New President, New NAFTA

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The Trump Administration will seek modest changes to the North American Free Trade Agreement renegotiation process. According to a draft of a letter sent to Congress last week, the Administration is seeking a more conventional approach to trade negotiation.

NAFTA, which was established in 1994 between Canada, the U.S., and Mexico, aims to reduce trading costs, increase multilateral investment, while helping North America become more competitive.However, during the 2016 presidential campaign, President Trump made the debate over free trade one of the central topics of his campaign.

What is the plan for the renegotiation?

The persistent U.S. deficit in goods trade with Canada and Mexico demands that the administration take quick action to revise the relationship and adapt to the new global environment. In 2016, the U.S. deficit in goods with Canada is $42.848 billion (Data from Census.gov.foreign-trade/balance), which is only 2% of the total Canadian trade of $545 billion.

The trade deficit in goods with Mexico is $63.191 billion. Exports are $231 billion, made up primarily of auto parts and petroleum products, while imports are $294 billion, with cars, trucks, and auto parts being the largest components.

In addition, this administration believes that Mexico has taken millions of manufacturing jobs from the U.S. Should the U.S. or Mexico just leave NAFTA?

My short answer is NO. According to the data provided by Mexican government, more than 80% of Mexican goods exports are tax free to the United States, and since the signing of the trade agreement, all kinds of US companies in Mexico have grown with large number of jobs.

In the United States, some U.S. manufacturers get hurt because of NAFTA, while most American farmers profit from the agreement. Withdrawing from NAFTA will aggravate the U.S. goods trade deficit and tensions will continue to escalate, and eventually this will lead to the rupture of NAFTA.

Mexican cars will be more competitive in the United States due to depreciation of the peso, and the trade deficit will expand. On the other hand, Mexico is the third largest agricultural export market for the United States and U.S. exports of agricultural products will be more expensive for Mexican consumers.

As President Trump moves to revisit the North American Free Trade Agreement with Mexico and Canada, some are concerned these negotiations would actually limit the aggregate benefits the United States can gain. Some even claim that the United States may be handing a leadership role to China, a country that has repeatedly ignored intellectual property laws and manipulates its own currency.

Handing this role to a country who’s bad practices are at the helm of whats wrong with global economy could make for a trying situation, and one that President Trump should think about before passing the torch to China.

New World New Policy: What Art Tells Us About the Global Economy

dafen-oil-painting-villageProfessor Michael R. Czinkota

The modern world of art offers fascinating insights into the forces currently shaping world trade and the global economic system. For decades, China has experienced breakneck economic growth and has become a world leader in both the consumption and production of art, which illustrates some intriguing changes in the global economy.

The global market for high-end, rare art pieces is a good example. In recent years, as China grew more prosperous, there has been a sharp uptick in luxury art purchases by Chinese customers. In 2016, according to insider information, Oprah Winfrey sold a 54”x54” painting to a Chinese collector for $150 million. This example indicates how China has grown in its appreciation of originals. This shift perhaps presages an eventual reduction in counterfeit products for which China is still infamous. Chinese auction houses have also risen to prominence. Of the world’s top ten art auction houses, six are Chinese, and many of the largest art houses are state-owned enterprises.

In the art world, China has not only become a dramatic consumer of art, but also a prodigious producer. The southern Chinese city of Dafen, nearby to megacity Shenzhen which borders Hong Kong, has become the center of knock off art masterpieces. Beginning in the 1980’s reform era, Dafen became a hub for starving artists from around the country to work and train, pumping out high-quality knock-offs of famous European and American painters ranging from van Gogh’s Sunflowers to portraits of Western icon John Wayne. Artists produce these works on the cheap and can offer custom alterations, such as changes to the color or size to fit the purchaser’s own décor. Since the works are not signed, they do not count as fakes.

The producers of export knock-off masterpieces will face pressure to adapt, focusing more on creativity and original works. When Chinese artists copy the great masters, they hone their skills and imagination, which over time will allow them to eventually emerge as new artists in their own rights

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International Logistics, Part 4 : Management of International Logistics

The purpose of multinational firm is to benefit from system synergism. Therefore the coordination of international logistics at corporate headquarters is important. Without coordination, subsidiaries tend to optimize their individual efficiency but jeopardize the overall performance of the firm.

Centralized logistics Management

If headquarters exerts control, it must also take the primary responsibility for its decision. To avoid internal problems, both headquarters staff and local logistics management should report to one person. This person can then become the final arbiter to decide the firm’s priorities. Of course, this individual should also be in charge of determining appropriate rewards for manager, both at headquarters and abroad, so that corporate decisions that alter a manager’s performance level will not affect the manager’s appraisal and evaluation. Further, this individual can contribute an objective view when inevitable conflicts arise in international logistics coordination.

Decentralized Logistics Management

If a firm serves many international markets that are diverse in nature, total centralization would leave the firm unresponsive to local adaption need. If each subsidiary is made a profit center in itself, each one carries the full responsibility for its performance, which can lead to greater local management satisfaction and to better adaption to local market conditions. Yet often such decentralization deprives the logistics function of the benefits of coordination.

Contract Logistics

A growing preference among international firms is to outsource, often referred to as contract or third-party logistics (3PL) Most companies have outsourced at least one major logistics function such as customs clearance, transportation management, freight payment, warehouse management, shipment tracking, or other transportation-related functions. The main thrust behind the idea is that individual firms are experts in their industry and should therefore concentrate only on their operations. 3PL providers are experts at logistics, with the knowledge and means to perform efficient and innovative services for those companies in need. The goal is improved service at equal or lower cost.

Logistics providers’ service at equal or lower cost. Logistics providers’ services vary in scope. Some may use their own assets in physical transportation, while others subcontract out portions of the job. Certain other providers are not involved as much with the actual transportation as they are with developing systems and database or consulting on administrative management services. In many instances, the partnership consists of working closely with established transport providers such as the FedEx or UPS.

One of the greatest benefits of contracting out the logistics function in a foreign market is the ability to take advantage of an existing network complete with resources and experience. One of the main arguments leveled against contract logistics does not and should not require the handing over of control. Rather, it offers concentration on one’s specialization – a division of labor.

 

Syllabus for International Business Course – STRT-261-01

For those who are interested, I am teaching a course on International Business at the McDonough School of Business this Spring. The final syllabus for the course is as follows –

 

Updated_ Syllabus IB SPRING 2016

 

View on migrants entering Hungary

Hungary has been the spotlight of the news recently with reports of the maltreatment of migrants entering and passing through the country. While I do not agree with the drastic measures taken, Hungary’s short-term solution is mainly about concern for its own economic stability.

I spoke with CCTV’s Asieh Namdar regarding my thoughts on the issue. You can view the video here: http://youtu.be/A6X4m-aWP-8