Global Financing and Exchange Rate Mechanisms

Essay by kingjohnUniversity, Master'sA+, October 2006

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The existence of discriminatory regulatory policy by governments is perhaps the largest single barrier to international trade in services, and can have an adverse impact on the ability of foreign entities to provide services in any country. Barriers to doing business overseas can include restrictive trade and investment rules, controls on the transfer of technology, government procurement policies, prejudicial tax structure, incompatible environmental and health policies, and more.

Trade Barriers

Barriers to trade in goods are fairly straightforward, and often begin and end at the border (with a tariff or quota, for example). "Trade barriers in services are often less visible to the international marketer since they can be embedded in complex domestic industry regulations, as well as in the overall business environment of that country" (Baldwin 1970). The banking, insurance, telecommunications, and transportation industries have tended to have more regulatory barriers imposed on them than other services. Government monopoly and control of many basic services has also worked to create market distortions in the pricing and delivery of services that are difficult for foreign providers to supercede.

In the past, many governments limited imports of certain kinds of services on the grounds that they were protecting their domestic consumers from foreigners that offered services of a differing technological standard, or of a lesser quality.

There is now a much greater acceptance on the part of national governments on the need to open up markets to foreign competition and include services under the rubric of international trade treaties. To a large extent, this has come about due to the growing trend towards inter-country deregulation and privatization in many countries, especially in key service industries, such as telecommunications, transportation, and health care. Listed below are some of the most common foreign trade barriers that restrict the international export of services.

International Payments

"Service firms sometimes experience difficulty repatriating fees, royalties, and profits to their home office' (Cavisgil 1981). This may occur when foreign repatriation procedures are ambiguous or poorly publicized or when governments fail to comply with their own regulations, effectively limiting, delaying, or discouraging repatriation. Currency exchange controls are often a major consideration also

Access to Public Sector Markets

In certain countries, service sectors are still regulated by governments that restrict foreign firms from obtaining government contracts. In such situations, local service firms will receive preference for government contracts, except in cases where they are unable to carry out the required services.

Preferential Purchasing Requirements

These are especially important for architects, accountants, and management consultants who work for government and public entities. Foreign architects may be excluded from bidding on government projects and enterprises are sometimes reserved for national firms. For example, this "buy national policy occurs when the US government decides to buy training services only from US firms, impeding foreign suppliers" (Dawson, 1985).

Importation of Tools of the Trade

Service firms needing to import materials related to their service are often hindered by questionable customs valuations, excessive delays and outright prohibitions. A particularly troublesome problem involves the importation of training material for in-house use. Many countries impose customs duties on such materials even though they constitute communication among affiliates rather than salable merchandise.


US service firms often encounter difficulty in obtaining permission to establish a branch or subsidiary in a foreign country. These kinds of barriers are not really trade barriers, but rather direct investment barriers. In addition, firms initiating franchises (a form of export through licensing) may face establishment barriers, and many nations explicitly restrict foreign access to certain industries (such as advertising) or impose strict limits on what constitutes a legal form of operation. Some countries limit the percentage of foreign ownership in a local service firm, often requiring that nationals hold majority ownership.

Licensing Standards and Domestic Employment Requirements

Professions such as accounting, law, medicine, engineering, and teaching are often heavily licensed and regulated in order to protect local practitioners. Regulations often discriminate against foreign professionals, either on the grounds that citizenship is required or local expertise and language proficiency are needed. Consultants are often forced to collaborate with local firms in order to practice. The overall development of service industries in some countries may be limited through a prohibition on hiring foreigners, since adequately trained personnel in the host country may not be readily available.

Non-tariff barriers did not seriously affect trade flows until the mid-1960s. Prior to that time, tariffs (e.g., financial surcharges) were the dominant means of distorting world trade flows to the benefit of a particular host country. However, the success of the General Agreement on Tariffs and Trade (GATT) rounds has resulted in relatively low tariff levels (averaging between 4 and 7 percent) among industrialized countries. As tariff protection has diminished, non-tariff protection has emerged as a difficult, challenging constraint and may now be the most significant trade distorting mechanism. While a free, unconstrained flow of world trade is a "theoretical economic ideal, political realities make protectionism a persistent fact of life" Jeanette, 1988). Thus, small businesses entering international trade markets must be familiar with the pervasiveness of NTBs. Any encounter with NTBs can spell instant failure for the small business not cognizant of the implications. Simply stated, NTBs provide a challenge not typically encountered in the smaller firm's domestic markets.

NTBs may be defined as "government laws, regulations, policies, or practices that either protect domestic producers from foreign competition or artificially stimulate exports of particular domestic products"(Johnston, 1985). For all practical purposes, this definition is normally broadened to include private sector business practices, such as monopolistic or oligopolistic industrial structures (e.g., closed distribution systems) that effectively preclude foreign access to domestic markets or restrain competition with domestic organizations. This broader definition is used here, and includes both public and private sector practices that distort trade flows.

In conclusion, countries are working through the World Trade Organization (WTO) and other trading blocs to get rid of barriers and to promote free trade between members and the rest of the world. If countries major industries lose a lot of business to foreign competition, the loss of jobs and tax revenue can severely impair parts of that countries economy. To consider this, protective tariffs have been issued to help keep this possibility from occurring. There are disadvantages to tariffs, which usually include increases in the price of the product at a disadvantage if they use that product to produce something else. This can make a domestic product less competitive in the market. The move toward market driven economies will continue to erase the barriers that are currently in place throughout the world and will create better quality products at competitive prices.


Baldwin, Robert E. (1970), "Non-Tariff Distortions of International Trade," Washington, D.C.: The Brookings Institute. Cao, A.D. (1980), "Non-Tariff Barriers to U.S. Manufactured Exports," Columbia Journal of World Business (Summer) 93-102.

Cavusgil, Tamer, and J. R. Nevin (1981), "International Determinants of Export Marketing Behavior: An Empirical Investigation," Journal of Marketing Research 18 (1), 114-119.

Dawson, Leslie M. (1985), "Marketing to Less Developed Countries," Journal of Small Business Management 23 (4), 13-19.

Jeannet, Jean-Pierre, and Hubert D. Hennessey (1988), International Marketing Management: Strategies and Cases, Boston: Houghton Mifflin, 54-58.