Import parity price

Import parity price or IPP is defined as, “The price that a purchaser pays or can expect to pay for imported goods; thus the c.i.f. import price plus tariff plus transport cost to the purchaser's location. This and the export parity price together define a range of the possible equilibrium prices for equivalent domestically produced goods”.^[1]

A simpler definition is used by the UN World Food Program: “The import parity price (IPP) is the price at the border of a good that is imported, which includes international transport costs and tariffs”.^[2]

The USAID Market and Trade Glossary definition is: "Import parity price (IPP) – is the monetary value of a unit of product bought from a foreign country, valued at a geographic location of interest in the importing country".^[3]

The IPP is used in International trade and is sometimes referred to as the International Benchmark Price. Both have the same meaning.

The phrase “...possible equilibrium prices for an equivalent domestically produced good.” in the first definition (above) is normally qualified by the following considerations:

• if the goods in question are not produced but is naturally occurring, such as water, a mineral or farm produce, and the population has benefitted from this bounty or produce at no cost or at local prices before import/export trade in the goods commenced, the domestic price of locally produced goods must remain the same and may not be influenced by the IPP;
• if a quantity of imported goods is less than the quantity available locally, the locally produced goods must continue to be sold at their historic prices and the cost of the imported quantity covered by its value being absorbed (added) to the quantity cost of the goods being sold in the domestic market;
• if the imported quantity is more than the quantity available locally, the cost of the imported quantity is covered by its value being absorbed (added) to the quantity cost of the goods being sold in the domestic market; and
• If there are regional divisions or markets within the country, the above considerations usually apply only to the region or market that imports the goods; and the domestic selling price in the regions or markets that do not import the goods is not affected by the IPP.

The IPP or International Benchmark Price is 'set' periodically (usually monthly) by the country that exports the largest volume of a commodity. Other exporting countries may set their own export prices or use the IPP, whichever is advantageous to them.

The selling price of imported goods is the sum of its cost, tariffs, freight, insurance and other charges including profits. The IPP is often used by sellers instead of the import price when the IPP is higher and provides a profit advantage to the seller. The price of imported goods or the IPP cannot be applied to locally produced goods of the same type whose local-production price is lower than the imported goods unless the quantity that is imported is vastly more than the quantity that is locally produced.

The IPP is not applied to locally produced goods in a regional market that is self-sufficient in the goods as this would be unfair to the consumers in the region and lead to an exorbitant profit for the seller. In such cases, the selling price is determined by the production cost in the region and governments may introduce price control to protect consumers against attempts by sellers to raise prices, particularly in the case of essential commodities such as water, food and fuel.

Where a country or a region in a country has a surplus of a product that is exported, consideration is given to the IPP when determining the export price or the Export Parity Price or EPP.”.^[4] The EPP applies only to the quantity that is exported and not to the quantity that is sold domestically.

Import Parity Price has no economic or trade validity. It is considered a variation of Purchasing Power Parity, which is an entirely different concept that is economically accepted. IPP is a recent concept introduced as a result of globalisation by commercial organisations to enable them to profit from imports and/or exports, mainly in developing countries. IPP cannot therefore be cited as a principle or policy to determine the local selling price of a locally produced commodity.

Developed countries such as the US, UK, Canada, Germany, etc., do not use the IPP to determine local selling prices. For example, in the US, which imports about 30% of the crude oil it consumes, the price of fuel is determined by the local production cost of gasoline, diesel or propane, including refinery cost, with the cost of any imported crude oil taken into consideration (added) when calculating the selling price. This practice is followed in almost every developed country.

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