Offsets: One answer to International Trade Imbalances
Michael R. Czinkota
When foreign governments shop for defense supplies, they are not solely motivated by price and quality. In light of the trade balance effects of major acquisitions such as aircraft or defense products, international customers often require U.S. vendors to purchase goods from them in order to “offset” the trade balance effects large purchases have on their trade flows. In light of enormous U.S. trade deficits, it is time for the United States to reciprocate with offset demands of our trading partners. Frequently we find ourselves in conditions where foreign sales to us are major and our sales to importers and their nations are minor. This leads to trade relations which are out of kilter. U.S. firms have accommodated foreign offset demands for decades. Now is the time when some give-back by our trading partners is the right medicine to improve world trade imbalances.
Offsets are industrial compensation arrangements demanded (so far only) by foreign governments as a condition for making major purchases, such as military hardware. Sometimes, these arrangements are directly related to the goods being traded. For instance, the Spanish air force’s planes – American-made McDonnell Douglass F/A-18 Hornets – use rudders, fuselage components, and speed brakes made by Spanish companies. U.S. sellers of the planes have provided the relevant technology information so that Spanish firms are now successful new producers in the industry. Under offset conditions, U.S. companies also often help export a client country’s goods go international, or even support the performance of tourism services. For example, the ‘Cleopatra Scheme’ allowed foreign suppliers to Egypt to meet their agreed upon offset obligations through package tours for international tourists.
In 2015, U.S. firms entered into 38 new offset agreements where they agreed to cause purchases with 15 countries valued at $3.1 billion. In 2017, the total U.S. trade deficit was $566 billion after it imported $2.895 trillion of goods and services while exporting $2.329 trillion. No country has a bigger trade surplus with the United States than China. In 2017, the U.S. deficit with China climbed to its highest level on record, amounting to a gap of $375 billion.
Eliminating imbalances is a core component of the Trump administration’s international economic policy. One policy approach has been the threat of tariffs against China,. One effective supplemental strategy could be the instigation of offset agreements with major trade surplus nations.
For instance, many American imports that contribute to the trade deficit are capital goods, such as computers and telecom equipment. An offset agreement between China and the United States could require China to use American-made components, perhaps even from Chinese owned plants. An example could be the export of Smithfield ham from the U.S. to be served in company cafeterias in China. Then there are excellent opportunities for Chinese tourists, particularly if equipped with high-spend budgets.
The American trade deficit is not easily resolved. Government would be well served to explore non-traditional options in order to develop more than one fulcrum for leverage. New use of offset agreements – which have provided our trading partners with past success at our expense – could help revitalize American industries and bring a new sense of balance to trade relationships. Our government should encourage offset commitments by foreign firms and countries who sell a lot to us. America deserves to reap the benefits!
Michael Czinkota (firstname.lastname@example.org) teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent, U.K. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE). Lisa Burgoa contributed to this commentary.
Future Research and Preparation
(Final in a series of six)
Valbona Zeneli, Marshall Center, Germany
Michael R. Czinkota, Georgetown University USA and University of Kent, UK
Gary Knight, Willamette University, USA
Concluding this series of our research findings, here are future directions for investigating terrorism and international marketing. Like the legs of a sturdy stool, three priority areas; the firm’s value chains, its rapidity of recognizing threats, and its preparedness with responses to terrorist events.
Marketing in emerging economies searches for the most effective operations to reduce the impact of terrorism, to decrease the response time to terrorism and to avoid market failures.
It is important to create business models that minimize interference and disruption. For example, hamburgers do not have to be distributed through burger palaces but can reach customers through outside vacuum tubes. Suppliers don’t all have to come from only a few nations but can be sourced from a wide diversity of countries.
Financial efficiency must now be traded off with robustness and a cushion against disruption. The balance of benefits and costs needs to be understood: just how much does it cost to increase protection by one percent. What risks are worth taking? What are heuristic spinoff effects of traditional models, and do they need to be revisited? The new aim must be the monetization of alternative terror responsive strategies which improve performance under risky conditions. Real options theory can focus on risk uncertainty and emphasize creating and then exercising the now appropriately understood options.
Research must conceptualize and communicate the exposures of proposed investment projects. Apart from the investment benefits one should also rate an investment for its tie-down effects expressed by the viability and cost to withdraw an investment once it has been made and the restrictive effect on strategic directions. For example, when a certain climatic investment locale has been chosen, it may affect future choices of locale or innovations of car paint. Also worth examining is exogenous uncertainty in international markets that lies beyond managerial control. International marketers need flexibility for unexpected market developments. Financial options theory can help measure and quantify the effect of such management versatility.
Systems theory lets managers examine the threat and vulnerability exposures of the firm. The interdependence of networks of firms, affiliates, and agents within larger systems require examination together with how individuals relate to and interface with other actors in the socio-political sphere of interest. A systems perspective reduces the risk for management to under-specify marketing parameters. It becomes easier to understand and respond to the geopolitical environment, terrorism networks, and newly recognized sources of risk in business systems themselves, with a focus on the vulnerability of specific network nodes.
Future research should differentiate the effects of terrorism on services industries. Some aspects of services, particularly for international markets, may vary substantially from those of traditional goods. We investigated the effects of terrorism on the international operations of manufacturing firms. By comparison, firms in the services sector are often more vulnerable to terrorism. Substantially affected industries include airlines, transportation, and hospitality, as well as banks, insurance firms, and other financial actors. Most service-providing firms enter foreign markets via Foreign Direct Investment (FDI). Services are growing in importance. They represent the fastest growing sector in international business and usually constitute the largest proportion of economic activity in advanced economies and emerging markets.
Assuring service resilience by both an industry as well as an individual person is therefore crucial and imperative for the viability of business under the threat of terrorism.
Michael Czinkota teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent. He is a trade policy analyst and frequent public speaker. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE).
My colleague and former student Dr. Valbona Zeneli, recently, published her book IN MY OPINION. The book presents 39 short articles about the core issues of European security, international trade, and the Western Balkans. She also uses cartoons with each topic. All of which have been drawn by her 12 year old son.
I had the pleasure to write the Foreword of the book as follows:
I like this book. The many articles of Dr. Zeneli provide a 360 degree view of the world. This collection of articles offers new decisions and policies that impact current events in our turbulent times. Equally important, Dr. Zeneli recognizes the fact that even those interested in a topic may not have the time to read and reflect on many lengthy academic treatises. The subsequent risk for the world are decisions made by policy makers, business executives, and researchers themselves, which are based on very limited information, fragmented insights, and very limited overall comprehension.
With the work presented here, Dr. Zeneli provides an answer to this problematic. She identifies core international policy and trade issues and addresses them with depth and parsimony, thus helping to create a new bedrock of understanding. Her answer is the new use of short and pertinent commentary.
Her background provides unique strength and capabilities to Dr. Zeneli. She was born and raised in Albania, and educated at leading global institutions. Combined with her exposure to practice, she is able to bring to her analysis and writing a rare combination of academic expertise and “real world experience”. Her training in economics and security studies took her from Italy, to the United States, and to Germany at the famous George C. Marshall European Center for Security Studie.
I have known Valbona for 15 years, since she was my students. in International Marketing class at Georgetown University in Washington D.C. she excelled then and ever since I have enjoyed working with her in researching and writing on current important in the fields of global trade, international marketing, trade agreements, corruption, and international terrorism. Her extensive exposure to and participation in policy, business, and academic research allows her to glide easily between the three worlds, and to understand different perspectives. Her international experience at the Marshall Center, where she works with leaders from all continents to discuss current security issues and future trends, is clearly demonstrated in her comparative comments, which allows readers to look at different perspectives.
Valbona Zeneli has written numerous research papers in her academic life, and has been a contributor of editorial commentary in the international business and security field. Her work has been published in well-known outlets such as The Diplomat, The Globalist, The National Interest, Atlantic Community, The Japan Times, SriLanka Guardian, Affari Internazionali among others.
Dr. Zeneli’s focus on economics, governance, and the interlocking aspects of world trade matter in these turbulent times. Her ability to capture current events and connect them to the foundation and requirements of governing and responsible decision making is truly special. This is where her skill shine best. Her ability to make sense of what makes societies successful, or causes them to fail, is both subtle and effective. By examining her thinking and it’s development over time, we are treated to key insights into the ongoing rapidity of change and the consequences of bad decision making. There articles provide us with key lessons.
She is a strong supporter of European integration of the Western Balkans, and a believer oin open trade and strong transatlantic bonds. A Europeanist and internationalist at heart, these feeling are evident throughout her writings.
Of equal importance is the fact that the articles presented here illuminate the mistakes to be avoided in a period of our history where decisions made with rapid reaction but often based on poor and even deceptive information are becoming the norm. Zeneli argues with a constant key take-away in mind. We live in a globalized world and we are highlyinterconnected.. Policy decisions are seldom exclusively national but have regional and global repercussions. Zeneli’s collection is a reminder of the butterfly effect where seemingly local actions can lead to major shifts even far away. Events such as poor governance, corruption,
migration, and the like in the Balkans can have a far reaching impact in Europe and beyond. Trade policies need to be separated from emotions with a heightened sense of clinical rigor and honesty and honor. Already today, but even more in the future, will these concerns be the bane of society. They therefore require our concentrated attention.
Dr. Zeneli’s articles are accompanied by a cartoon. With the artistic support of her eleven-year old son this book offers drawings reflecting both simplicity and understanding of her commentaries, appealing to the reader with words and sights, and and adding the dimension of humor to complicated security issues.
Valbona Zeneli’s articles capture what are still current events but she tells a story that will endure. I therefore encourage you to go to your nearest book store and buy this book. It is worth your effort to do so, since a systematic reading of the material presented, your reflection of the ongoing implications and your review of the cartoons, will likely make you the smartest person in the room when it comes to discussions of security, regionalism and trade. My congratulations go to Dr, Valbona Zeneli for the fine work she has conducted.
Michael R. Czinkota
Washington D.C., January 2018
Global Medical Tourism
Medical tourism can be traced to 4000 B.C. – when Greek pilgrims would sail abroad to seek the healing power of hot springs and baths. Over the past two decades, the industry encountered dramatic shifts.
Once wealthy patients from emerging economies sought treatments not available in their home countries. Since the new millennium, however, the flow of patients goes in the other direction. Rising health care costs prompt travelers from advanced economies to seek international destinations offering lower-cost or timelier alternatives to domestic care.
For instance, a spinal fusion in the United States costs an average of $110,000 in 2016. The same procedure was $6,150 in Vietnam. Heart bypass surgery, which costs $123,000 in the U.S. in 2016, is $12,100 in Malaysia. For many patients from high-priced countries, the solution is clear – it pays to seek medical care abroad!
The size of such tourism has ballooned since the late 1990s. Its value ranges between US $45.5 billion and $72 billion in 2017, with approximately 14 to 16 million patients seeking medical care beyond their countries’ borders.
Modern medical tourism is a global phenomenon. Traditional models emphasized internationalization as an incremental procedure. But the industry surged after the Asian financial crisis of 1997, which drove hospitals in Malaysia, Singapore, and Thailand to seek patients from abroad. They had already undergone substantial modernization, catering to a domestic middle class that demanded medical services commensurate with their newly acquired wealth. With the economic downturn, however, a shrinking middle class could no longer afford these superior facilities. International clients, provided a ready solution to an excess supply of private medical facilities..
The success of hospitals in Southeast Asia inspired other countries towards medical tourism. Regional hubs emerged due to advantages of geographical proximity and specialization. Malaysia and Singapore, for instance, received an influx of patients from Indonesia, while many patients in India came from Africa and the Middle East. Brazil, Costa Rica, and Mexico all benefitted from their proximity to the United States.
A clear pattern has emerged in the lifecycle of medical industries. First, countries in the developing world begin to offer services similar to those found in advanced economies. As new segments of international healthcare populations emerge, just like sun flowers, new medical tourism destinations grow towards the new opportunity. Close proximity to wealthy consumers constitute a competitive edge. To retain their market share, leading destinations formulate new strategies and options.
In order to survive growing competition, hospitals in emerging nations tend to implement two strategies. Since technologies stem from post-industrialized countries, most can only imitate. Their novelty comes from specialization in specific medical procedures. Doing few tasks very often improves capability, capacity, and efficiency, and thus improves reputational success.
However, this tactic may be ineffective as other hospitals develop similar capabilities. Consumer preferences will hinge on how closely services comply with their own cultural preferences and norms. Hospitals attract patients based on familiarity with local approaches and usages. Such an approach gives room for the increasingly recognized component of holistic healing.
It is important to understand how the lifecycle of hospitals continues to evolve. Different stakeholders – from governments to accreditation services to healthcare providers to patients themselves – will be affected by the expansion of the industry. For example, to date, there is still much unfounded reluctance to accept health care services offered by international sources. Once the industry manages to break out of restrictive domestic silos, a fundamental reconfiguration of service and cost will be the consequence. Let’s look forward to that!
Nittaya Wongtada is a Professor at the NIDA Business School of the National Institute of Development Administration, in Bangkok, Thailand.
Michael Czinkota teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE).
This comment is based on the article “Transformation in the Global Medical Tourism Industry”, Transylvania Review, Vol. 25, 2017.