Let Us Organize World Trade

There is broad historic agreement that the World Trade Organization (WTO) has been one the most successful international institutions; its membership accounts for more than 98 percent of world trade. However, today’s global economic landscape is changing rapidly, coupled with retrenchment and distancing from multilateral agreements. Combined, these factors impact the discernible value and role of the WTO going forward.

Changed Patterns of Trade and Investment

The expansion and development of IT infrastructure, telecommunications, and computing made the global revolution of the last few decades possible. New technologies, nonexistent when the WTO was established in 1995, have become crucial for growth and development in this decade. The outsourcing revolution has affected the developing world in a major way: global manufacturing and new services have dramatically changed supply chains; corporate espionage and intellectual property infringements supported many corporate changes in developing countries; and WTO negotiations and augmented enforcement procedures have not been able to slow that trend.

Moreover, one of the most critical issues in global trade is the aspect of unprecedented imbalances. Today, China is the new top global merchandise exporter with a total of $2.263 trillion, or 16.25 percent of world exports, according to WTO reports. It is the largest global exporter of goods, 17 percent of world exports, and the third largest importer, 12 percent of global imports.

The United States is the main goods importer with 13.4 percent of the global imports, totaling $2.4 trillion. In 1994, the United States was running an annual merchandise trade deficit of about $120 billion; by 2017, the U.S. annual trade deficit with China alone has ballooned to over $375 billion.

Stalemate at the WTO: Too Big to Be Effective?

The last successful WTO negotiation — the Uruguay Round — was a result of a strengthened, single market in Europe, the creation of NAFTA, and several plurilateral agreements, such as the Information Technology Agreement (ITA).

The Doha Round of negotiations, beginning in November 2001, aimed to achieve major reforms in the international trading system, with an explicit focus on developing nations. Nevertheless, this premise failed; disagreements concerning the agricultural sector, free trade of services, and intellectual property rights have stalled negotiations.

Twenty years ago, the principal WTO concerns were pollution, global warming, disease, and structural unemployment — none of these agenda items, arguably, have been addressed effectively, much less solved.

Size is also an issue. The WTO is comprised of 164 members, with widely diverse perspectives, levels of development, linkages, and ambitions. The WTO system has become unwieldy because of the unanimity requirement of its voting process. The result: progress with new agreements is at a standstill. Case in point is the reduction of trade tariffs, which, at a global 3 percent of Most Favored Nations status, is at the same level as in 2000.

China: A “Rule Shaker” or a “Rule Maker”?

The West’s open invitation for China to join the WTO in 2001 paved the way for its rise to a global economic power. Since then, the balance of power at the WTO has changed dramatically. Chinese outward investment in the global economy has increased thirtyfold, from $7 billion (making up only one percent of the global FDI) to almost $200 billion (13 percent of the global FDI).

China entered the WTO as a “rule taker,” evolved into a “rule shaker,” and now aims to become a “rule maker.”

In fact, economic relations between China, the United States, and the EU define many of the agreements and disputes at the WTO. Xi Jinping’s “China Dream” of national rejuvenation could be seen as a way to reshape the international economic system, putting China at the center.

China has not been an easy partner for the West. Initial optimism that China would turn toward a free market economy has yet to come to fruition. Moreover, with its “capitalism with Chinese characteristics,” the country has taken the main benefits of the open trade system by creating major distortions and causing disputes that the WTO lacked the capacity to handle. Controversial issues include intellectual property rights (IPR), free market revisions through government subsidies and state-owned enterprises (SOEs), unequal conditions for market access with major restrictions to market entry in China, and unfair technology transfer. Foreign firms operating in China struggle against restrictive regulations — the government often requires them to hand over their intellectual property as a condition of market access. Asymmetrical market access and lack of reciprocity are magnified further at political levels.

With the existing WTO rule book, it is difficult to hold China accountable. Implications of Chinese “market distortion” and “unfair competitive conditions” consume global trade relations rhetoric; these opinions, voiced loudly by the current U.S. administration, are also shared broadly by other players, such as the EU and Japan. Due to high trade deficits, the United States is pushing for WTO reforms, increasing tariffs, and blocking the nominations of seats on the WTO’s appellate body (where the U.S. is a major player in the dispute resolution process) as leverage. Desired reforms aim to regulate market distortions caused by government interventions, simplifying the process of gathering information on unfair trade and investment practices, broadening the scope of banned subsidies, and setting boundaries to proportionate retaliations. But, at the end of the day, why would China agree on reforms that jeopardize its state-run economic model?

The WTO as a Reflection of a “New World”

The WTO does not operate in isolation from changes and new developments impacting trade. In the last two decades, the world’s macroeconomic environment was shaken by at least two significant events: the spread of terrorism, and the financial crisis of 2008. Terrorism has enhanced the inward focus of the political and economic aspects of national security; the global recession has caused an inward retraction of production and services. International economic issues were largely ignored as attention shifted to domestic job creation, the security and protection of domestic credit markets, and enhancing liquidity. Further, financial and political conflicts seem to foster greater polarization among legislators in many countries around the world.

As a result of continued stalemates and disagreements at the WTO, external actors are adopting a new “do-it-yourself” approach defined by preferential plurilateral trade negotiations — handmade for and benefitting only a limited number of players.

In addition, there is the issue of China’s growth in influence. In September 2018, the United States together with  the EU and Japan signed a brief statement voicing shared concerns regarding the future of the WTO, questioning its validity as a primary platform for multilateral trade. As an immediate result of difficult trade relations between the United States and China, and tremendous  pressure applied by the current U.S. administration, China afforded European companies access to some sectors, while pledging to cooperate with the EU on WTO reforms — a decision taken in July 2018 during the EU-China Summit.

Since the appearance of President Xi Jinping at the World Economic Forum two years ago, Beijing has been signaling that it is willing and prepared to assume the role of a new custodian of globalization. However, it seems obvious that China would not accept any reforms at the WTO, or any level, that would jeopardize its own economic model and welfare. At the same time, China wants to preserve the existing global trade order, as the outside world is more crucial than ever for its economic development.

Today’s global economic realities are not only introducing a new set of concerns and means of doing business, they are also challenging the very effectiveness of the WTO’s historical role as an arbiter of world trade.

Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies. The views presented are those of the author(s) and do not necessarily represent views and opinions of the Department of Defense or the George C. Marshall European Center for Security Studies. 

Michael R. Czinkota is a professor at the University of Kent in Canterbury and at the McDonough School of Business at Georgetown University, He is a former Deputy Assistant Secretary of Commerce in the United States Department of Commerce. 

In the Interest of Food

Michael R. Czinkota

While around the globe we all celebrate some form of Thanksgiving, the food consumed does vary. In the U.S. we consume Turkey – usually store bought, not hunted. Bavaria sees such celebration with Beer and Bratwurst. In China the celebratory meal consists of tea and Hot Pot.

“Everything can be solved by a hot-pot. If not, it can be solved by two.” These words are popular in China. A staple comfort food, the hotpot is a symbol of Chinese leisure life and culture. Similar to the French cheese fondue, the traditional Chinese dish consists of a communal pot in which small ingredients are dipped. The ritual always involves gathering around the dining table, with a large hot pot of broth placed at the center. While simmering, the broth is then enriched by fresh and raw ingredients. These include finely cut meats, vegetables, tofu, and seafood that are cooked in the broth.

The dish can be found in homes and in restaurants across China and other parts of Asia. Recently, the hotpot found its way in other regions around the world as Hai Di Lao International Holding Ltd. – China’s largest hotpot restaurant group in terms of sales – gained market shares abroad. Most hotpot restaurants will attempt to distinguish themselves with their unique flavors and taste, but nothing compares to Hai Di Lao’s secret recipe.

Aside from the delicious hotpot, Hai Di Lao’s success is due to its remarkable service strategy. Hai Di Lao aspires to make every customer feel special. Outside the restaurants, customers line up at the door, waiting with great patience as they indulge in Hai Di Lao’s complimentary services. Such services range from free snacks and beverages, to free massages and manicures. Once customers enter the restaurant, waiters greet them, always with a smile, while subsequently taking their order with speed and accuracy. If dining alone, the restaurant provides its customers with a stuffed toy to be seated in front of them, in order to keep them company.

(All photos credit to Shiying Wang, Georgetown University.)

Although the hotpot restaurant business is extremely competitive, the chain succeeded in standing out from other hotpot restaurants by creating the ultimate dining experience. Branches are managed directly by a shared and central distribution network, ensuring the standardization of food quality across all its stores. By offering exceptional customer service, and adopting a supply chain management system, all Hai Di Lao subsidiaries tend to fulfill, and at times exceed, customer expectations.

Gaining increasing popularity in China, plans call for the chain to enter overseas markets, including the UK and Canada. In late September, Hai Di Lao presented an IPO to help fund and continue its expansion. Initially priced at $2.27 per share, the public offering gave the firm a valuation of about $12 billion. Some people may argue that Hai Di Lao’s IPO value is a bit high, considering its lack of success in the United States.

Back in 2013, Hai Di Lao opened its first U.S. restaurant in Arcadia, California. The restaurant received negative reviews on Yelp and less and less customer retention. Reviewers complained about Hai Di Lao’s overpriced menu, and intrusive and incompetent staff service. Despite its roaring success in China, the company failed to stand out in the United States and was proven to be a big disappointment.

Fast forward to today – with an international expansion right around the corner, how can Hai Di Lao succeed outside of China? Hai Di Lao will have to face more than its competing hotpot counterparts, and learn from its mistakes with the earlier US expansion. Challenges will also come from the local food industry, including other comfort foods such as hamburgers and hot dogs.

In overseas markets, new conditions will apply. First, the chain needs to develop a differentiation strategy by offering complimentary services that are less intrusive and that adhere to U.S. standards. Since offering mani-pedis would be considered a health code violation and waiting to hand tissue paper to customers after washing their hands would seem strange, Hai Di Lao needs to tailor its services to fit the American market’s wants and needs. Such services comprise complimentary hair ties, phone chargers, restroom grooming kits, and an iPad ordering system. They also provide video conferencing rooms, in which customers can enjoy their hotpot experience while video chatting.

Additionally, the firm needs to focus on the product and pricing strategy. Chinese food in the U.S. is still labeled as inexpensive, fast food. Hai Di Lao prices its authentic dining experience between $30 and $50 per person, which may seem costly to American customers. In an attempt to retain more customers, the company can either expect to lower its prices to be more local-consumer friendly or to provide more value to its American patrons through its complimentary services.

To succeed in overseas markets, Hai Di Lao needs to gain a comprehensive understanding of its target markets. Hai Di Lao is strengthening its products by offering locally grown items. The flavors will reflect more local preferences and flavors. This strategy should attract the American consumer who is used to eating fast food and “bowling alone”. Hai Di Lao will take their habit of eating alone into account by offering small one-person pots, perhaps at the expense of an authentic, communal Chinese hotpot experience. Some people may argue that Haidilao’s IPO value is a bit high. It took place on September 26 and initially got the price at $2.27 per share, giving it a valuation of about $12 billion. But if the demand is strong and the company is able to appeal to the American consumer, Hai Di Lao will gain more deal size and American patrons willing to invest. As the Chinese proverb goes, “There are a thousand Hamlets in a thousand people’s eyes”. There also can be a thousand hotpots in a thousand people’s mouths.

Professor Czinkota teaches international business and trade at Georgetown University and the University of Kent. His latest book is ‘In Search For The Soul Of International Business (Businessexpertpress.com) 2018

Package from China: Who pays the freight?

Michael R. Czinkota


Running a small business which ships low weight merchandise, say 10 T-shirts or small hardware from China to the United States, made logistics cost easy. The U.S. provided for a large shipping discount of 40% to 70%.


Such generosity came from U.S. membership in the Universal Postal Union (UPU). Founded in 1874, the UPU is the international postal organization in Switzerland, committed to a smoothly running international postal system.

In 1969, the UPU’s developed country members implemented discounts for poor nations when shipping small parcels. China then was isolated with few outward shipments. In consequence, consumers in Washington, the shipping cost of a face cream was more affordable from China than from Los Angeles. Today, however, China delivers more than one billion small packages a year to the U.S. and the special discount treatment continued.

Then there came change. The Trump administration announced U.S. withdrawal from the UPU as of October 17, 2018. The objective was to arrive at competitive and fair global shipping rates. This move showed the Trump Administration’s willingness to leave quit multilateral agreements judged unfavorable to U.S. interests. Although the UPU withdrawal process takes one year, U.S. deep discounts for Chinese packages ended immediately.
Now China Post has introduced a new Express Mail Service. It raised the price of packages to the U.S. from $ 30 to $34 for the first 0.5kilogram shipped. Who pays, who benefits?
The United States Postal Service (USPS) can use higher payments from China. But transshipments through other nations and competition will lead to reduced shipping volume.

The price advantage of many Chinese e-commerce vendors declines. Higher cost of shipping reduces this advantage even further. Most endangered are eBay type international vendors. Sellers who compete on price alone face higher cost and more competition. To survive it will become new practice to find alternatives for product and service delivery both for processes as well as markets.

Adjusting the rules for new conditions makes sense. Few parameters conditions have remained static for 144 years. The UPU should get ready for a significant restructuring. What applies to China, the U.S., and other relationships, applies to other nations as well. One should expect further exploration of antiquated subsidies which have been bypassed by new market conditions. Such tracking can identify new opportunities for change and innovation.

De-subsidization will create market alternatives based on new forms of delivery. Such adjustments will be cost analyzed and competitively compared to achieve higher efficiency. Legislators and internationally active framers of distance trade, such as the World Bank and the World Trade Organization can use this opportunity to pinpoint, develop and scale up models which reflect transport cost sensitive sectors and practices. In addition to greater accuracy and fairness, the President’s initiative for higher prices can lead to higher capabilities, more efficiencies and better services. A good start!

Professor Czinkota teaches international business and trade at Georgetown University and the University of Kent. His latest book is ‘In Search For The Soul Of International Business (Businessexpertpress.com) 2018