US Import and Export Price Indexes - Example

International Trade International trade refers to trade that occurs between nations (Chipman It is normally characterized with a high preference of natural and artificial barriers to trade and factor movements and use of different currencies and involves various autonomous governments. This leads to a pattern of shocks, which impact different countries in different ways (Chipman 1). Pepsi is a multinational, soft drink and beverage manufacturing company headquartered in New York, United States of America. Pepsi owns a series of companies such as Pepsi-Co, Quaker, Tropicana, Gatorade and Frito Lay (Boycott Pepsi). The company offers a variety of products, which ranges from soft drinks to food snacks. The United States of America, in which Pepsi is located, majorly exports capital goods, automotive vehicles, feeds, foods, beverages, parts and engines, as well as industrial supplies and materials (U.S. Department of Commerce). The country’s major imports include automotive vehicles, engines, parts, capital goods, consumer goods, foods, feeds and industrial supplies and materials. This research identifies products of Pepsi, within the United States and analyzes why imports or exports are taking place, in consideration of the trade policies or trade barriers. The research analyses issues such as labor productivity, demand and supply, comparative advantage, consumption issues, as well as, political issues that affect operation of Pepsi in international trade. The United States of America as a country provides a good market for soft drinks and snacks. It is also among the leading countries in which soft drinks and snacks are manufactured. The Coca-Cola Company and PepsiCo are located in the United States, and these are the leading soft drink, beverage and snack producers of the world. It should be noted that among the commodities that the United States of America exports and imports in large quantities, are foods, feeds and beverages. Foods, feeds and beverages are produced by major soft drink manufacturing companies such as Pepsi and sold to countries that are unable or find it difficult to produce such commodities. This is because the United States of America has a comparative advantage in the production of soft drinks in terms of technology, skilled labor and cost, compared to other countries. Table 1 and Chart 1 show the imports price and changes from 2013 and 2014 for foods, feeds and beverages in the United States of America, respectively. Similarly, Table 2 and Chart 2 show the exports price and changes from 2013 and 2014 for foods, feeds and beverages in the United States of America, respectively. Table 1: Foods, Feeds and Beverages Imports Price Indexes and Changes, 2013 - 2014 Relative Importance April 2014 Index April 2014 Index May 2014 Annual% Change 2013-2014 Monthly % Change in Jan to Feb Monthly % Change in Feb to March Monthly % Change in March to April Monthly % Change in April to May 5.32 180.5 179.1 2.9 -0.7 3.5 -0.8 -0.8 Source: Bureau of Labor Statistics Chart 1: Foods, Feeds and Beverages Imports Price Indexes and Change, 2013 -2014 Source: Bureau of Labor Statistics Table 2: Foods, Feeds and Beverages Exports Price Indexes and Change, 2013 -2014 Relative Importance April 2014 Index April 2014 Index May 2014 Annual% Change 2013-2014 Monthly % Change in Jan to Feb Monthly % Change in Feb to March Monthly % Change in March to April Monthly % Change in April to May 8.8 228.7 230.4 1.7 1.3 2.9 1.8 0.7 Source: Bureau of Labor Statistics Chart 2: Foods, Feeds and Beverages Exports Price Indexes and Change, 2013 -2014 Source: Bureau of Labor Statistics It should be noted that when the cost of production differs in various countries, some countries are comparatively advantaged than other countries or their trading partners. For instance, in the United States of America, it is relatively cheaper to manufacture, snacks and soft drinks, compared to other countries. Given this comparative advantage Pepsi, which is located in the United States of America, can easily manufacture and trade soft drinks and snacks to other countries. A country resolves to trade what it produces most cheaply to people who want such a product most because for them, the production of the commodity is either costly or impossible. For instance, it is very costly or almost impossible for developing countries to manufacture soft drinks. This means that for them, it would be cheaper to import soft drinks and snacks from the United States than manufacturing such commodities by themselves for their own consumption and export. Separately, the United States of America is also forced to import some products, which have a high demand, but the country is unable to produce them cheaply. For instance, coffee and tea are imported to the United States because most people want to drink these beverages and the United States of America is unable to produce such beverages cheaply (Institute of International Trade 30). The fact that demands for soft drinks is high in countries where it is difficult and expensive to produce such drinks, international importation and exportation takes place. This is because Pepsi can capitalize on the United States’ comparative advantage to produce soft drinks and snacks to supply to countries where demand is high. Pepsi benefits from economies of scale. The reason why Pepsi enjoys economies of scale is because it has powerful beverage and snack brands. This is augmented by the company’s enormous distribution network (Fleck). The company has acquired various companies, with which it shares production and distribution costs and networks. This leads to economies of scale. Large scale production and distribution leads to saving of costs, as well as operational benefits for Pepsi. This has also made it possible for Pepsi to specialize in the commodities that it can produce cheaply and market them in the international soft drink and beverage market. The high level of labor productivity in the United States creates an absolute advantage of producing soft drinks for Pepsi. Pepsi has been successful both in the domestic and international soft drink markets because the United States is the largest market in carbonated soft drinks. Secondly, Pepsi has diversified into the food industry, a reason why it features both in the soft drinks industry and in the food industry (Economic Commission for Latin America and the Caribbean 114). On the other hand, when there is trade limiting policies, the benefits that a country expects to obtain from cost price and existence of variety. For the case of Pepsi, there are expected benefits from the company’s wide variety of brands. It is expected that the company should enjoy benefits of having a wide variety of brands in terms of diversification. However, due to various restrictions on commodities due to health concerns, the company is deemed to lose all such benefits. For instance, there have been raising concerns pertaining to high calorie foods such as fatty snacks and their relationship with obesity and diabetes in the United States and other countries where Pepsi trades its products. Consequently, when governments restrict consumption of such products, Pepsi loses in terms of the volume or quantity that it sells. In some case, the company is unable to supply its products to other countries where such restrictions have been imposed. In other cases, when there are restrictions of moving part of the production process to other countries or limitations of exporting or importing can undermine comparative advantages (Institute of International Trade). For instance, Pepsi has been adversely affected by issues such as restrictions of imports and exports, restrictions on foreign ownerships, repatriation of funds regulations in countries such as Venezuela (PepsiCo). This reduces the sales volume of Pepsi and hinders the company’s capability of engaging in international trade. Separately, Pepsi is among the beverage companies that have to fight with a shift in consumer tastes and preferences for soft drinks. Given that the current international market has experienced a shift in consumer preferences, the market has provided both opportunities and challenges to Pepsi. For instance, consumer tastes have changed from alcoholic to non-alcoholic beverages and from carbonated to non-carbonated beverages. However, Pepsi has been capable of continuing dominating the market because it has diversified its products. The company’s commodities include alcoholic beverages, non-alcoholic beverages, carbonated and non-carbonated soft drinks and food snacks. Therefore, through diversification, Pepsi has been able to trade a wider variety of non-carbonated soft drinks, including juices, bottled water and light beverages so as to boost its market sales. Various factors in the international soft drink and beverage market arena have posed adverse effects on the performance of Pepsi in the markets that it operates. For instance, the company is facing competition from the domestic companies that produce and market substitutes in the markets where Pepsi operates. There are products such as Tubainas and Kola Real that are sold for lower prices in Brazil and Peru respectively (Economic Commission for Latin America and the Caribbean). This means that Pepsi has no advantage over the companies that produce soft drinks in some countries, especially when such countries sell their products at lower prices. Political issues in the international market have also affected Pepsi adversely. For instance, civil unrest in countries such Egypt and some Middle East countries, where Pepsi trades its products have led to a decline in the company’s sales. In addition, Pepsi faces legal challenges in its domestic market, the United States of America. This is because of the restrictions imposed by Proposition 65 in California, which requires the company to place a specific warning on any of the company’s products that are sold in California, which has been listed among the substances that have been found to cause cancer or birth defects (PepsiCo). It should be noted that placing such warnings on Pepsi’s products will lead to a decline in sales, both in California and in other markets. The company further faces legal challenges in other countries where it operates. For instance, tax on sugary drinks was instituted by Mexico recently (Fleck). This has led to a significant decrease in the company’s sales in Mexico because it markets sugary drinks. In case, other markets or governments took such action, Pepsi could lose more revenue in the international market. Works Cited Boycott Pepsi. "Pepsico Products List." 6 February 2009. Web. 18 June 2014. Bureau of Labor Statistics. "U.S.Import and Export Price Indexes - May 2014." 12 June 2014. Web. 18 June 2014. Chipman, John Somerset. The Theory of International Trade, Volume 1. Cheltenham: Edward Elgar Publishing, 2008. Print. Economic Commission for Latin America and the Caribbean. "Trans-Latins in the Food and Beverages." 2005. Web. 18 June 2014. Fleck, Adam. "Pepsi enjoys a Wide Economic Moat, Driven by its Leading Snacks Business." 21 May 2014. Web. 18 June 2014. Institute of International Trade. "Has US Comparative Advantage Changed? Does This Affect Sustainability?" 16 April 1999. Web. 18 June 2014. PepsiCo. "Our Business Risks." 2011. Web. 18 June 2014. U.S. Department of Commerce. "U. S. Census Bureau: U.S. Bureau of Economic Analysis News." 4 June 2014. Web. 18 June 2014. Read More