Does the WTO still contribute to World Trade? (With Prof. Valbona Zeneli)

In 1948, after years of negotiations, more than 50 nations signed the Havana Charter to create the International Trade Organization (ITO). But in the 1950s, President Truman decided not to resubmit the ITO charter to Congress for ratification, due to perceived threats to national sovereignty and the danger of too much ITO intervention in markets. The result was the much more limited General Agreement on Tariffs and Trade (GATT), which brought rules and regulations to world trade. A major breakthrough occurred in 1994. Negotiators launched a totally new organization, which the Uruguay Round (1986-1994) negotiations agreed on—the World Trade Organization (WTO).

After two politically and economically charged decades, we find that the WTO has been one of the most successful international institutions. With a rejuvenated framework of multilateralism enabled by global political shifts brought on by the fall of communism, the WTO now seeks to reduce tariffs, eliminate trade barriers and quotas, and expand coverage of services, intellectual property, foreign direct investment, and agriculture.

The WTO has encouraged international trade to prosper by fostering openness and lowering trade barriers, increasing confidence and encouraging fair trade practices. The WTO’s agreements have helped countries develop by increasing international confidence and cooperation in the system. Thought there are no WTO black helicopters for enforcement, its dispute settlement process had advanced progress.

Since 1948, world trade has grown very rapidly, with trade in goods growing yearly by an average of 6% a year in real terms. In 1948, total world trade was valued at just above $58 billion, with the United States accounting for 34 percent of free world trade flows. Japan’s imports exceeded its exports to the U.S.  by 160 percent. By 1994, world trade exceeded $4 trillion and the United States had a share of 12 percent. Almost twenty years later, in 2015, total world trade in goods and services amounted to $23 trillion. The United States held a share of 19 percent at $3,848 billion, heavily influenced by a high level of imports. Germany’s share was 13 percent and Japan’s $1,547 billion represented a share of 7 percent. The United States (3), the European Union (1) and China (2) have been the three largest global players in international trade since 2004 when China passed Japan.

This new international trading system has provided more choices of products and qualities for the consumers, raised incomes internationally, has stimulated economic growth, increased standards of livings. The trade system promoted by WTO has also helped promote peace and encouraged good governance. Economies that have been more open to embrace the international trade and investment policies have grown quicker than the more closed economies. Higher interdependence has allowed countries to specialize in areas where they can be more competitive using their best advantages and opportunities.

The multilateral system has produced new energy, growth, rising incomes and better standards of living throughout the world, both in developed and developing countries. China is a perfect example of developing countries that have benefited greatly from liberalization of global trade and investment. 600 million people have been lifted out of poverty in only 30 years only, and moved up from a poor country with less than $400 per capita (on a purchasing power parity basis) in 1980, to a middle-income country in 2015 with $13,801.

China’s accession to WTO in December 2001 paved the way for its economic rise and significantly contributed to increasing world trade. Two decades ago, China was only entering the playing field of international trade; in 2015, China dominates trade after an unprecedented growth spurt. In the last decades, China’s growth has seen an exponential rise, with its Gross Domestic Product representing only 7.4 percent of the global economy in 2000, and almost 17 percent of it in 2015.

Tax inversions and other cross-border expansion of manufacturing chains and free trade zones have further globalized corporations. The predominance of both the English language and the U.S. dollar as global reserve currency has kept this process energetic and unifying. All this has reduced the psychic abyss of 20 years ago into a pre-Alpine hillside, supported by standardized and affordable communications.

The WTO’s unenviable position over the last two decades is similar to a team trying to score on a field that was constantly changing in size, with the teams and positions frequently becoming newly named and defined, and the sports equipment taking on different weights and shapes.

The hopes for an ambitious multilateral trade deal at the WTO level have diminished, and the stalemates of the Doha round have forced countries to pursue Regional Trade Agreements. Services and agriculture remain tough to resolve. Also, the marginal benefit from additional resolutions seems less in the Doha Round, as all the “low-hanging fruits” have already been picked. According to Ambassador Moore, former Director General of the WTO, multilateralism has yet a chance to triumph. It will take some of the newcomers and participants who have only recently found their voice and power, specifically African countries and India, to come to an agreement, before other nations can get much accomplished.We appreciate the research support by Jozsef Szamosfalvy of Exworks Capital in Washington D.C.

We appreciate the research support by Jozsef Szamosfalvy of Exworks Capital in Washington D.C.

Highlights of APEC 2015

The Asia-Pacific Economic Cooperation (APEC) is a forum of 21 Pacific Rim member countries that promotes free trade in the region. They are linked by their boundary with the Pacific Ocean. As such, India which has asked to join has not been allowed to do so.

Established in 1989, its aim is to leverage the growing interdependence of the Asia-Pacific economies. The member countries include Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, South Korea, Thailand, Taiwan, United States, and Vietnam. The total GDP of all the APEC countries is $44 trillion as of 2014. US and China account for over 60% of the total, more than all the other members combined.

Apec GDP

APEC ensures that goods, services, investment and people move easily across borders. Members facilitate this trade through faster customs procedures at borders; more favorable business climates behind the border; and aligning regulations and standards across the region. APEC operates as a cooperative, multilateral economic and trade forum. Member economies participate on the basis of open dialogue and respect for views of all participants.

The theme of this year’s APEC Summit held in the Philippines is “Building Inclusive Economies, Building a Better World.”

Some of the highlights from the summit include the following commitments:

  1. To support comprehensive and ambitious structural reforms; achieve positive economic, social, and environmental outcomes; and promote good governance. We recognize that corruption impedes economic sustainability and development and agree to combat the harmful effects of the illegal economy and to promote cultures of integrity across borders, markets, and supply chains.
  1. To foster an enabling trading environment that is responsive to new ways in which goods and services are produced and delivered and that promotes inclusiveness, especially for Micro, Small and Medium Enterprises. We need to develop policies that take full advantage of global value chains (GVC) and encourage greater participation and added value. We will promote competition, entrepreneurship, and innovation through effective and comprehensive measures, including balanced intellectual property (IP) systems and capacity-building.
  1. To build sustainable and disaster-resilient economies. We welcome and adopt the APEC Disaster Risk Reduction (DRR) Framework to facilitate collective work in building adaptive and disaster-resilient economies supporting inclusive and sustainable development in the face of the “new normal.”
  1. To make urbanization work for growth. We remain committed to a new type of urbanization featuring green, energy-efficient, low-carbon, and people-oriented development.
  1. To redouble our efforts to empower our people with the tools to benefit from and participate in economic growth. In the current environment characterized by the rapid and ubiquitous use of technology, our people, in particular women and youth, need to be equipped not only with technical skills in science, technology, and innovation but must also be adaptable and resilient.

Occurring shortly after the Paris attacks, the summit also made a statement about terrorism and its impact to the global economy.

“We will not allow terrorism to threaten the fundamental values that underpin our free and open economies. Economic growth, prosperity, and opportunity are among the most powerful tools to address the root causes of terrorism and radicalization. We stress the urgent need for increased international cooperation and solidarity in the fight against terrorism. “

Read the full 2015 APEC declaration here: http://globalnation.inquirer.net/132206/full-text-2015-apec-economic-leaders-declaration-in-manila

Sources:

The Case of Tesco: Community Promises and Local Priorities

Based in the United Kingdom, Tesco is the world’s third largest grocer, operating more than 7,817 stores and franchises in 12 countries. More than 60 percent of Tesco’s sales space is now located outside the United Kingdom. The company made its first move abroad in 1994, when it set up in Hungary, followed by Poland, Slovakia, and the Czech Republic. In addition to becoming a clear winner in Eastern Europe, the company is now the market leader in Malaysia. Tesco also planned to double the number of Tesco Express stores in Turkey in 2008 and more than doubled its online grocery sales in South Korea – its second most profitable market – since 2007.

Tesco set out a strategy to grow the core business and diversify with new products and services in existing and new markets. Some of their tactics included:

  • Partner with local players in emerging new markets – Tesco entered the US$270 billion a year grocery market in China in 2004 through a joint venture with Taiwan’s Hymall, which it now owns 90 percent. Today, Tesco operates 135 stores in China and has recently closed a deal with the state-run China Resources Enterprise. Tesco has its international sourcing headquarters based in Hong Kong, from where it sources more than 50 per cent of all clothing and 40 per cent of other non-food items. It buys about US$3 billion worth of goods and services from China annually.
  • Cater to local shopping preferences – Tesco is highly flexible in its retailing format to respond to different customer norms and tastes. The company’s stores in Thailand seek to replicate the product selection experience of traditional street markets, with less emphasis on the neatly packaged portions found in many Western markets. Tesco sells live toads and turtles in its Chinese stores, catering to consumers’ preference for shopping in “wet” markets.
  • Source talent globally, staff locally – The company has filled 80 percent of managerial posts in China with people hired locally, consistent with its strategy of acclimatizing to each country and keeping down the number of expatriate employees. At the same time, Tesco has recruited MBA degree holders from Indian consulting firms to staff its global function charged with deploying its global operations around the world.

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This is an excerpt from the book by: Michael R. Czinkota, Ilkka A. Ronkainen. International Marketing 10th Ed (USA: Cengage, 2013), pg 503.

 

Considering Labor Costs in Foreign Expansion

by Guest Blogger Nick Rojas

Ever since the National Science Foundation ended its sponsorship of the “NSFNET Backbone Service” on April 30, 1995 any remaining restrictions on using the Internet for commercial purposes were lifted. This resulted in a revolution for many industries, especially those focused on information and communication.
Nick1

All of a sudden, you did not have to go to the local library to look up information on subjects you were researching. You also no longer had to contact newspapers and magazines to issue job postings.

What was happening on a local level would soon cross international borders and connect entire workforces, industries, and populations. Outsourcing labor and expanding export and import infrastructures soon became a trending topic for an increasingly connected, global society of the 21st century.

Why Outsource?

The U.S. and large parts of Europe underwent massive economic growth in the second half of the 20th century. With all the growth, however, came the increase in local labor and energy costs.

This was one of the main reasons why many Western corporations began to invest into production facilities in foreign markets, where labor costs were comparatively low and where they could give local economies a boost.

Made in China

One of the nation’s becoming most popular during this era was China, which made a name for itself by offering high productivity at low wages – as low as 100$ a month for non-skilled labor in Chinese factories. The “Made in China” label, to this day, is synonymous with cheap manufacturing labor, as opposed to, for example, the equally famous “Made in Germany” (representing high quality engineering).

Even though China is a Communist country, it was able to build a capitalist economy integrated into the World market. This, however, combined with the increased exposure to Western standards and philosophies among the Chinese population – due to the Internet – has in recent years led to many demonstrations and a generally more pressing uprising of the Chinese labor force against corporations and the government, echoing what Europe went through during its Industrial Revolution in the 19th century.

So while China is still a cheap manufacturing market, investments into the nation’s cheap labor force are becoming increasingly risky considering the latest political developments, which are only now gaining momentum and will continue to raise awareness as the rest of the world learns more about the situation.

India – a Valuable Tech AllyNick2

If China is known for cheap manufacturing labor and Germany for first class engineering, then India is the nation that offers the highest density in talented software developers and other computer-based services.

There are two main reasons for this, the first one being that not only colleges, but Indian companies also invest into technology-related education of young adults. Secondly, since India’s industrial infrastructure is still catching up to Western standards, the chances of landing a job in the mechanical, electrical, or chemical fields are low. In addition to that, many American and European companies are increasingly outsourcing software-related labor to the Indian market, so this trend is not going to change anytime soon.

While China is struggling with an increasingly difficult political situation, an interesting synergy is starting to develop between Western and Indian people. The latest generation of entrepreneurs of companies like Facebook, Uber, and WhatsApp consists largely of Millennials, the first generation that grew up with access to the Internet.

Their exposure to global information and cultures has turned them into a tolerant, curious, and cosmopolitan generation. For Millennials, globalization is not a new development, but status quo.

As a result, they don’t see their Indian counterparts as just another source for cheap labor, but as potential partners who share the same passion and interest – technology. So while wages in India are still much lower – an experienced programmer in the U.S. makes up to $200 an hour, whereas Indian developers charge closer to $20-30 an hour – this growing “partnership” between generations and nations will have an impact on Indian labor costs, especially in the area of software development.

Other Markets

China and India have certainly become very popular for their outsource-friendly workforce, but South America and Africa are going to be interesting to watch over the next few decades as the United States is making significant investments into their local infrastructure, renewable energy, and banking system.

Conclusion

It might seem like commercial Internet has been around forever, but it has really only been around for two decades. Considering the massive impact on the global marketplace it has already had, it is clear that we will see dynamics shifting between foreign markets over the course of the next century, and labor costs will be one of the most important factors to watch.

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Nick Rojas is a business consultant and writer who lives in Los Angeles and Chicago. He has consulted small and medium-sized enterprises for over twenty years. He has contributed articles to Visual.ly, Entrepreneur, and TechCrunch. You can follow him on Twitter @NickARojas,. or you can reach him at NickAndrewRojas@gmail.com.

Birmingham Insights on Asia — (2) The Impact of the Government Policy on the Small and Medium-Sized Enterprises’ (SMEs) Export Activities in China

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This comment is based on Zheng Guan’s Dissertation written under the supervision of Prof. Michael Czinkota at the University of Birmingham, UK.
Recommendations for the Government Sector
1) Enhance SMEs’ export assistance and promotion activities. The government should develop more preferential export policies