Price Escalation

Cost of exporting:

Excess profits exist in some international markets, but generally the cause of the disproportionate difference in price between the exporting country and the importing country, here termed price escalation is the added costs incurred as a result of exporting products from one country to another. Specifically the term relates to situation in which ultimate prices are raised by shipping costs, insurance packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuations. The majority of those costs arose, as direct moving goods across borders from one country to another and often combine to escalate the final price a level considerably higher than in the domestic market.

Taxes, tariffs and administrative Costs:

Nothing is surer than death and a tax has a particularly familiar ring to the ears of the international trader because taxes include tariffs and tariffs are one of the most pervasive features of international trading. Taxes and tariffs affect the ultimate consumer price for a product in most instances; the consumer bears the burden of both. Sometimes however, consumers benefit with manufacturers selling goods in foreign countries, reduce their net return in order to gain access to a foreign market. Absorbed or passed on taxes, at tariffs must be considered by the international businessperson.

A tariff or duty is a special form of taxation. Like other forms of taxes, a tariff may be levied the purposes of protecting a market or for increasing government revenue. A Tariff is a fee charged when goods are brought into a country from another country. The level of tariffs is typically expressed as the rate of duty and may be levied as specific, Ad valorem or compound. A specific duty is a flat per physical unit imported such as 15 cents per bushel of rye. Ad valorem duties are levied as a percentage of the value of the goods imported such as 20 percent of the value of imported watches. Compound duties include both a specific and an ad valorem charge such as $1 per camera plus 10 percent of its value. Tariffs and other forms of import taxes serve discriminate against all foreign goods.

Fees for import certificates or for the administrative processing can assume such levels that they are, in fact import taxes. Many countries have purchase or excise taxes, which apply to various categories of goods value added turnover taxes, which apply as he product goes through channel of distribution and retail sale taxes , the primary discriminatory tax that must be taken into account in reckoning with foreign competition.

In additions to taxes and tariffs a variety of administrative costs are directly associated with exporting and importing a product. Export and import licenses other documents and the physical arrangements for getting the product from port or entry to the buyer’s location mean additional costs. Although such costs are relatively small, they add to the overall cost of exporting.


In countries with rapid inflation or exchange variation the selling price must be related to the cost of goods sold and the cost of replacing the items. Goods often are sold below their cost of replacement plus overhead and sometimes are sold below replacement costs.

Because inflation and price controls imposed by a country are beyond the control of companies they use a variety of techniques to inflate the selling price to compensate for inflation pressure and price controls. They may charge for extra services inflate costs in transfer pricing or break up products to components separately.

Inflation causes consumer prices to escalate and the consumer is faced with ever rising prices that eventually exclude many consumers from the market. On the other hand, deflation results in ever decreasing prices creating a positive result for consumers but both put pressure to lower costs on everyone in the supply chain.
Source: International Marketing