European Union & global economy: lessons to be learned

Consumers in the world accept European products because of the strong quality tradition. However, regardless of heritage’s importance, European industry is also an excellent example of the path the European companies follow in adapting to the future challenges; in doing so they create jobs and business opportunities for people in the EU states.

Over the next twenty years, the share of European growth will reduce to 10 per cent of the global, i.e. about 90 per cent of the world’s growth will happen outside of the European Union’s borders.

Therefore, the first lesson, Karel De Gucht, European Commissioner for Trade underlined, is that the industry’s “target market” is the global economy and markets. Knowing the advantages of the European Single Market, the companies expect something similar in the outside world. That’s not going to happen; and more European companies are obliged to meet global challenges.

The second lesson is competing on quality, as products and services’ quality is becoming ever more important to export success. Producing high-value added goods is essential for any developed economy as high-value goods which incorporate skills and experience allow for well-paying jobs for people with such skills and that experience.

Finally, the lessons show the importance of intellectual property. European economy has to protect both individual company trademarks and so-called “geographical indications” (e.g. more than 300 geographical indications in the EU are linked to spirits, both Scotch and Irish whiskies as well as Cognac, Polish vodka, Orujo de Galicia and many others). One can say that intellectual property is “monetizing quality”; it is essential for the European economy’s model that industry specializes in the high value tasks of global value chains.

Governments’ decisions

For the European business to gradually adapt to the changing world, an important role belongs to governments in forcing companies understand and prepare for the challenging future.

 The EU member states’ governments (and the European Union’s trade policy, in particular) have to facilitate the connections that could bring prosperity back to Europe, argued the Commissioner. That means making sure Europe has an open economy, so that companies that are part of global value chains can gain access to the best quality goods and services from around the world, at the best prices.

 For European industry, for which local production and local ingredients are so important, access to internationally traded goods and services does play a role, whether those are capital goods, transport, logistics or finance. That is essential for Europe’s broader competitiveness, as well.

 However, in the European economy it is not just political decisions made in the EU that count.

Governments around the world make decisions that affect European business as well, e.g. like levying a discriminatory excise duty or using unfair methods to value goods at the border (e.g. India’s 150% tariff on spirits). And by getting in the way of European exports, they undermine companies’ ability to bring growth back home to Europe.

European Union’s trade policy

The underlying goal of the European Union’s trade policy is to make sure that those decisions are made in a fair and balanced way. There are some priorities in this: the first one is that of the World Trade Organisation, WTO. The multilateral trade system has been through a difficult decade, and the issues at the core of the Doha Round are still not resolved.

But a system that allows the EU to deal with so many partners at the same time – that establishes uniform rules for almost the entire world economy and that is backed up by the world’s best international dispute settlement system must be preserved and expanded.

 In December 2013in Bali, WTO members showed they understand this. The deal on trade facilitation reached there will directly benefit several industry sectors while simplifying customs and border procedures across the world. The member states now need to make sure that deal is implemented, and get to work on what remains to be done.

 The second priority for EU trade policy is to complete an unprecedented agenda of bilateral free trade agreements. The virtue of these negotiations is two-fold; on the one hand, they allow the EU states to move ahead with opening markets with those countries which are willing, rather than be held back by those who are more reluctant.

 This has allowed the Commission to put in place deals with Korea, Columbia, Peru and Latin America. It is what has brought European companies closer to achieving final deals with Canada and Singapore and being engaged in major initiatives with the United States, Japan, India, Mercosur and several ASEAN countries.

 This priority of the free trade agreements is important because it allows the EU to go deeper, tackling more of the issues that affect businesses. It also allows the EU to promote the enforcement of intellectual property rights in Latin America and tackle discriminatory technical labeling regulations around the world.

 The final priority is enforcement, which is necessary because negotiations have no value if the agreements reached are not put into practice.

As the report highlights, the EU case against the Philippines’ discriminatory excise duties is one example of how the WTO’s dispute settlement system can be very effective. The EU is committed to using that system whenever it is necessary; the EU is also committed to using its trade defence measures when those are required.

 These legal tools are complemented by the EU’s Market Access Strategy, which uses all channels of trade diplomacy to help the EU institutions to focus governments’ minds on problems that need to be solved. This approach has allowed to resolve issues around distribution in Vietnam and push for progress where difficulties have arisen in China and Russia.

Conclusion

The EU’s comprehensive strategy is to make sure the European member states are well placed for developing prosperity as the world changes. The Commission is able to put this strategy into practice for as long as the European people understand the way European economy functions with all the benefits from being part of an open global system.

Most people do see that the rise of vast new economic powerhouses is also the rise of vast new markets for European goods and services. But many people also see that globalisation presents challenges for Europe, most of all the need to adapt to rapid changes and deal with new competitors.

 As the recent European elections have confirmed, some people wish to react to these challenges by shutting “European doors”. The Commission’s view is that it would be a disaster for the European Union. That means it is very important that people understand how open markets help industries to be successful.

 People need to know that shoppers in China and the United States are buying high-quality goods from all across Europe. And they need to know what that means for their local economies.

“It is certainly the role of politicians to tell the whole story”, concluded the Commissioner.

Source: European Commission, Karel De Gucht, European Commissioner for Trade: Speech/14/503 “Thriving in a global economy”, 25 June 2014.

Source: http://www.baltic-course.com/eng/analytics/?doc=93382

Economic Lessons from the Olympics

As the Olympics deliver another sports highlight to the world, some Americans remain highly irate with the uniforms worn by the U.S. team. The reason: the team uniforms are made in China. One senior U.S. senator suggested piling up the uniforms and burning them. Some are even trying to use this controversy against presidential candidate Mitt Romney, due to his leadership of the 2002 Winter Olympics. In response to this public relations debacle, Ralph Lauren, a design icon in the U.S., has already firmly committed that uniform production for the 2014 Winter Olympic game will take place on U.S. soil. Before we sweep this controversy under the rug, however, here are a few thoughts on the importance of the Olympics for economic thinking.

First off, there are also others who voice discontent about their national Olympic outfits. The British public, host of the games, complains about its uniforms designed by Stella MaCartney. They believe that there is not enough red in the uniforms, which therefore do not seem to sufficiently reflect the national colors of the U.K. Second, it almost seems as if the debate over the labels on the uniforms draws more attention than the actual preparation of team USA or the London games themselves. Shouldn’t the essence of the Olympics lie in the performance of the athletes from around the world competing with each other to excel by fulfilling the Olympic motto: “Citius, Altius, Fortius” (Faster, Higher, and Stronger). There is no part of the motto calling for ‘domesticus’ or ‘pulcher’. One could well argue that attention should mainly be focused on the performance of the athletes, rather than how they look during the opening ceremony. Furthermore, the real performance is not delivered in dress uniforms, but rather in the swim suits or leotards made wet and sweaty by competition.

If there were to be a debate, the quality of the uniforms rather than the source of production should receive public attention. The Olympics are all about effectiveness and efficiency. The economic argument should focus on a cost benefit analysis of those uniforms. Does the outsourcing of stitching tasks to China lower the costs, and how does such international procurement affect quality?  There is no need for a patriotic argument here, but rather the simple exploration of whether the team gets what has been paid for. If there has to be some flag waiving about Olympic clothes, then it might be during the entrance of the Chinese team,  since  its national basketball team and six other Chinese sports teams will compete in outfits featuring the swoosh of Nike, a U.S. owned-brand.

The current debate over the Olympic clothes reflects much bigger issues such as the upcoming U.S. presidential campaign and the subsequent formulation of national policy, but also the future direction of all major economies around the world. How should one deal with and respond to international competition both in terms of process and activity? We all like to win, but the Olympics indicate that we should be willing to let everyone put up their best efforts and honor the highest performers. Typically, we prefer that participants on national teams are domestic citizens. But for special athletes (or products), outsourcing seems to be acceptable, yet touches a nerve if domestic conditions are problematic.

Comments made by some politicians about the Olympics and about the economy may sound silly and outrageous; but just like other outsourcing kerfuffles in the past, their true meaning ought to be taken with a grain of salt, and seen as the vote catching lamentations which they are. For both an economy and the Olympics, it seems unlikely that thoughtful leaders would ignore the value of designs and innovations in favor of low-value added sewing and stitching. After all, outsourcing low value manufacturing provides consumers in wealthy nations with low price products, particularly valuable to low income segments. We should also remember that as originators of the Games, (and of the word ‘economy’) the Greeks get to be first in presenting their flag during the opening march, but when it comes to performance, they are on equal footing with all other nations.  Economies also need to refresh their innovation every day.

Right after the opening ceremony, the impact of the dress uniform’s origin will begin to fade. It deserves perhaps mention that the Olympic Game athletes of yore were competing in the buff, which reinforces that it is the context and performance that matter, rather than the clothes. With the athletic performances the Olympic athletes do set an economic example for all of us: We need to embrace change, observe the best, and learn from all for future improvements.  The clothes may differ, but the competition continues.

By Michael Czinkota and Jiashan Cui

Professor Czinkota and research assistant Cui work at Georgetown University, McDonough School of Business. Blog: michaelczinkota.com