The document provides an overview of political economy and international trade. It discusses several topics, including the European Union and its institutions, emerging markets and risks, and international trade and World Trade Organization (WTO) rules. For each topic, it outlines key concepts, organizations, agreements, and case examples to illustrate the issues. The document is intended to cover these topics at a high level for educational purposes.

1. POLITICAL ECONOMY
AND
INTERNATIONAL TRADE
Stephen Ong, BSc(Hons) Econs (LSE),
MBA International Business(Bradford)
Visiting Fellow, Birmingham City University
Visiting Professor, Shenzhen University
MBA1034 GOVERNANCE, LAW & ETHICS

2. • Discussion: Forex and Hedging1
• The European Union and
institutions
• Emerging markets and risks
• International trade and WTO rules
2
• Case Discussion : Toys R Us and
Globalisation3
Today’s Overview

3. 1. Open Discussion
• Bartram, S (2008) What lies beneath: foreign
exchange rate exposure, hedging and cash
flows. Journal of Banking and Finance, 32 (8).
pp. 1508-1521.

4. 2.1
POLITICAL ECONOMY OF
EUROPEAN UNION

5. Topics Covered
• Introduction
• The European Union
• The institutions of the European
Union
• Nonmarket issues
• Interests and their organization
• Nonmarket strategies in the
European Union

6. Introduction
• The European Union (EU) has
taken landmark steps toward
economic and political
integration

8. The European Union
• Post World War II, Europeans
recognized the need to increase
trade and encourage political
cooperation
–Treaty of Paris
–Treaty of Rome
–Treaty of Brussels
–Treaty of Nice

9. The Single European Act
• Took effect in 1987
• Addressed several impediments to trade
• Provided measures to facilitate access to
national markets
• Increased the power of the EU
government relative to the governments
of the member states:
–By limiting the use of the unanimity rule
for decision making

10. The Maastricht Treaty
• Established a timetable for:
–A common European currency
–An independent European
Central Bank

11. The Treaty of Lisbon
• Formally recognized the
Charter for Fundamental
Rights
–Made human and civil rights
enforceable by the European
Union

12. EU Legislative and Administrative
Institutions

13. The Court of Justice
• Supreme judicial body of the
Union
• Has the authority to overturn
decisions that conflict with the
EU treaties

14. The European Economic and
Social Committee (EESC)
• An advisory body whose 344 members
represent employees, employers,
farmers, trades, and other interests
–Based in Brussels
• Has six sections
–Provide forums to express opinions on
Commission proposals and suggest
changes in them

15. The EU legislative process
• The EU has three basic procedures
for developing directives and
regulations
–Consultation
–Co-decision
–Assent

16. The European Central Bank and
Monetary Union
• Council of Ministers endorsed a series of
steps to realize an Economic and Monetary
Union (EMU)
– Commenced in 1998 with the formation of the
European System of Central Banks and the
European Central Bank (ECB)
• To conduct a single monetary policy for its members
• ECB is an independent central bank
patterned after Germany’s central bank
– Stated primary objective of the ECB is “to
maintain price stability”

17. Competition Policy
• Includes EU policies involving:
–Structure, conduct, and
support of industries, including
state aid
• Enforcement
• Mergers

18. State Aids and the Common
Agriculture Policy
• State aids - Subsidies paid by
member state governments to
their industries or government-
owned companies
• Common Agriculture Policy (CAP)
- Provided subsidies to farmers
totaling €41 billion in 2009

19. The Social Charter, Social
Democracy, and Labour Markets
• The Social Charter provides a vision for:
– Free circulation of labour and the rights to fair wages
– Improvement of living and working conditions
– Social security
– Free association and collective bargaining
– Vocational training and education
– Equal treatment for men and women
– Information
– Consultation and participation for workers
– Health protection and safety in the workplace
– Protection for children
– Adolescents and the elderly
– Protection of the disabled

20. Nonmarket Issues
• Categorized by:
–The level at which they are
addressed
–The EU level versus that of a
member state
–Whether they are specific to an
industry or to an individual firm

21. Interests and Their Organization
• Interests are pluralistic in
the EU
–Organization is different:
•In part because the
governments of the member
states are parliamentary

22. Nonmarket Strategies in the EU
• Much of the nonmarket action in the EU takes place
behind the scenes
– Most businesses avoid taking public action that might be
subjected to criticism
• Because of the pervasive influence of government
in most EU countries:
– Firms seldom engage in open confrontation with
government
• Lobbying is the principal political activity for
implementing:
– Representation
– Informational strategies in the EU

23. EU Institutions, Constituencies,
and Access

24. Case - The European Union
Carbon Tax
• The carbon/energy tax would affect production
and consumption decisions throughout the
European Union
• The tax would ultimately be borne in large part
by individuals and would have the greatest
impact on those who intensively used energy,
and particularly carbon-based fuels
• A carbon/energy tax also would generate
substantial revenue for governments
• Trade associations opposed the tax and argued
for voluntary conservation measures

25. Case - The European Union Data
Protection Directive
• In 1995 the European Union enacted a Directive
on Data Protection to protect the privacy of EU
residents when using the Internet,
telecommunications, and various commercial
transactions
• EU did not have an explicit rule about personal
information processed through cloud
computing, and since the processing could take
place anywhere in the world, concerns were
raised
• The modernization of the Directive could have
broad ramifications for e-commerce, social
media, and mobile communications companies

26. Case - The Euro Crisis
• Greece joined the euro zone in 2002 but never met
the qualification criteria
– The sovereign debt of Greece reached 143 percent of
GDP in 2010 and long-term borrowing became
increasingly difficult to arrange
• The risk of default was borne by the holders of Greek
sovereign debt and lenders to Greek banks and
companies
• With the situation dire the so-called troika, EU, IMF,
and ECB, provided €100 billion to Greece in May 2010
• It was feared that financial markets would drive other
countries out of the euro affecting the world economy

29. 2.2
EMERGING MARKETS
AND
RISKS

30. Topics Covered
• Introduction
• Country assessment
• Opportunities
• Risk assessment
• Management in the nonmarket
environment

31. Introduction
• Eighty percent of the world’s
population lives in emerging markets
countries
• Opportunities in many emerging
market countries are very attractive to
firms
• Foreign direct investment has flowed
to the relatively stable and lower-risk
countries

32. Factors in Country Assessment
• Individual freedom
• Economic freedom
• Corruption
• Ease of doing business
• Competitiveness
• Political risk
• Sovereign default risk
• Use of the measures
• Culture

33. Rankings of BRIC Countries

34. Types of Opportunities in
Emerging Markets
• Opportunities in emerging
markets are of two basic types:
–Use a country to export goods to
better developed countries and
markets
–Use the opportunity that stems
from the domestic economy

35. Underdeveloped Markets and
Business Groups
• Domestic capital markets may be
inadequate for the financing
needed in emerging market
economies
–Has led to the formation of
business groups in a number of
countries as a means of providing
financing and diversifying risks

36. Opportunity at the Bottom of the
Pyramid?
• C.K. Prahalad (2004) argued that:
–Companies had overlooked as
customers the 4 billion people in the
world who lived on less than $2 a day
–Private companies could make a
“fortune” serving these consumers,
helping to bring them out of poverty

37. Bottom of the Pyramid

38. BRIC Markets Pyramid

39. Opportunity at the Bottom of the
Pyramid?
• Karnani criticized Prahalad’s thesis
–Argued that:
•It was “logically flawed and
inconsistent with the evidence”
•The market at the bottom of the
pyramid was not that large and was
costly to serve

40. Microfinance
• Modern version due to Muhammad
Yunus
–Grameen Bank - Loaned to groups or
circles of women, who were
responsible for:
• Allocating the borrowings among
themselves
• Ensuring that the borrowings were
repaid

41. Fair Trade
• Fair trade movement was begun to improve
the lives of:
– Poor farmers
– Workers trapped by market conditions
• Can be understood as an approach to
improving the well-being of poor farmers in
developing countries by:
– Circumventing markets
– Coordinating market behaviour

42. The Fair Trade System
• Challenges
–A large price premium that
may suppress the demand
–Quality concerns

43. Risk Assessment
• Risks in emerging markets can differ in
magnitude and nature from those in
developed countries
–Risks are greater in magnitude in emerging
markets
–Foreign risks arise from a broader range of
factors than do domestic risks
–Risks can depend on the country of origin

44. Sources and Types of Risks
• Coups
• Democratic
revolution
• Policy risk
• Regulatory risk
• Price controls
• Financial restrictions
• Nationalization and
seizures 17-44
• Political
megalomania
• Political corruption
• Ethnic and religious
conflict
• Media restrictions
• Environmental risks
• Market risk hedging

45. Management in the Nonmarket
Environment
• Managing policy risk:
–Understand the preferences of the actors
in the market and nonmarket
environments
–Have a structure analogous to that of the
intelligence community that can provide
information and assessments
–Influence the risk through collective action
and coalitions

46. Case - Social Entrepreneurship: Kiva
• The Flannerys sent e-mail to their wedding guest list
announcing the opportunity to lend, and over the
weekend all eight were funded
– They also sent out a press release that was posted on Daily
Kos, and $10,000 was raised in one day
• A year later Kiva was featured in a 15-minute segment
on PBS, and it was deluged with funds
– Matched lenders with entrepreneurs over the Internet
– Did not select the entrepreneurs but instead relied on field
partners
– On its Risk and Due Diligence page Kiva warned lenders
about the potential risks associated with their lending

47. Case - Equity Bank of Kenya
• Beginning in 1984 as a microfinance
lender, Equity Bank of Kenya had:
–Focused on providing banking services to
the unbanked and to small account holders
• The bank had begun to expand the
scope of its banking activities beyond
those of its individual and household
base
• Mobile phone banking

48. Case - Equity Bank of Kenya
• Agency banking
– A shopkeeper would act as the front office with the
bank managing and guaranteeing deposits
– The agent would receive training and be provided
with the necessary technology to handle a variety of
banking transactions
• Equity Bank’s overall strategy was to expand in
COMESA (Common Market of East and Southern
Africa) countries
• Despite the promising market opportunities in
East Africa, shares in Equity Bank fell to a 20-
month low

49. 2.3
INTERNATIONAL TRADE
AND
WTO

50. Topics Covered
• Introduction
• The economics of international trade
• The political economy of international trade
policy
• International trade agreements
• U.S. trade policy
• The political economy of protectionism
• The political economy of market opening

51. Introduction
• International trade policy is the result of
economic and political forces
– The principal economic force is the gains from
trade
• Provides the economic rationale for free trade
– The principal political force
• Benefits that firms, consumers, employees,
and suppliers can obtain through favorable
trade policies

52. International Trade Policy Process

53. The Economics of International Trade
• Competitive theory - Based on
the gains from trade
–Evident in the case of a country
that cannot produce a product
that its citizens wish to
consume

54. Production and Consumption
Possibilities — Autarky
19-54

55. Production and Consumption
Possibilities with Trade

56. The Economics of International Trade
• Strategic trade theory - Economists
have considered whether a nation can
gain from a strategic trade policy
–Intervention to:
•Protect domestic industries
•Subsidize exports
•Stimulate demand for domestic goods

57. The Politics of International Trade Policy

58. Asymmetries in the Politics
• Due to:
– Sunk resources
– Rents on those resources

59. The World Trade Organization (WTO)
• The WTO has 154 member countries
• Three principal roles
– Provides a system of agreements that helps trade
move more freely
– Provides a forum for trade negotiations such as
the telecommunications agreement concluded in
1997
– Provides a dispute settlement mechanism to
resolve trade disputes in a timely manner

60. The World Trade Organization (WTO)
• The WTO agreements
–GATT
–GATS
–TRIPS
–Dispute settlement
–Trade policy reviews
–The Agricultural Agreement
–Agreement on government procurement

61. Antidumping, Countervailing
Duties, and Safeguards
• Antidumping had been used almost
exclusively by developed countries
• Countervailing duties are allowed by the
WTO agreements to offset the effects of
subsidies provided by another country
• Temporary safeguards against a surge in
imports can be taken to avoid “serious
injury” to a country

62. Other Trade Agreements
• NAFTA
• Common Market of the
European Union
• A large number of bilateral and
multilateral agreements

63. The Structure of U.S. Trade Policy
• The politics of international trade takes place
in four institutional arenas
– Cabinet departments
– Regulatory agencies
– Congress
– The Office of the President
• The administration of trade policy has been
placed with executive branch agencies
– Primarily the Departments of the Treasury, State,
and Commerce

64. Major Components of U.S. Trade Law
Section 201 (temporary
safeguards)
Provides for temporary relief for domestic industries seriously
injured by increased imports; no unfair trade practice is required
Section 301 (presidential
retaliation)
Provides for action against countries that restrict imports of U.S.
goods or subsidize exports to the United States
Section 731
(antidumping)
Provides authority for the imposition of duties on goods imported
to the U.S. at a price that is less than fair value (LTFV)
Section 303
(countervailing duties)
Provides authority for the imposition of duties against those
countries that subsidize their domestic industries
Section 337 (intellectual
property)
Allows retaliation against countries that violate U.S. patents,
copyrights, or protected trade secrets
Trade Adjustment
Assistance
Provides assistance for those injured by imports

65. The Political Economy of
Protectionism
• Protection applies to two kinds of
conditions
– Predatory trade practice - Where a foreign
firm sells in the U.S. at a price below its cost
• Export subsidization or predatory dumping
– Relative efficiency - When foreign firms have
lower costs than U.S. firms and sell in the U.S.
at prices above their costs yet below the
prices of domestic goods

66. The Political Economy of
Protectionism
• The relative inefficiency of domestic industries is
addressed in four ways
– Those injured may be compensated under the Trade
Adjustment Assistance Act
– Safeguards relief can be granted under Section 201 in
the form of temporary tariffs, etc.
– Relief is granted under Section 731 when a
petitioner’s dumping complaint is affirmed by the ITC
and the ITA
– Protection is provided by measures ranging from
tariffs to voluntary agreements to limit imports

67. The Cost of Protectionism
• Consumers bear the cost of
protectionism
–Consumers are costly to organize
–Individual consumers are unlikely to act
politically on trade protection issues
–Organized consumer groups have largely
been inactive in cases involving protection
of domestic industries

68. Channels of Protection
• Firms, labour unions, and
industries can seek protection
from imports through:
–Political channels
–Administrative channels

69. The North American Free
Trade Agreement (NAFTA)
• A free trade agreement and not
a market integration agreement
• Provided for the elimination of
tariff and nontariff barriers over
a 10-year period
–Some barriers were to be phased
out over 15 years

70. The North American Free Trade
Agreement (NAFTA)
• Measures were taken to reduce opposition
– NAFTA included transition provisions for a
gradual phase out of trade barriers to give
industries time to adjust
– To obtain congressional votes, the Clinton
administration made a number of side deals
outside the trade area
– Side agreements were concluded to reduce the
opposition of environmental groups and
organized labour

71. Market Opening Under the Threat
of Retaliation
• Most effective means of
addressing foreign barriers to
trade is through negotiations
–Countries, particularly the United
States, have used retaliation and
its threat to provide leverage

72. Bilateral Free Trade Agreements
• United States had 17 bilateral
free trade agreements in effect
–Free trade agreements were
negotiated with South Korea,
Panama, and Columbia in 2006 by
the Bush administration

73. Case - Cemex and Antidumping
• In August the U.S. International Trade Commission ruled that:
– Cemex had unfairly depressed cement prices in the southern
and southwestern United States by dumping cement and
cement clinker
• The antidumping laws codified in Section 731 allowed:
– Either a private party or the International Trade Administration
(ITA), an arm of the Department of Commerce (DOC), to file a
petition for redress
• To find material injury or the threat of material injury, the ITC had
to first determine the “like product” and the “domestic industry”
• From the beginning of the process, Cemex complied fully with the
requests for data

74. Case- Cemex and Antidumping
• Zambrano decided to reduce substantially
Cemex’s exports to the United States
• Cemex maintained a substantial Type II (bulk)
cement market in Mexico
• Cemex requested administrative reviews of
the duty
– In the first review the petitioners alleged that
Cemex had created a fictitious bulk market in its
home country to reduce the duties

75. Case - Compulsory Licensing,
Thailand, and Abbott Laboratories
• Brazil had threatened to invoke
compulsory licensing in 2000 on three
AIDS drugs, including one produced by
Abbott
• In 2004 Thailand introduced a national
health care plan
• In January 2007 Thailand notified
Abbott and Sanofi-Aventis that
compulsory licenses would be issued
for Kaletra and Palvix, respectively
• Abbott publicly objected and
announced that it was withdrawing all
pending applications for marketing new
drugs in Thailand

76. Cases - Compulsory Licensing,
Thailand, and Abbott Laboratories
• After discussions with the
World Health Organization,
Abbott agreed in April 2007
to change its strategy and
negotiate with the Thai
government
• The French AIDS activist group Act
Up-Paris launched a cyber attack
on Abbott’s Web site
– Disrupted services,
including its online sales
• Brazil decided to use
compulsory licensing as a
bargaining tactic

77. Case - The Airbus and Boeing
Trade Disputes
• The market for large civil
aircraft is dominated by
Boeing and Airbus
• The characteristics of the
LCA market explain the
emergence and
persistence of the current
duopoly
• LCA market is
characterized by a steep
learning curve due to the
technological complexity
of the production
processes
• Economies of scope

78. Case - The Airbus and Boeing Trade
Disputes
• The Bilateral Agreement in 1992 did not
seek to eliminate subsidies in the LCA
industry
– Instead allowed the EU and the US to
continue to provide a limited level of
support to their respective aircraft
industries
• On October 6, 2004, the US withdrew from
the Bilateral Agreement
• The US complained about several forms of
aid allegedly granted by the EU
• The EU and its member states filed a
counterclaim:
– Accusing the US of providing subsidies
to Boeing that were inconsistent with
the SCM Agreement and the GATT

79. CASE DISCUSSION :
TOYS R US

81. Core Readings
• Baron, David P.(2013) Business and its environment,
7th Edition, Pearson, Ch.15-19

82. Next Week’s Ideas for Discussion
• Bartram, S (2008) What lies beneath:
foreign exchange rate exposure, hedging
and cash flows. Journal of Banking and
Finance, 32 (8). pp. 1508-1521.

83. QUESTIONS?