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Mba1034 cg law ethics week 13 political economy global trade 072013

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Political economy, International Trade, Emerging markets, WTO, European Union

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Mba1034 cg law ethics week 13 political economy global trade 072013

  1. 1. POLITICAL ECONOMY AND INTERNATIONAL TRADE Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford) Visiting Fellow, Birmingham City University Visiting Professor, Shenzhen University MBA1034 GOVERNANCE, LAW & ETHICS
  2. 2. • 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
  3. 3. 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.
  4. 4. 2.1 POLITICAL ECONOMY OF EUROPEAN UNION
  5. 5. Topics Covered • Introduction • The European Union • The institutions of the European Union • Nonmarket issues • Interests and their organization • Nonmarket strategies in the European Union
  6. 6. Introduction • The European Union (EU) has taken landmark steps toward economic and political integration
  7. 7. 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
  8. 8. 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
  9. 9. The Maastricht Treaty • Established a timetable for: –A common European currency –An independent European Central Bank
  10. 10. The Treaty of Lisbon • Formally recognized the Charter for Fundamental Rights –Made human and civil rights enforceable by the European Union
  11. 11. EU Legislative and Administrative Institutions
  12. 12. The Court of Justice • Supreme judicial body of the Union • Has the authority to overturn decisions that conflict with the EU treaties
  13. 13. 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
  14. 14. The EU legislative process • The EU has three basic procedures for developing directives and regulations –Consultation –Co-decision –Assent
  15. 15. 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”
  16. 16. Competition Policy • Includes EU policies involving: –Structure, conduct, and support of industries, including state aid • Enforcement • Mergers
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. Interests and Their Organization • Interests are pluralistic in the EU –Organization is different: •In part because the governments of the member states are parliamentary
  21. 21. 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
  22. 22. EU Institutions, Constituencies, and Access
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 2.2 EMERGING MARKETS AND RISKS
  27. 27. Topics Covered • Introduction • Country assessment • Opportunities • Risk assessment • Management in the nonmarket environment
  28. 28. 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
  29. 29. Factors in Country Assessment • Individual freedom • Economic freedom • Corruption • Ease of doing business • Competitiveness • Political risk • Sovereign default risk • Use of the measures • Culture
  30. 30. Rankings of BRIC Countries
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. Bottom of the Pyramid
  35. 35. BRIC Markets Pyramid
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. The Fair Trade System • Challenges –A large price premium that may suppress the demand –Quality concerns
  40. 40. 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
  41. 41. Sources and Types of Risks • Coups • Democratic revolution • Policy risk • Regulatory risk • Price controls • Financial restrictions • Nationalization and seizures 17-44 • Political megalomania • Political corruption • Ethnic and religious conflict • Media restrictions • Environmental risks • Market risk hedging
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. 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
  46. 46. 2.3 INTERNATIONAL TRADE AND WTO
  47. 47. 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
  48. 48. 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
  49. 49. International Trade Policy Process
  50. 50. 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
  51. 51. Production and Consumption Possibilities — Autarky 19-54
  52. 52. Production and Consumption Possibilities with Trade
  53. 53. 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
  54. 54. The Politics of International Trade Policy
  55. 55. Asymmetries in the Politics • Due to: – Sunk resources – Rents on those resources
  56. 56. 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
  57. 57. The World Trade Organization (WTO) • The WTO agreements –GATT –GATS –TRIPS –Dispute settlement –Trade policy reviews –The Agricultural Agreement –Agreement on government procurement
  58. 58. 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
  59. 59. Other Trade Agreements • NAFTA • Common Market of the European Union • A large number of bilateral and multilateral agreements
  60. 60. 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
  61. 61. Major Components of U.S. Trade Law Section 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
  62. 62. 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
  63. 63. 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
  64. 64. 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
  65. 65. Channels of Protection • Firms, labour unions, and industries can seek protection from imports through: –Political channels –Administrative channels
  66. 66. 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
  67. 67. 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
  68. 68. 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
  69. 69. 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
  70. 70. 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
  71. 71. 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
  72. 72. 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
  73. 73. 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
  74. 74. 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
  75. 75. 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
  76. 76. CASE DISCUSSION : TOYS R US
  77. 77. Core Readings • Baron, David P.(2013) Business and its environment, 7th Edition, Pearson, Ch.15-19
  78. 78. 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.
  79. 79. QUESTIONS?

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