget. Countries such as Japan are a difficult market for a new firm to enter without a local partner due to linguistic and cultural differences and traditional wholesale and distribution mechanisms. Some Asian and African countries are markets that cannot be shipped by sea and where road transport carries security risks.

The value differences of the country's currencies, namely the exchange rate, determine the export and import possibilities between countries. A low exchange rate policy leads to the sale of that country's export products in the world market at a lower cost. In this case, other countries producing the same products will be at a disadvantage.

2- Trade Blocks

European Union trade blocs such as ASEAN in the Asia-Pacific region provide duty-free customs trade between member countries. Trade blocs make it difficult for countries outside the bloc to export to community members. Exports from a non-Community country will be as expensive as the customs tax rate, and the processing time will be longer due to customs procedures. Many trade blocs make it difficult to import product groups from abroad through quota and certification processes to protect the local production of community members.

The world's largest trade blogs:

• ASEAN – Association of South East Asian Nations.

• APEC – Asia Pacific Economic Cooperation.

• BRICS - Brazil, Russia, India, China and South Africa

• EU – European Union.

• USMCA – US, Mexico, Canada Agreement

• CIS – Commonwealth of Independent States.

• COMESA – Common Market for Eastern and Southern Africa

3 - Protectionism

Types of Protectionism reflect the protectionist policies applied. Tariffs, quotas, subsidies, standardizations, Import licensing, exchange controls, technical barriers, and many more minor ways to decreasing importation and make ways to increase export goods.

a) Tariffs:

Taxes on imported products are called tariffs. High tariffs increase the cost of imported goods, and these products whose cost is increasing cannot compete with domestic products in the domestic market. Tariffs were the most common measure to increase the cost of imported products. However, countries respond to tariff measures by increasing taxes on the same product or a more critical export product of the exporting country. Therefore, informal measures called non-tariff measures are applied.

b) Quotas:

Quotas are quantitative (volume) limits on the permitted level of imports. For example, suppose that a 100,000-ton quota is set for olive oil imports from a country. It means that in no way can import from that country exceed this volume. Quotas are used to balance the supply of imported products in the domestic market or balance importing a product for which the exporting country is hugely competitive. A restriction on imports causes the prices of imported goods to rise, causing the domestic market demand to decline.

c) Subsidies:

Subsidies include tax relief for domestic producers or financial support to increase exports. A subsidy is a method used to encourage domestic production by lowering the costs of producers. The subsidy can be done in different ways, such as direct financial contribution, tax cuts to businesses, low-interest loans, lower input costs, etc.

d) Standardization:

Sometimes countries require minimum standards or certain obligations for importing a product. Although health, quality, and environmentalism are suggested for standardization, the aim is to protect the producers in the domestic market or balance the excessively increasing imports. For example, a country where the imported shoes contain a certain percentage of leather material or set a limit on the percentage of rubber on the sole is an example of standardization.

e) Imitation of patents, copyrights, and branded products

It is common for patented, branded, or copyrighted products to be imitated in foreign markets. Especially in the textile sector, it is seen that the special designs of our companies are quickly imitated by the manufacturers in some countries and put on the market, and they earn high incomes. Worse still, since counterfeit products lack quality and safety, this situation causes great damage to the reputation of the company that has the right to the design or the brand in the world markets.