Question: Why are Chinese goods so cheap?

The Chinese goods are substantially cheaper than Indian goods and come in wide varieties. In very simple terms in Economics, we know that anything like large scale dumping and imports can spell a disaster for the economy. This article focuses on the background of the Pricing Policy by China, the damage or not it can cause for the Indian domestic industry, the anti dumping tariffs adopted by the Indian government, the latest Statistics and we conclude with some Policy suggestions. The cost of production being less in China is an obvious answer but when we dwell deeper into the world of Chinese manufacturing, the reasons abound. Chinese goods are known for their moderate quality, prompt delivery and affordable prices in comparison to Indian goods. Following are some of the reasons behind Chinese goods being cheaper than Indian goods 1. China does not have stringent intellectual property rights (IPR) issues so come any new product in the world market; China is ready with a cheaper alternate. Thus there is no cost of research, designing and redesigning of any product. 2. 3. 4. 5. The labor is not demanding and does not go on strike. Where most Indian companies are striving for a Total Process Review (TPR) for quality satisfaction, Chinese companies are not so particular. China does not have any after sales tax on its products leading to a further lowering of costs. Are we enjoying the cheap Chinese goods because the Chinese currency is undervalued leading to purchase of cheap Chinese goods? This needs to be carefully studied. 6. 7. The cheap Chinese labor is another major reason for the dirt cheap Chinese goods especially like toys where intensive labor techniques are employed With the removal of quantitative restrictions (QR), the ending of the textile quota regime and Chinese accession to WTO, the dumping activity by Chinese has increased manifold. 8. 9. 10. Lower rate of Indirect taxes on Inputs High level of cash subsidies being offered by the Chinese government to its producers and exporters Lower taxes enable the Chinese companies to participate in the world market at a lower margin and thus dominate it. Adopt the business model focused on higher volumes is a natural progression in this scenario. We must also mention here the advantages of the high economies of scale and

higher level of Productivity achieved by highly skilled labor. We must remember here that China could not have been able to do it alone. The import of technology and Infrastructure from West has played a very important role. Had West not opened its gate to the Chinese products, China could not have boasted of such huge trade surplus. China Imports very little from the rest of the world. It is noteworthy to mention the reverse Chinese model of manufacturing. China produces in bulk and sells in bulk. Rather than waiting for the orders and then producing, Chinese have mastered the art of producing first and selling it later. This is possible due to low interest rates and low taxes Chinese government imposes. This model helps the buyers as they do not have to wait for the produce. They can inspect, pay and ship the delivery in a single day! Since Chinese accession to WTO, China has been much more liberalized in reducing Tariff and Non Tariff barriers. The Liberalization measures taken by China have been more broad and deep in nature though it entered WTO in 1991 whereas India has been a member since Inception.

'Made in China' = 'Buyer Beware'

Over the years, low-priced products from China started flooding in to the world market in every segment including consumer goods and electronics. We always wonder about how they can sell it so cheap. The answer is here. Chinese manufacturers can afford to price their products so competitively because of a number of factors as listed below. 11. 12. 13. 14. 15. Primarily, the raw materials used are of the worst quality. They are not investing on research or innovation; they simply copy the products of established brands. They are not spending for customer support or after sales service. They are not spending money for advertising or marketing. Mass production When we buy Chinese made product we are putting our health and our childrens health in danger. Almost 90% of the chinese products which we find in the market are substandard. Since there are no strict quality checking methods in china, the manufacturers are able to adulterate products.The only way to keep ourselves safe is to avoid Chinese products.

International Terms of Payment

Method

Usual Time of Payment

Goods Available To Buyer

Risk to Seller

Risk to Buyer

Comments Seller's goods must be special in one way or another, or special circumstances prevail over normal trade practices (e.g., goods manufactured to buyer-only specification). Letters of Credit require total accuracy in conforming to terms, conditions, and documentaion. Consult your United Shipping Associate member for determining feasibility of terms and conditions.

CASH IN ADVANCE

Before shipment

After payment

None

Complete. Relies on seller to ship exactly the goods expected, as quoted and ordered

LETTER OF CREDIT (L/C) (See next two items.)

Commerical Invoice must match the L/C exactly. Dates must be carefully headed. "Stale" documents are unacceptable for collection. Assures shipment is made but relies on exporter to ship goods as described in documents. Terms may be negotiated prior to L/C agreement, alleviating buyer's degree of risk.

CONFIRED IRREVOCABLE CREDIT

After shipment is made, documents After presented to the payment bank.

Gives the seller a double assurance of payments. Depends on the terms of the letter of credit.

The inclusion of a second assurance of payment (usually a U.S. Bank) prevents surprises, and adds assurance that issuing bank has been deemed acceptable by confirming bank. Adds cost and an additional requirement to seller.

UNCONFIRMED IRREVOCABLE CREDIT

Same as above

Same as above

Seller has single bank assurance of payment and seller remains dependent on foreign bank. Seller should contact his banker Same as above to determine whether the issuing bank has sufficient assests to cover the amount.

Credit can be changed only by mutual agreement, as stipulated in a sales agreement. Becomes open account with buyer's bank as collection agent. Foreign bank may have problems making payment in sum or timeliness. A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions), consult with your banker and freight forwarder to determine the most desirable means of doing business in a given country. A draft can be a collection instrument used to exchange possession and title to goods for payment. Seller is essentially drawing a check against the bank account of the buyer. Buyer's bank must have pre-approval, or seek approval of the buyer prior to honoring the check. Payble upon presentation of documents.

DRAFTS (See next two items.)

Remittance time from buyer's bank to seller's bank may still take one week to one month.

Drafts, by design, should contain terms and conditions mutually agreed upon.

SIGHT DRAFT (with documents against acceptance)

On presentation of draft to buyer.

If draft not honored, goods must be returned or After resold. Storage, handling, payment to and return freight buyer's bank. expenses may be incurred.

Assures shipment but not content, unless inspection or check-in is allowed before payment.

TIME DRAFTS (with documents against acceptance)

Before On maturity of the payment, draft after acceptance

Relies on buyer to honor draft upon presentation.

Assures shipment but not content. Time of maturity allows for adjustments, if agreed to by seller.

Payable based upon the acceptance of an obligation to pay the seller at a specified time. Although a time draft has more collection leverage than an invoice, it remains only a promissory note, with conditions. All terms of payment, including extra charges and terms should be mutually understood and agreed upon prior to open account initiation. Companies conducting ongoing business are candidates for open account terms of payment. Seller must measure not only buyer's credit reliability but the country's as well.

OPEN ACCOUNT

As agreed, Before usually by invoice payment

Relies completely on buyer to pay account as agreed

None

Terms Ranked from LEAST RISK to MOST RISK for the Seller

BARRIERS TO INTERNATIONAL TRADE Barriers are the hurdles or obstacles which affect the smooth traffic of goods. The increased competition

in international trade, has made it necessary for almost all countries to impose various barriers on their export import trade. Inabsence of these trade barriers, the status of the international trade would be no better than the ocean where the big fish eat the small fish. There are basically two types of barriers : (a) Tariff Barrier and (b)Non Tariff Barrier Tariff Barriers : A tariff is a duty or tax which is imposed on a product when that product crosses a national boundary. Tariff can be of two types protective tariff and revenue tariff. Protective tariff are imposed by an importing country in the form of customs duty. They aim at making the imported product costlier than the same product manufactured locally.

(a) Export Duties : Export duties are generally levied for revenue. Are more popular in the countries exporting primary products than in those exporting manufactured products. The mother country sometimes compels its colonies to levy export duties to protect its domestic industry from the competition of the colonies. Certain countries levy export duties to collect funds for defraying the expenses of export promotion activities. Sometimes the duties are levied to charge higher prices from the foreigners for the commodities which are in short supply.

(b) Import Duties : One of the important purposes of import duties is to obtain revenue for the public treasury. Tariffs are also very popular for protecting domestic industries from foreign competition. In order to achieve uniformity amongst countries as to customs duties and other levies, products have been grouped into various categories, depending upon the material of which they are made the nomenclature system has been worked out by an international committee of exports under the aegis of the Customs Cooperation Council.

(c) Transit Duties : Progress in the field of transportation during the nineteenth century robbed transit duties of their earlier profitability and decreased the incentive century robbed transit duties of their earlier profitability and decreased the incentive for their maintenance. Other important factor which led to the elimination of transit duties is the desire among nations for international economic cooperation. The burden of transit duties is borne either by the consumers in the importing country or by the exporters in the producing country depending between the demand and supply conditions of both the countries.

(d) Anti Dumping Duties : This is levied when the selling price of an imported product is lower than the normally prevailing domestic price. To meet a situation of this nature whenever it arises, most countries, under their own legislation, have the power to impose anti dumping duties on the ground of injury to their domestic industries. Anti-dumping duties normally take the form of additional import duties and charges.

(e) Countervailing Duties : These are levied in the same way as anti-dumping duties and the explanation for their levy is generally the charge that imports from a specified country are directly or indirectly subsidized. The amount of countervailing duty normally corresponds to the amount of the subsidy.

Non Tariff Barriers : (a) Prior import Deposits : Some countries impose a condition that importers in their countries should deposit money upto 100 percent of value of their imports in advance with any specified authority, normally their Central Bank. Such deposits are generally for a specific period, and whenever such a policy is introduced by any country.

(b) Quantitative restrictions through Quota / License system : Under this system the importing country specifies the quantities of a commodity that would be allowed to be imported from various countries. The quotas fixed normally depend on the relationship of the importing country with the supplier of the commodity. As soon as the specified commodity is imported no more quotas are sanctioned.

(c) Foreign Exchange Regulations : Are usually adopted by most of the developing nations who experience an unfavourable balance of payments. Under this scheme, the importer has to ensure that adequate foreign exchange is available for import of goods by obtaining a clearance from the exchange control authorities prior to the concluding of contract with supplier.

(d) Consumer Formalities : (e) Health and Safety regulations : Many countries impose strict health and safety regulations on the import or sale of products, particularly food products, Regulations based on environmental considerations are becoming increasingly important. A failure to know about such regulations would exclude a supplier from the market. A prospective exporter must find out this information before he decides to enter a market.

(f) Government Procurements : Under the government procurement method tender notices are sometimes issued with a very short deadline for foreign firms to submit their bids in time, with a complete specification of the goods being tendered for. It is always advisable for exporters, desirous of participating in tenders for large value contracts invited by foreign governments to have their own arrangements for getting advance information on such tenders.

(g) State Trading : Foreign trade business is conducted exclusively for specialized foreign trade, organizations, which buy and sell a specific range of products in accordance with the target set by the countrys long term and short term economic plants. The export-import business is generally carried on within the framework of bilateral agreements, selling out products and quantities to be exchanged between the partners. (h) Technical and Administrative Regulations : Establish international technical regulations and standards of products in international trade. Standardize system of conformity assessment to the technical standards. Set up international standards as a reference point for developing countries. Prevent arbitrary, unjust and discriminatory use of international regulation and standards.

Short notes question 5. Push and pull factors for going international

MOTIVATIONS TO GO GLOBAL Most companies move their business operations to foreign countries by going global. They take their business overseas for different reasons. These companies adopt the reactive or defensive approach to stay ahead of the competition. A few of them take the proactive or aggressive approach to accomplish the same purpose. A majority of them choose to adopt both approaches to avoid a decrease in their competition. In order to remain competitive, companies move as quickly as possible to secure a strong position in some of the key world or emerging markets with products customized for the need of the people in such areas in which they plan to establish. Most of these world markets are attracting companies with new capital investments with very good incentives. Some of the reactive or defensive

reasons for going global are: (1) Trade Barriers (2) Customer Demands (3) Globalization of Competitors (4) Regulations and Restrictions In the case of trade barriers, companies move from exporting their products to manufacturing them overseas in order to avoid the burden of tariffs, quotas, the policy of buy-local and other restrictions that make export too expensive to foreign markets. Companies respond to customer demands for effective operations and product assurance and reliability, or/and logistical problem solutions. Most foreign customers, who seek accessibility to suppliers may request that supply stay local in order to enhance the flow of production. Companies usually follow that request to avoid losing the business. For the globalization of competitors, companies are aware that if they leave companies overseas too long without challenge or competition, their investments or foreign operations in the world market may be so solid that competition will be difficult. Therefore, they try to act quickly. Most companies' home government may have regulations and restrictions that are so inconvenient and expensive, thus limiting the expansion, encroaching in the companies' profits, and making their costs uncontrollable. Hence the reason for the companies moving to different market environment with few foreign restrictive operations. The proactive or aggressive reasons for going global are: (a) Growth opportunities (b) Economies of Scale (c) Incentives (d) Resource assess and Cost Savings Many companies will prefer to invest their excess profits in order to expand, but sometimes they are limited because of the maturity of the markets in their area. Therefore, they seek the overseas new markets to provide such growth opportunities. So, these companies, in addition to investing their excess profits, also try to maximize efficiency by employing their underutilized resources in human and capital assets such as management, machinery, and technology. Companies seek economies of scale in order to achieve a higher level of output spread over large fixed costs to lower the per-unit cost. They also, want to maximize the use of their manufacturing equipment and spread the high costs of research and development over the product life cycle. Some of the developing countries that need improvement and development through capital infusion, skills, and technology voluntarily provide incentives such as fixed assets, tax exemptions, subsidies, tax holidays, human capital, and low wages. These incentives seem attractive to these companies due to their increase in profits and reduction of risks. Caution: The repatriation of profits and foreign exchange risks due to instability in leadership of these developing countries should be put into consideration in negotiation. Access to raw materials and low operational costs in financing, transportation, low wages, lower unit costs, and power are attractive in terms of resource access and cost savings. Most companies move their headquarters to overseas to avoid their respective home countries' high taxes and

other costs associated in business operation in those countries. Companies need to develop strategies, design and operate systems, and also work with people, different companies, and countries around the world in the form of strategic alliance to ensure sustained competitive advantage. Global management and management functions are usually formed by the prevailing conditions and ongoing stable and unstable developments in the world. A few countries take advantage of these companies, but when companies become aware that they are being used, they should then learn how they can be useful in that different cultural environment in order to make a lot of profits. Dr. Sidney Okolo is a professor, consultant, strategist, and Africa expert. He is affiliated to several universities, the Managing Director of International Business Associates, a management consulting firm, and also the CEO of Global Education Support, an education assistance program. Among other things, he engages in all aspects of learning, knowledge, organization and human change. His focus is on leadership, management, entrepreneurship, profit engineering, human potential, excellence, achievement, business strategy, research and development. Product management, change management, conflict management, athlete management, marketing, business development and operations. He works with clients to adapt to change due to change in factors of production, technology, goods and services. He engages clients in training, retraining, development, skills enhancement, association, behavior modification, ways of thinking, and attitude adjustment. In addition to his work in the United States, his focus is also on developing countries in the continent of Africa, their leadership, culture, economic and market structure, community planning and development, and his created four letter word, "PIES", which stands for: poverty, instability, ethnicity, and sectarianism.