Sailors On the Ship Europa: No Easy Cruise Ahead

They say more marriages might survive if the couple realized that sometimes the better comes after the worse. Unfortunately, political partners tend to have little patience and loyalty. We have seen the referendum in Scotland that nearly tore the United Kingdom asunder. Now the British exit (BREXIT) from the European Union is rearranging the deck chairs on the ship Europa.

While sailors on the ship, marketers do not have the captain’s power to change the game, but they can help to achieve a less painful adjustment by understanding and preparing for the major transformations and significant effects in marketing on both sides of the Atlantic.

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Economic truth vs. political fiction in presidential debates

The toxic display of rude behavior and character assassination that has become a hallmark of this presidential primary season is matched only by the disturbing manifest ignorance by some of the candidates about economic issues.

We have heard, ad nauseam, epithets such as: “We don’t make things anymore . . . We keep sending our jobs overseas . . . China and Mexico are killing us on trade deals . . . The Chinese manipulate their currencies.”

Each one of these assertions, aimed at riling up the voting public, is absolutely false.

Let’s see what the truth actually is:

▪ “We don’t make things anymore.” This one is the mother of all lies. U.S. manufacturing is strong, growing larger, and more productive and competitive than ever — especially in machinery, electronic equipment, aircraft and vehicles, America’s top four exports. However, it is less labor-intensive as technology (including robots) substitutes humans — a global trend, impacting rich and poor nations alike, including China. Nonetheless, the $2.5 trillion U.S. manufacturing economy faces a shortage of 2 million skilled jobs over the next decade. Both foreign direct investment (FDI) and exports are drivers of America’s manufacturing competitiveness. FDI in manufacturing exceeds $1 trillion, with motor vehicles most prominent (e.g., Honda in Indiana, Nissan in Tennessee, Mercedes in Alabama, BMW in South Carolina). U.S. auto exports (2 million vehicles) set a record high last year.

▪ “We keep sending all our jobs and moving our factories overseas.” Despite all the hysteria over the U.S. outsourcing more and more of our jobs, it affects less than .2 percent of employed Americans. Less than 20 percent of workers affected by outsourcing lose their jobs; the rest are repositioned within the firm. In recent years more and more companies have beenbacksourcing — bringing outsourced work back home. As for “runaway plants,” many of those overseas plants source inputs from the United States. The Mexican operations of Ford and GM, for examples, source 65 percent-75 percent of their components from U.S. plants.

▪ “China and Mexico are killing us on trade deals.” The United States has no free trade deals with China. As for Mexico, part of NAFTA along with Canada, trade has increased 632 percent since the accord was implemented 22 years ago. It now equals over $1 trillion and produces a trade surplus for the U.S., not a deficit. Here’s the math: Mexico sold $290 billion to the U.S. in 2014 — $166 billion was U.S. content, which added to the $240 billion we exported to Mexico renders a surplus for the U.S. of $162 billion. As for other trade deals, next up on the docket is the Trans-Pacific Partnership involving the U.S. and 11 signatory countries. Opposed by a number of the candidates, the agreement eliminates over 18,000 different tariffs on American exports and includes the strongest worker protections of any agreement in history.

“The Chinese are manipulating their currency.” The fact is that every central bank — including the Fed — has the legal monopoly power to fix its exchange rate to achieve price stability or full employment. The U.S. does this through the federal funds rate. It is comparative advantage that drives trade regardless of monetary policy. From 2004-2014 the dollar depreciated 25 percent against the yuan while our deficit with China more than doubled! Nevertheless, as the yuan continues to gain value, expect China to buy more goods and services from the United States; to invest more here ($36 billion currently); to purchase more government securities and to send us more tourists and students.

The xenophobic, protectionist rants of neo-populists of both the left and right prey upon the anger, fear, and limited economic knowledge of voters.

The American people deserve better from those who vie for the highest office in the land.

At the same time citizens have the responsibility to educate themselves to learn the facts and make the most sensible presidential choice for in November.

Jerry Haar is a business professor at Florida International University and a senior research fellow at Georgetown University’s McDonough School of Business.

The TPP: International Law and Geopolitics

After seven years of negotiations, the Trans-Pacific Partnership (or TPP) has finally been agreed upon by the twelve signatories. The parties involved are the United States, Canada, Mexico, Singapore, Brunei, New Zealand, Chile, Australia, Peru, Vietnam, Malaysia, and Japan. There has been significant controversy regarding the TPP from within the United States, with naysayers arguing that the benefits accruing from the TPP are minimal, and that the US already has bilateral trade agreements with most (if not all) the participating countries, making the bulky agreement redundant. Yet there do exist considerable advantages for the US from the conclusion of the TPP negotiations. To name but a few, the TPP has ensured the updating of the frameworks applied to multilateral trade agreements. It also allows for the harmonization and regulation of standards across a global and dispersed supply chain.

A significant worry has been the investor-state dispute settlement mechanism (ISDS), key buzzwords thrown about by the American and international media. The inclusion of the ISDS in the TPP has been regarded by some, most notably Elizabeth Warren, senator from Massachusetts as a threat to regulatory sovereignty. It allows for corporations to sue governments for changes in the regulatory environment that have adverse impacts upon the former. The legal provision, however, does not allow the reverse, i.e. governments cannot take legal action against firms. Nevertheless, the inclusion of the ISDS is a major development for international law precedent, which has typically been restricted to matters of interstate disputation.

The glaring exclusion of China from the agreement has been highly debated in the intellectual circles of Washington. Some have argued that the nation chose to stay aloof – that the Chinese economy has outgrown the “meager” benefits that could accrue to it from the TPP that pale in comparison to the restrictions and conditions that China would have to meet if it joined. Optimists hope that the coalition of participating countries will be able to contain, offset and challenge China’s rapid relative economic ascent. They suggest that the success of the TPP will lead to a clamor by countries like China and India to be included, the conditions of which would be set by the triumphant and advantaged existing members. Whatever the future of China in relation to the TPP may be, its current exclusion clearly limits its geopolitical reach.

 

Michael R. Czinkota (czinkotm@georgetown.edu) teaches international business and marketing at Georgetown University’s McDonough School of Business. His key books is International Marketing, 10th edition.

Lunch with Dr. Theo Weigel

On the first of October, Professor Michael Czinkota hosted a private lunch with Dr. Theo Weigel at the McDonough School of Business, in collaboration with the Washington D.C. office of the Hanns-Seidel Foundation. Dr. Weigel served as the German Minister of Finance from 1989 to 1998, in the Cabinet of Chancellor Helmut Kohl. He was instrumental in the creation of the European monetary union, and the common currency. He was accompanied by a team of delegates that included his wife, Irene Epple-Weigel, the former alpine skier and Olympic medalist, and their son, Konstantin, a law student in Munich. Also part of the delegation was Richard Teltschik, the Director of the Hanns-Seidel Foundation in Washington. Georgetown University was represented also by Professors Thomas Cooke, Ricardo Ernst, Charles Skuba, David Walker, and Lee Pinkowitz. Also in attendance were three students – one from the McDonough School of Business, and two Masters candidates from the Walsh School of Foreign Service. Additional visitors came from the Hanns-Seidel Foundation and the German Embassy.

The lunch was inaugurated by Professor Czinkota, who gave a welcome address that included an introduction of Dr. Weigel’s many accomplishments. Following this, Dr. Weigel addressed the attendees of the lunch. He discussed his experiences with the creation and establishment of the Euro, relating both facts and anecdotes. One such story was of how the common currency came to be known as the “Euro,” rather than the other alternatives under consideration at the time, such as the Frank, Mark or ECU. He vehemently denied the common perception that the Euro was Germany’s reward of others for support of reunification, asserting that the two momentous events were planned and executed separately. Dr. Weigel talked about the fall of the Berlin Wall and the reunification of West and East Germany, at what was the eve of the 25th anniversary of the reunification. Yet it was not only German history that was discussed at the lunch, but also contemporary German politics and European current affairs. The issue of the refugee crisis in Europe was explored by Dr. Weigel as well as the other participants. Dr. Weigel believes that Germany can absorb the current volume of incoming refugees, approximately 800,000, for one year (possibly two). This will help the German economy, which is currently facing a demographic shortage of working-age and job-seeking citizens. Any absorption of refugees beyond this number, however, would end up harming the German economy.

For more than an hour, issues such as U.S.-Germany relations, collaborations and perceptions by the youth of the two countries, and Germany’s leadership role in the world were addressed in the question and answer session following Dr. Weigel’s speech.

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Fact or Myth: Foreign law is a threat to the economy

There has been an ongoing debate about the use of foreign law to interpret the American constitution. In 2010 Oklahoma enacted a broad ban on the use of foreign law. A federal court later lifted this ban. There remains however a lot of opposition to the use of international law. Justice Scalia stated, “we must never forget that it is a Constitution for the United States of America that we are expounding. Where there is not first a settled consensus among our own people, the views of other nations, however enlightened the justices of this court may think them to be, cannot be imposed upon Americans through the Constitution.”

Scalia is not alone in his views. The court’s conservatives – including Chief Justice John Roberts Jr., Justices Clarence Thomas and Samuel Alito Jr. – argue that foreign decisions can be relevant in some of the court’s cases that deal specifically with international issues but never in interpreting the Constitution.

On the other hand, Justice Stephen Breyer in his new book, “The Court and the World: American Law and the New Global Realities,” cites the importance of using foreign law in deciding tough cases. Breyer says, “15 to 20 percent of the cases we review require the judges to know something about what happens abroad. Sometimes facts, sometimes laws, sometimes decisions.” Justices Anthony Kennedy and Ruth Ginsburg agree that examining such information from abroad is no different from reviewing the many studies or briefs that seek to influence court deliberations.

While we shouldn’t embrace every attempt to introduce foreign law into the American legal system, neither should we reject it altogether. There will be times when American law should seek reference to foreign law and times when it should not. It is up to the judges then and those who interpret the Constitution.

With 16.5% of the United States GDP attributed to foreign direct investment, the U.S. must look at foreign laws. The constitutional limitations along with restrictions on tax laws, antitrust laws, and immigration laws all affect foreign investment. While the United States should remain true to its roots, if it does not adapt to the new global realities, it may very well be left behind.

According to the Organization for International Investment: Worldwide, cumulative foreign inward investment rose to $25.5 trillion through 2013. The U.S. share dropped to less than one-fifth in 2014 from more than a third in 2000. This is because competition for foreign investment dollars has increased, and multinational companies have expanded their investments in faster growing developing markets. For the fourth consecutive year, more than half of all foreign direct investment in 2013 flowed to developing and transition economies; in fact, developed countries now account for only 39% of global FDI inflows. So foreign allies seem to matter after all.

Sources: Breyer, S. (2015). The court and the world: American law and the new global realities.