THE WORLD OF NAMES
The value of a brand name is that it wards off competition. That the buyers are so much richer than the producers makes it very important for the seller or the intermediary to focus on quality rather than price.
What makes, for any potential new entrant, the challenge of undercutting the incumbent even harder is that the price paid to the supplier tends to be a small part of what a good-quality product is worth to the buyer. Indeed, branding and distribution costs are often much larger than manufacturing costs. For many items, the cost of production is no more than 10–15 percent of the retail cost. This means a more efficient producer can do very little to affect the final price of the product in proportional terms. Cutting his cost of production by 50 percent would only reduce the overall cost of putting the product in the hands of the buyer by at most 7.5 percent.That could still be a significant amount of money, but as a large literature has demonstrated, proportional changes are what buyers seem to care about. In a classic experiment, one group was asked whether they would drive twenty minutes to save $5 on a $15 calculator and another group whether they would do the same for a $125 calculator. Twenty minutes is twenty minutes, and $5 is $5, but the answers were very different: “68 percent of the respondents were willing to make an extra trip to save $5 on a $15 calculator; only 29 percent were willing to exert the same effort when the price of the calculator was $125.” The point is that $5 is a third of $15 but only 4 percent of $125, which is why they switch in one case but not the other. Consumers are unlikely to switch sellers to save 7.5 percent.35
What this means is China’s prices can increase quite a bit without anyone really noticing. Moreover, there is no reason for these prices to significantly increase anytime soon. China is a big country with a lot of very poor people willing to take jobs at current wages, so costs will remain low. Countries like Vietnam and Bangladesh that aspire to be the next China, the supplier of every kind of cheap manufacture to the world, might spend a long time waiting in the wings. And it is a bit frightening to imagine just how long that could be for Liberia, Haiti, and the Democratic Republic of the Congo, which would like to inherit the same mantle one day, once Bangladesh and Vietnam are too rich to want it.
The outsized role of reputation means international trade is not just about good prices, good ideas, low tariffs, and cheap transportation. It is very difficult for a new player to enter and take over a market, because they start without reputation. This along with the stickiness of labor means the easy flow of people and moneys that free trade is meant to leverage, and which the Stolper-Samuelson thesis is based on, does not work nearly as well on the ground.