Impact of Brexit and Trump on International Marketing

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21/02/19 Marketing Reference this

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“In light of the Brexit and other political events in 2016, discuss the possible implications for companies’ international marketing strategies.”

Introduction

The world as we know it, is changing. In light of the previous years, humanity has witnessed severe changes in the political arena around the world. The election of Donald Trump as the 45th president of the United States (U.S), the referendum in the United Kingdom (U.K), the failed Coup in Turkey, the breakup of the Trans-Pacific Partnership and the Rise of the Far-Right in Europe are just some of the major political events that will change and reform the world dramatically imposing changes in businesses international marketing strategies (Foster, 2016; Lindsay, 2016). Amendments in the political scene trigger changes in all aspects of everyday life, with the impact of these alterations depicted in economy, business, society and even in climate. In this paper, an analysis will be conducted to examine the relation between marketing strategy and politics and how they affect the international marketing strategy in terms of standardization or adaption, along with possible alterations in the marketing mix. Furthermore, an attempt will be made to discuss the possible impact that important political events, such as Donald Trump’s presidency and Brexit, had on companies’ strategies.

Relations between political environment and businesses

In recent decades, the world has observed the globalisation and democratization of markets, a phenomenon that enabled companies to transcend borders and entry international markets (Czinkota, 2016). As Theodosiou and Leonidou (2002) claimed, the globalisation and democratization of international business scene is related moderately to the liberation of trading, which has changed the way companies and marketers design and implement their international strategies. Reduced domestic growth and excessive domestic competition are further reasons for firms moving into foreign markets (Kotler et al., 1996). As companies gain more knowledge and experience in international operation, they progress through stages of internationalization following the Upsala Internationalization Model (Keill0r, Boller & Luke, 1998).

In other words, companies had to assess if they will comply with a standardization approach or adapt their strategies in cross-border countries. The former approach was led by: the similarities of countries due to the globalization of markets, the update and expansion of international communication channels and the birth of Internet, while the latter underlined that companies should acknowledge and adapt to the variations amongst different countries (Theodosiou & Leonidou, 2002).

Kottler et al. (2011) claim that businesses’ decisions on which market they will enter, and by what means, are based on the evaluation and ranking of several factors. One of them is the risk of the political power that each country and government has. According to Ghauri & Cateora (2014), the importance of the political power over companies can be understood by the recognized authority that each government has, to control and restrict companies’ operations, by either offering support and encouragement or by implementing restrictions in the mode of expropriation, import restrictions (to protect their own industries), confiscation, domestication, price controls etc. It is then clearly understood, that the political environment places power on businesses and plays a great role in international companies’ operations and margin.  

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Indeed, ‘the ideal political conditions for a foreign firm is a stable and friendly government’ (Ghauri & Cateora, 2014: p.91). Both political climate and continuity of the set of rules established in a country are essential elements of the cultivation of good relations between companies and governments in a mutual beneficial and prosperous way. As Agawal & Feils (2007) suggest, ‘Political risk is highly relevant factor during the pre-entry and post-entry stages of the “process” model of internationalization.’ (p.166). Therefore, it is ideal for multinational companies to rely on stability to, sustainably, expand and invest.

As mentioned, political changes have a great impact on the company’s decisions and marketing strategies. In fact, changes in the political scene have reflections into more factors than just trading policies. When a new government introduces import restrictions and trade tariffs, it affects the prices of goods, since companies trade expenses are increasing (Mor, 2017). In addition, additional border checks make the transport and distribution of commodities slower and more expensive. However, the introduction of tariffs is followed by a variety of non-tariff technical barriers, such as different product standards in labelling, packaging and safety (Mor, 2017). Combining all these together, it is obvious that not only are all four P’s in the marketing mix affected, but also the strategy which is designed by the marketers (Baines, Fill & Rosengren, 2017).

Furthermore, apart from the impact to the global economy, political changes affect currency power. To be more precise, changes in governments which influence stock markets and trade, affect the value of the currency (Samson, Wigglesworth & Bullock, 2017), since its depreciation causes the equilibrium in trade to collapse (Melvin & Sultan,1990). Indeed, the value of each country’s currency affects the exchange rates followed by changes in import and export expenses, effecting the company’s competitiveness in foreign markets (Cox, Chu & Rodionova, 2017).

Nevertheless, companies, in order to minimize the impact of the political uncertainty and risk, will reassess and readjust a great part of their international marketing strategy, which is thus how they enter the markets, choosing a safer path than the Foreign Direct Investment (FDI). Indeed, ‘the higher the degree of country risk, the greater the probability is that exporting (contractual agreement) rather than FDI as a market entry strategy will occur at the early (late) standardization phase.’ (Malhotra, Agarwal & Ulgado, 2003: p.19). In other words, FDI implies a ‘higher level of commitment’ (Keillor, Boller & Luke, 1998: p.2).

Impact of political events in international marketing strategies

Donald Trump Presidency

One of the events that altered modern history is the election of Donald Trump as the 45th president of the U.S. Donald Trump promised a series of political changes with effects extending to businesses and trade, such as reducing corporate taxes by 20%, investments in infrastructure, cutting the trade deficit to enhance job creation within the U.S and the creation of a ‘border tax’ for the companies that trade commodities outside the U.S to the U.S (BBC News, 2017). Trump’s aggressive political strategy, his order to withdraw the U.S from the Trans-Pacific Partnership, failure to effectively renegotiate the North American Free Trade Agreement, and establish fair trading relations with China, has reformed America’s marketing climate.

International marketing will experience a great hit, since Trump’s strategy is basically introverted. Trump’s policy leans toward domestically-orientated companies which are expected to succeed in favour of higher economic growth and protectionist trade policies (Samson, Wigglesworth & Bullock, 2017). Trade between the U.S and international companies will be affected since trade restrictions will be imposed and renegotiations will change the way commodities are distributed inside and outside the U.S. Asia and Latin America will be affected the most, while tariffs could jeopardise the exporting of their goods to the U.S. Indeed, according to FXCM (2017), imposed tariffs in imports will pressure multinational companies to relocate production facilities and readjust the distribution channels. China will face the biggest threat since the U.S is the largest market for Chinese commodities; receiving 18% of China’s exports.

There are winners and losers of Trump’s policies. In accordance to Milne (2016), pharmaceuticals such as Pfizez, oil & gas companies like Continental Resources are among the sectors that will benefit from Trump’s strategies based on his campaign. However, U.S carmakers who place their production outside the U.S such as GM, Cadillac, Ford and Japanese carmakers, are expected to be affected by the pricing strategies to foreign exchange rates. Furthermore, retailers and consumers will have a significant impact, since his policies will affect their expenses, trade agreement and supply chain; ‘could destroy the cross-border trade between the U.S and Mexico in high fructose corn syrup’ (Milne, 2016).

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To conclude, by imposing taxes and tariffs, standardization becomes adaption in the biggest world market and the domestically-oriented strategy affect the way marketers place and promote products in this market, insinuating changes in the marketing mix. Moreover, the U.S will affect the marketing strategy of international companies towards this market and they will put pressure to the potential entry of new companies. FDI is now a risk. By implementing new regulations and trades agreements international companies will observe a rise in their distribution expenses towards the U.S, affecting their margin. In order for these companies to survive in this market, they will have to increase prices which will pose a reduction to the consumption of their products, since natives will be attracted by domestic substitutes with lower prices, resulting in a possible loss of their competitive advantage (Milne, 2016). However, in order to maintain or minimize their profit decline, companies will either try to negotiate with the U.S on their trading terms or in the worst-case scenario, costly relocate their activities and abandon this market.

Brexit

Within the scope of the biggest and most important referendum of modern history, British people voted for the U.K to leave the E.U, in an act that reflects that British people are not keen on accepting the migration tendency and people’s diversity (Czinkota, 2016). According to the same author, Brexit carries the burden of a future conflict within not only the E.U but also between the U.S, weakening their relationships. The importance of Britain’s businesses is reduced, while the British pound has reached its lowest level in the last 31 years (Market Inspector, 2017).

As Brexit happened, the country fell into political uncertainty and turbulence. Financial Times (2016) proclaim that Britain is not ready to absorb the consequences of Brexit since the scene is still unclear. In the light of this uncertainty though, not only the U.K’s economy, but also businesses domestically and internationally are affected (Watts, 2017). The impact is great since, in accordance to Market Inspector (2017), exports will be affected if they leave the E.U without negotiating a new trade agreement-imposing tariffs-, resulting in a potential loss of U.K businesses’ competitive power in the E.U and global markets. Furthermore, the loss of access into the Single Market and higher trade tariffs will decrease the FDI flow in the U.K by 22%, a figure which may not be realistic due to the uncertainty of the future trading relations (Market Inspector, 2017).

Based on Bowler (2017), the fall of the pound benefited the exporting activity, but it also made travel into international destinations less affordable for the British public, but more affordable for the inbound tourists. However, the worst impact of the pound’s decline was observed in terms of import expenses; a major factor in the U.K’s car industry and in the food and drinks sector (Cox, Chu & Rodionova, 2017).

In addition to the general norm of Brexit, some companies already witnessed Brexit’s consequences and took premeasures in order to prepare for the upcoming changes, as depicted in the table below:

Figure 1 : Companies Statements of Action in light of Brexit. (Source: Market Inspector, 2017)

However, as suggested in Market Inspector (2017), despite the loss of negotiation power within the E.U, the U.K will possibly acquire more control over negotiation with countries outside the E.U, which will allow a fresh start for business deals with countries all over the world, exploring trades with China in a greater extent. By negotiating freely with other countries on its own terms, Britain can capitalize on new trading deals which will benefit international markets. The report produced by Irwin (2015) claims that Brexit exposed several countries in different magnitudes such as the Netherlands, Ireland, and Germany, due to their alignment with the U.K trading policies, while ‘export, supply chain, investment and policy interests of many large corporates would be adversely affected’ (p.39).

Similarly to the situation in the U.S, international companies which operated using the U.K as their base or were relying on the U.K’s business economy and economic importance, now face threats and have to be proactive for the future. This implies that marketers should now adjust their strategies to be relevant to the future agreement that the U.K will have with Europe and the world in general. Adaptation is gaining ground since Britain’s referendum was a clear sign of a form of xenophobia and introversion (Czinkota, 2016). Since new trade deals will be imposed and new non-tariff technical agreements will be made (Mor, 2017), product’s place, promotion and price will change, consequently marketers have to readjust not only the new elements of the marketing mix to be effective and competitive, but also the way they enter the market, by reassessing exporting and the advantages of FDI.

Conclusion

To conclude, an analysis of the relation between politics and international marketing was conducted. Radical changes in the political scene can occur in the most stable governments and are translated in changes in the business world. Tariffs, taxes, boarder checks, non-tariff technical barriers and exchange rates imposed by the new governments according to their campaigns and beliefs, reflect in a business’s international marketing strategy, as the liberation of the markets is now being narrowed and limited. Adaption is gaining power over standardization and companies re-evaluate their strategies under the light of the political changes and the risk within them. The scene in the U.S and U.K is still uncertain, and this feeling is not welcomed by international companies which hunt markets with balance and stability in their internal and external policies, affecting the way and the means which a business chooses to operate within or with them. As the future is unclear, and several agreements are in stake, the world in on the edge of major changes in two of the biggest and most important markets.

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