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Debate: Grey imports

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Should retailers be allowed to import for resale “grey” goods from abroad?

Background and context

Globalising trade and the Internet have stoked controversy about “grey” (“parallel”) imports – where prices in one country are undercut through the importation of the same goods, originally earmarked for sale at a different price in another country. This argument occurs in a wide variety of contexts, including software/entertainment, designer clothing and luxury brands, cars within the European Union, pharmaceutical imports from Canada to the U.S., re-export of brands from developing countries, etc.

Contents

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Argument #1

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Yes

Allowing grey imports is consistent with basic principles of free trade. If a manufacturer/distributor is selling the same item at different prices in two countries, free market economics suggests that the rational purchaser will purchase in the cheaper of the two, presuming e.g. that the difference will not be wholly swallowed up by transaction and transportation costs, taxes, etc. If this holds for a consumer choosing between two jeans shops in his town, why does it not also hold for a retailer choosing between a jeans manufacturer’s price lists in two countries? Until recently, there was an information asymmetry, as the manufacturer knew about their differential pricing, but the purchaser did not; information technology has now changed the equation and allowed the market to operate more efficiently.

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No

Free trade involves a principle of free will. The buyer should be able to decide to whom he wishes to sell and on what terms, and if the seller does not accept those terms then the buyer should be able to refuse to deal with him. Manufacturers can have many good reasons for choosing to price goods at different levels in different countries, e.g. their wish to build a long-term brand preference by cheaper initial marketing in a developing economy, or their desire to maintain an aura of exclusivity in mature markets through high pricing and confining sales to specialist retailers. Grey imports result in the manufacturer/ distributor effectively losing some and often most control of their pricing and retailing strategy in the importing country. This reduces their capacity to position the brand as they see appropriate.

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Yes

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No

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Argument #2

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Yes

Allowing grey imports means that manufacturers do not concentrate economic power in a monopolistic way which can be damaging to free trade (even Adam Smith believed certain monopolies were antithetical to free trade). Banning them is tantamount to granting a licensed monopoly or cartel on a country-by-country basis, which inevitably means higher prices for consumers. As manufacturing has increasingly been relocated into a smaller number of offshore countries, rather than in the country of purchase, it makes sense that other parts of the supply chain should make a similar move so that they too can realise the efficiency benefits of a globalised economy.

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No

Grey imports limit a company’s control over its own products. Many manufacturers/distributors wish to control their distribution outlets for sound commercial reasons, e.g. to protect the image of their brand. This becomes very difficult, possibly impossible, to do if grey imports are allowed, as this circumvents their planned distribution network. It becomes much harder for a manufacturer/ distributor to track their products where they have been used in a grey importation. This can lessen their effectiveness when they need this information e.g. for a safety recall.

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Argument #3

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Yes

Consumers benefit from grey imports. The economics of grey import drive sourcing to low-cost economies. Even if retailers take some of this benefit as improved profit margins, typically at least some of it will be passed on to consumers in the form of reduced prices. Grey imports also allow consumers to buy products that may not yet be available in their own market e.g. because they have not yet been released, or because in their market the manufacturer feels there is insufficient demand. Thus, grey imports expand consumer choice.

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No

Consumers do not really benefit overall from grey imports. Although manufacturers may reduce prices in some (typically, richer) countries, they are at least as likely to raise prices in less developed economies, depriving consumers there of access to international brands and luxury goods, and so depriving them of a real choice.

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Argument #4

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Yes

Grey imports benefit the importing economy. Because some grey imports will be products originally targeted at a foreign market but which turn out to achieve some popularity in the host market, they increase foreign trade. In this way, grey imports act to internationalise consumer tastes and cross-cultural understanding. Through the downward pressure on retail prices, grey imports will also encourage industry to more efficiency, as ultimately factory gate prices will be expected to fall too.

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No

Grey imports damage the importing economy. By reducing the profitability of the manufacturer/distributor in the importing country, grey imports accordingly often lessen the amount of money that the company can invest in its operations in that country. This is a vicious circle which may reduce demand and so lead to greater inefficiencies in official importation, etc.. An acceptance of imports – especially of unclear provenance – hastens the demise of the manufacturing base of the importing country. The manufacturer will have less reason to support the brand locally through e.g. advertising, as the benefit does not show up in their local results and in any case grey imports tends to start focussing consumers’ minds on price rather than the brand identity. This can be detrimental to the advertising and media spend in the importing country, which for a premium consumer goods brand (e.g. perfume, clothing) could represent quite a significant economic benefit.

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Argument #5

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Yes

A free flow in goods is a desirable end in itself. The rational, efficient supply chain of grey imports reflects the ideal of the free market. Moving it from the shadows to a position of legitimacy would make it even more efficient, by reducing the effort currently employed to keep the imports’ trail hidden, etc. There is also job creation involved in the distribution network. For example, the logistics and transportation activities involved in grey imports will create new work as the trade grows.

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No

A free flow of goods is not always an automatic good. The extra transport and pollution involved in grey imports alone is a serious argument against it. Grey importers often do not make clear that products sold under the same brand name in different markets are in facts sometimes tailored to suit the local market environment. So, for example, one of the reasons for lower pricing in some products in particular countries is that they do not include all of the same ingredients as a product sold under the same brand name in another country. This can be, for example, because the performance needs (e.g. the climate), regulatory framework, or consumers’ willingness to pay in the two countries vary. Accordingly, in the importing country, consumers may end up paying for a familiar brand that is not actually as well designed for their needs as the domestically marketed version. There are many practical problems with grey importation. For example, consumers may not understand usage instructions.

Motions:

  • This House believes in global free trade
  • This House believes that expensive perfume stinks
  • This House is glad to be grey
  • This House supports grey imports

In legislation, policy, and the real world:

See also

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Books:

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