Given the lack of tangible proof that Japan's NTMs are in fact covert trade barriers, economists have broadened their search for indirect evidence that these barriers exist. Knetter found such evidence when he analyzed the pricing policies of German companies exporting goods to Japan. In a study published in the International Journal of Industrial Organization , Knetter compared the prices set in Germany for some 37 broad categories of products bound for Japan with the prices set for those same goods sold to the US, the UK, and Canada between 1975 and 1987. He found that in most of these categories, Germany charged Japan between 10 percent and 45 percent more per unit for goods than the prices it charged other countries. According to Knetter's theoretical model, exporters establish f.a.s.
Profit maximization involves a trade-off between profit margins and market share.
This scenario is particularly likely to occur when the exporters have a chance to recover at least some portion of the excess retail price for themselves, as is the case with NTMs. On the other hand, if high retail prices are attributable to domestic distribution problems, exporters stand to receive nothing and therefore have no incentive to set high prices in the first place. Given this model, says Knetter, the high f.a.s. prices set by German exporters to Japan refute the distribution cost theory and strongly support the argument that restrictive NTMs are operative in Japan. The next step, he says, is a closer examination of the inverse relationship between the f.a.s. price of exported goods and the quantity shipped. Michael M. Knetter is associate professor of business administration at the Tuck School of Business.