Mba1034 cg law ethics week 13 political economy global trade 072013

POLITICAL ECONOMYAND

INTERNATIONAL TRADE

Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford)

Visiting Fellow, Birmingham City UniversityVisiting Professor, Shenzhen University

MBA1034 GOVERNANCE, LAW & ETHICS

• Discussion: Forex and Hedging1

• The European Union and institutions

• Emerging markets and risks• International trade and WTO rules

2

• Case Discussion : Toys R Us and Globalisation3

Today’s Overview

1. Open Discussion

• Bartram, S (2008) What lies beneath: foreign exchange rate exposure, hedging and cash flows. Journal of Banking and Finance, 32 (8). pp. 1508-1521.

2.1 POLITICAL ECONOMY

OF EUROPEAN UNION

Topics Covered• Introduction• The European Union• The institutions of the European

Union• Nonmarket issues• Interests and their organization• Nonmarket strategies in the

European Union

Introduction

• The European Union (EU) has taken landmark steps toward economic and political integration

The European Union• Post World War II, Europeans

recognized the need to increase trade and encourage political cooperation–Treaty of Paris–Treaty of Rome–Treaty of Brussels–Treaty of Nice

The Single European Act• Took effect in 1987• Addressed several impediments to trade • Provided measures to facilitate access to

national markets• Increased the power of the EU

government relative to the governments of the member states:–By limiting the use of the unanimity rule

for decision making

The Maastricht Treaty

• Established a timetable for:–A common European currency –An independent European

Central Bank

The Treaty of Lisbon

• Formally recognized the Charter for Fundamental Rights–Made human and civil rights

enforceable by the European Union

EU Legislative and Administrative Institutions

The Court of Justice

• Supreme judicial body of the Union • Has the authority to overturn

decisions that conflict with the EU treaties

The European Economic and Social Committee (EESC)• An advisory body whose 344 members

represent employees, employers, farmers, trades, and other interests–Based in Brussels

• Has six sections–Provide forums to express opinions on

Commission proposals and suggest changes in them

The EU legislative process

• The EU has three basic procedures for developing directives and regulations–Consultation–Co-decision–Assent

The European Central Bank and Monetary Union• Council of Ministers endorsed a series of steps

to realize an Economic and Monetary Union (EMU)– Commenced in 1998 with the formation of the

European System of Central Banks and the European Central Bank (ECB) • To conduct a single monetary policy for its members

• ECB is an independent central bank patterned after Germany’s central bank– Stated primary objective of the ECB is “to maintain

price stability”

Competition Policy

• Includes EU policies involving:–Structure, conduct, and

support of industries, including state aid

• Enforcement•Mergers

State Aids and the Common Agriculture Policy• State aids - Subsidies paid by

member state governments to their industries or government-owned companies• Common Agriculture Policy (CAP)

- Provided subsidies to farmers totaling €41 billion in 2009

The Social Charter, Social Democracy, and Labour Markets• The Social Charter provides a vision for:

– Free circulation of labour and the rights to fair wages– Improvement of living and working conditions– Social security– Free association and collective bargaining– Vocational training and education– Equal treatment for men and women– Information– Consultation and participation for workers– Health protection and safety in the workplace– Protection for children– Adolescents and the elderly– Protection of the disabled

Nonmarket Issues

• Categorized by:–The level at which they are

addressed–The EU level versus that of a

member state–Whether they are specific to an

industry or to an individual firm

Interests and Their Organization

• Interests are pluralistic in the EU–Organization is different:•In part because the governments of the member states are parliamentary

Nonmarket Strategies in the EU• Much of the nonmarket action in the EU takes place

behind the scenes– Most businesses avoid taking public action that might be

subjected to criticism

• Because of the pervasive influence of government in most EU countries:– Firms seldom engage in open confrontation with

government

• Lobbying is the principal political activity for implementing:– Representation – Informational strategies in the EU

EU Institutions, Constituencies, and Access

Case - The European Union Carbon Tax• The carbon/energy tax would affect production

and consumption decisions throughout the European Union

• The tax would ultimately be borne in large part by individuals and would have the greatest impact on those who intensively used energy, and particularly carbon-based fuels

• A carbon/energy tax also would generate substantial revenue for governments

• Trade associations opposed the tax and argued for voluntary conservation measures

Case - The European Union Data Protection Directive• In 1995 the European Union enacted a Directive on

Data Protection to protect the privacy of EU residents when using the Internet, telecommunications, and various commercial transactions

• EU did not have an explicit rule about personal information processed through cloud computing, and since the processing could take place anywhere in the world, concerns were raised

• The modernization of the Directive could have broad ramifications for e-commerce, social media, and mobile communications companies

Case - The Euro Crisis

• Greece joined the euro zone in 2002 but never met the qualification criteria– The sovereign debt of Greece reached 143 percent of GDP in

2010 and long-term borrowing became increasingly difficult to arrange

• The risk of default was borne by the holders of Greek sovereign debt and lenders to Greek banks and companies

• With the situation dire the so-called troika, EU, IMF, and ECB, provided €100 billion to Greece in May 2010

• It was feared that financial markets would drive other countries out of the euro affecting the world economy

2.2EMERGING MARKETS

ANDRISKS

Topics Covered

• Introduction• Country assessment• Opportunities• Risk assessment• Management in the nonmarket

environment

Introduction• Eighty percent of the world’s

population lives in emerging markets countries• Opportunities in many emerging

market countries are very attractive to firms• Foreign direct investment has flowed

to the relatively stable and lower-risk countries

Factors in Country Assessment• Individual freedom• Economic freedom• Corruption• Ease of doing business• Competitiveness• Political risk• Sovereign default risk• Use of the measures• Culture

Rankings of BRIC Countries

Types of Opportunities in Emerging Markets• Opportunities in emerging

markets are of two basic types:–Use a country to export goods to

better developed countries and markets–Use the opportunity that stems

from the domestic economy

Underdeveloped Markets and Business Groups• Domestic capital markets may be

inadequate for the financing needed in emerging market economies–Has led to the formation of

business groups in a number of countries as a means of providing financing and diversifying risks

Opportunity at the Bottom of the Pyramid?• C.K. Prahalad (2004) argued that:–Companies had overlooked as

customers the 4 billion people in the world who lived on less than $2 a day–Private companies could make a

“fortune” serving these consumers, helping to bring them out of poverty

Bottom of the Pyramid

BRIC Markets Pyramid

Opportunity at the Bottom of the Pyramid?• Karnani criticized Prahalad’s thesis–Argued that:• It was “logically flawed and

inconsistent with the evidence”• The market at the bottom of the

pyramid was not that large and was costly to serve

Microfinance

• Modern version due to Muhammad Yunus–Grameen Bank - Loaned to groups or

circles of women, who were responsible for:• Allocating the borrowings among

themselves • Ensuring that the borrowings were

repaid

Fair Trade

• Fair trade movement was begun to improve the lives of:– Poor farmers– Workers trapped by market conditions

• Can be understood as an approach to improving the well-being of poor farmers in developing countries by:– Circumventing markets– Coordinating market behaviour

The Fair Trade System

• Challenges–A large price premium that

may suppress the demand–Quality concerns

Risk Assessment

• Risks in emerging markets can differ in magnitude and nature from those in developed countries–Risks are greater in magnitude in emerging

markets– Foreign risks arise from a broader range of

factors than do domestic risks–Risks can depend on the country of origin

Sources and Types of Risks

• Coups• Democratic

revolution• Policy risk• Regulatory risk• Price controls• Financial restrictions• Nationalization and

seizures17-44

• Political megalomania

• Political corruption• Ethnic and religious

conflict• Media restrictions• Environmental risks• Market risk hedging

Management in the Nonmarket Environment

• Managing policy risk:–Understand the preferences of the actors

in the market and nonmarket environments–Have a structure analogous to that of the

intelligence community that can provide information and assessments– Influence the risk through collective action

and coalitions

Case - Social Entrepreneurship: Kiva

• The Flannerys sent e-mail to their wedding guest list announcing the opportunity to lend, and over the weekend all eight were funded– They also sent out a press release that was posted on Daily

Kos, and $10,000 was raised in one day

• A year later Kiva was featured in a 15-minute segment on PBS, and it was deluged with funds– Matched lenders with entrepreneurs over the Internet– Did not select the entrepreneurs but instead relied on field

partners– On its Risk and Due Diligence page Kiva warned lenders

about the potential risks associated with their lending

Case - Equity Bank of Kenya

• Beginning in 1984 as a microfinance lender, Equity Bank of Kenya had: – Focused on providing banking services to

the unbanked and to small account holders• The bank had begun to expand the

scope of its banking activities beyond those of its individual and household base

• Mobile phone banking

Case - Equity Bank of Kenya

• Agency banking– A shopkeeper would act as the front office with the

bank managing and guaranteeing deposits– The agent would receive training and be provided with

the necessary technology to handle a variety of banking transactions

• Equity Bank’s overall strategy was to expand in COMESA (Common Market of East and Southern Africa) countries

• Despite the promising market opportunities in East Africa, shares in Equity Bank fell to a 20-month low

2.3INTERNATIONAL TRADE

ANDWTO

Topics Covered• Introduction• The economics of international trade• The political economy of international trade

policy• International trade agreements• U.S. trade policy• The political economy of protectionism• The political economy of market opening

Introduction• International trade policy is the result of

economic and political forces– The principal economic force is the gains from

trade• Provides the economic rationale for free trade

– The principal political force • Benefits that firms, consumers, employees,

and suppliers can obtain through favorable trade policies

International Trade Policy Process

The Economics of International Trade

• Competitive theory - Based on the gains from trade–Evident in the case of a country

that cannot produce a product that its citizens wish to consume

Production and Consumption Possibilities — Autarky

19-54

Production and Consumption Possibilities with Trade

The Economics of International Trade

• Strategic trade theory - Economists have considered whether a nation can gain from a strategic trade policy–Intervention to: •Protect domestic industries• Subsidize exports• Stimulate demand for domestic goods

The Politics of International Trade Policy

Asymmetries in the Politics

• Due to:– Sunk resources – Rents on those resources

The World Trade Organization (WTO)

• The WTO has 154 member countries• Three principal roles– Provides a system of agreements that helps trade

move more freely– Provides a forum for trade negotiations such as

the telecommunications agreement concluded in 1997

– Provides a dispute settlement mechanism to resolve trade disputes in a timely manner

The World Trade Organization (WTO)

• The WTO agreements–GATT–GATS– TRIPS–Dispute settlement– Trade policy reviews– The Agricultural Agreement–Agreement on government procurement

Antidumping, Countervailing Duties, and Safeguards• Antidumping had been used almost

exclusively by developed countries• Countervailing duties are allowed by the

WTO agreements to offset the effects of subsidies provided by another country

• Temporary safeguards against a surge in imports can be taken to avoid “serious injury” to a country

Other Trade Agreements

• NAFTA • Common Market of the

European Union• A large number of bilateral and

multilateral agreements

The Structure of U.S. Trade Policy

• The politics of international trade takes place in four institutional arenas– Cabinet departments– Regulatory agencies– Congress– The Office of the President

• The administration of trade policy has been placed with executive branch agencies– Primarily the Departments of the Treasury, State,

and Commerce

Major Components of U.S. Trade LawSection 201 (temporary safeguards)

Provides for temporary relief for domestic industries seriously injured by increased imports; no unfair trade practice is required

Section 301 (presidential retaliation)

Provides for action against countries that restrict imports of U.S. goods or subsidize exports to the United States

Section 731 (antidumping)

Provides authority for the imposition of duties on goods imported to the U.S. at a price that is less than fair value (LTFV)

Section 303 (countervailing duties)

Provides authority for the imposition of duties against those countries that subsidize their domestic industries

Section 337 (intellectual property)

Allows retaliation against countries that violate U.S. patents, copyrights, or protected trade secrets

Trade Adjustment Assistance

Provides assistance for those injured by imports

The Political Economy of Protectionism• Protection applies to two kinds of

conditions– Predatory trade practice - Where a foreign

firm sells in the U.S. at a price below its cost• Export subsidization or predatory dumping

– Relative efficiency - When foreign firms have lower costs than U.S. firms and sell in the U.S. at prices above their costs yet below the prices of domestic goods

The Political Economy of Protectionism

• The relative inefficiency of domestic industries is addressed in four ways– Those injured may be compensated under the

Trade Adjustment Assistance Act– Safeguards relief can be granted under Section 201

in the form of temporary tariffs, etc.– Relief is granted under Section 731 when a

petitioner’s dumping complaint is affirmed by the ITC and the ITA

– Protection is provided by measures ranging from tariffs to voluntary agreements to limit imports

The Cost of Protectionism

• Consumers bear the cost of protectionism–Consumers are costly to organize– Individual consumers are unlikely to act

politically on trade protection issues–Organized consumer groups have largely

been inactive in cases involving protection of domestic industries

Channels of Protection

• Firms, labour unions, and industries can seek protection from imports through:–Political channels–Administrative channels

The North American Free Trade Agreement (NAFTA)• A free trade agreement and not

a market integration agreement • Provided for the elimination of

tariff and nontariff barriers over a 10-year period–Some barriers were to be phased

out over 15 years

The North American Free Trade Agreement (NAFTA)• Measures were taken to reduce opposition– NAFTA included transition provisions for a

gradual phase out of trade barriers to give industries time to adjust

– To obtain congressional votes, the Clinton administration made a number of side deals outside the trade area

– Side agreements were concluded to reduce the opposition of environmental groups and organized labour

Market Opening Under the Threat of Retaliation• Most effective means of

addressing foreign barriers to trade is through negotiations–Countries, particularly the United

States, have used retaliation and its threat to provide leverage

Bilateral Free Trade Agreements

• United States had 17 bilateral free trade agreements in effect–Free trade agreements were

negotiated with South Korea, Panama, and Columbia in 2006 by the Bush administration

Case - Cemex and Antidumping

• In August the U.S. International Trade Commission ruled that: – Cemex had unfairly depressed cement prices in the

southern and southwestern United States by dumping cement and cement clinker

• The antidumping laws codified in Section 731 allowed: – Either a private party or the International Trade

Administration (ITA), an arm of the Department of Commerce (DOC), to file a petition for redress

• To find material injury or the threat of material injury, the ITC had to first determine the “like product” and the “domestic industry”

• From the beginning of the process, Cemex complied fully with the requests for data

Case- Cemex and Antidumping

• Zambrano decided to reduce substantially Cemex’s exports to the United States

• Cemex maintained a substantial Type II (bulk) cement market in Mexico

• Cemex requested administrative reviews of the duty– In the first review the petitioners alleged that

Cemex had created a fictitious bulk market in its home country to reduce the duties

Case - Compulsory Licensing, Thailand, and Abbott Laboratories

• Brazil had threatened to invoke compulsory licensing in 2000 on three AIDS drugs, including one produced by Abbott

• In 2004 Thailand introduced a national health care plan

• In January 2007 Thailand notified Abbott and Sanofi-Aventis that compulsory licenses would be issued for Kaletra and Palvix, respectively

• Abbott publicly objected and announced that it was withdrawing all pending applications for marketing new drugs in Thailand

Cases - Compulsory Licensing, Thailand, and Abbott Laboratories• After discussions with the

World Health Organization, Abbott agreed in April 2007 to change its strategy and negotiate with the Thai government

• The French AIDS activist group Act Up-Paris launched a cyber attack on Abbott’s Web site

– Disrupted services, including its online sales

• Brazil decided to use compulsory licensing as a bargaining tactic

Case - The Airbus and Boeing Trade Disputes• The market for large civil

aircraft is dominated by Boeing and Airbus

• The characteristics of the LCA market explain the emergence and persistence of the current duopoly

• LCA market is characterized by a steep learning curve due to the technological complexity of the production processes

• Economies of scope

Case - The Airbus and Boeing Trade Disputes

• The Bilateral Agreement in 1992 did not seek to eliminate subsidies in the LCA industry– Instead allowed the EU and the US to

continue to provide a limited level of support to their respective aircraft industries

• On October 6, 2004, the US withdrew from the Bilateral Agreement

• The US complained about several forms of aid allegedly granted by the EU

• The EU and its member states filed a counterclaim:– Accusing the US of providing subsidies

to Boeing that were inconsistent with the SCM Agreement and the GATT

CASE DISCUSSION : TOYS R US

Core Readings• Baron, David P.(2013) Business and its environment, 7th

Edition, Pearson, Ch.15-19

Next Week’s Ideas for Discussion

• Bartram, S (2008) What lies beneath: foreign exchange rate exposure, hedging and cash flows. Journal of Banking and Finance, 32 (8). pp. 1508-1521.

QUESTIONS?