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Globalization's Dirty Little Secret


Economic Viewpoint

GLOBALIZATION'S DIRTY LITTLE SECRET

The price of gold in London almost equals the price of gold in New York. Otherwise, traders would buy in the cheaper market and sell in the dearer one. This process, known as arbitrage, enforces what economists call the "law of one price"--namely, that in a perfectly free market the same product, net of transaction costs, will sell for the same price everywhere.

Why, then, do Levi's jeans cost double in London what they cost in New York? Why does the same compact disk, fridge, or dishwasher cost the British consumer more in pounds than it costs the U.S. consumer in dollars? Why does a Ford Escort sell for about $10,000 in the U.S. and $20,000 in Britain?OVERPRICED. Only a small part of this difference, it turns out, can be explained by the higher consumption taxes, shipping costs, or duties. Most of it reflects plain old monopoly pricing, which makes British consumers effectively poorer. In this case, Britain has much weaker antitrust laws than the U.S. and a stronger tradition of price maintenance--and American manufacturers are happy to collude. Supposedly, price competition "between" manufacturers solves this problem. But in Britain, everyone's CDs, jeans, autos, etc. are overpriced.

In principle, some clever entrepreneur could buy jeans at the U.S. wholesale price and ship them to a discount emporium in Britain. But if you try to do that, the manufacturer is free to refuse to sell to you. Even if you buy retail in the U.S. for sale in a higher-priced foreign market, you could be infringing on somebody's exclusive distribution arrangements or the manufacturer's copyright or trademark. In Britain, retail chains such as Tesco have been rebuffed by the manufacturers when they tried to discount Calvin Klein and Nike brands. The British Office of Fair Trading sided with the manufacturers.

The globalization of price competition, in short, is lagging far behind the globalization of commerce. Price-rigging remains a form of "nontariff barrier" that nobody is seriously contesting. Neither the rules of the World Trade Organization, the European Union, nor the domestic antitrust laws of leading nations reach this problem.

The European Union, supposedly now a single market, still displays surprising national price differences for identical products. A report released on July 10 by the European Commission found auto price disparities between Britain and Ireland as high as 40%. The British government colludes with Japanese auto makers (who have been kind enough to build plants in Britain) to impose quotas on imports by independent distributors from Japan, where the domestic auto price is about half the British price.

You might think that in an age of global corporations, mail-order catalogs, and Internet sales, global consumer prices would have long since converged. But no. In some respects, pricing disparities and barriers are becoming more entrenched. A recent case decided by the European Court upheld the right of an Austrian eyeglass maker to sell its product more cheaply outside the EU and to sue anyone who tried to reimport the discounted glasses for resale in an EU member country. A men's madras shirt from Lands' End costs $29.50 in the U.S. catalog and 28.50 ($46) in the British one. Only about a third of this premium is value-added tax.CHANCE FOR BLAIR. The term for all of this is "pricing to market." Despite globalization, it remains rampant. And while some national antitrust laws effectively restrain price maintenance within nations, they hardly touch it globally. When price maintenance by foreign distribution systems has the effect of keeping out U.S. products (as in Japan), American manufacturers and the U.S. Trade Representative scream bloody murder. But when the effect is to let in U.S. products but retard price competition (as in Britain), the American manufacturer happily--and quietly--reaps a windfall at the expense of foreign consumers.

It is intriguing that Britain should be a hotbed of price-rigging. Since 1979, British Thatcherism has preached the bracing virtues of swashbuckling free markets. But Thatcher-style capitalism was more for capitalists than consumers. If the Labour government of Tony Blair got serious about antitrust, Blair could dramatically raise British living standards overnight.

As long as price discrimination benefits producers, markets are less than self-correcting--and antitrust regulation has a necessary role. Today's newly globalized markets need regulations promoting competition. The WTO has lately begun sniffing around this issue as a new species of trade barrier. It should persist.By ROBERT KUTTNER


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