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Economy

International Trade: A New Chapter in History

Osama Rizvi

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International political observers were shocked by Brexit and then Donald Trump‘s US Presidential victory. These two events are potent enough to unnerve the contemporary global order: first, in matters relating to security and, second as to trade. By the end of next March, Theresa May will likely invoke Article 50 of the Lisbon treaty and the complex process of Britain’s divorce from the European Union (EU) begins.

Also, it now has been a more than a month into Trump’s administration; and his flurry of Executive Orders have rocked the Washington, DC establishment.

This article examines the future of Multinational Corporations (MNCs) under this new Trump era and – with Brexit clearly on track – how MNCs will respond.  Some global firms may arguably be in retreat given the political uncertainty introduced by these changes.

During the 20th century, China was lowering its bulwarks to trade and other exchange and started opening up to the world and the Soviet Union collapsing.   The age of ‘Consumerism,’ had begun as Francis Fukuyama wrote in his seminal essay “The End of History.” At that time the idea of a global firm seemed quite attractive and lucrative. There was a vacuum, a space to be filled and the idea of the global firm was to fill this space.   Companies grew, businesses sprawled begetting supply chains and creating jobs, trade relationships, luring stakeholders.   Their businesses entail supply chains that cover 50% of world trade.   Nevertheless, the global arbitrage that international trade has created is starting to shrink.   Global business have become so large that it is, at times, difficult to manage the perplex, legal and logistical tapestry of carrying them out. Recalling the recent tax case of Apple Inc., Governments are now cracking on companies accused of tax evasion and as a result MNCs are stashing earnings in off-shore tax havens.

To give the above scenario some perspective, consider these facts: according to the UK Financial Times Stock Exchange (FTSE), the profits of the top 700-odd multinational firms have dropped by 25% and the ROE (return on equity) ratio is down by 7%- from “18% a decade ago to 11%”.   The Economist magazine reported research “examining record of 500 large firms which shows “in eight out of ten sectors multinational firms have expanded their aggregate sales more slowly than their domestic peers”.   We can see local firms, in some places, over taking or at least starting to take in some cases substantial market share from the MNCs. Take for example Uber’s surrender to the Sino giant Didi, in India and where Reliance mobile competing aggressively against Vodafone.   Nevertheless this doesn’t means that global firms are totally in retreat but that their earlier dominance is now facing some heat from the local firms.

However, in some case global firms may have started to sense a change in hospitality by host countries to investment.   This may provoke US and EU leaders such as Mr. Trump, Marine La Pen and other rightists and nationalists who are arguably perceived to be eager in targeting a scapegoat with their protectionist agendas.   So, we see Mr. Trump’s success in exploiting the sentiments of the US people by peppering his slogans with rightest promises. His policies at face value may appear productive – that is, reducing taxes (now taking the shape of Border Adjustment tax), less regulations and bringing jobs back but they have caused an unnecessary and unwanted surge in the US dollar.   This has led Janet Yellen to hint at an interest rate hike when the US Federal Reserve Bank’s FOMC (Federal Open Market Committee) meets next month in its policy setting meeting.   It may be argued that a strong US dollar is not good for the US and its trading partners. Donald’s Trump’s proposed “twenty-percent tariff” (against Mexican imports), if implemented, will make the dollar appreciate further causing inflation.   Economists will ask how?   An article in The Atlantic explains by suggesting that “higher tax on imports paired with lower taxes on exports will theoretically cancel each other out, as demand increases for U.S. exports (such exports would be cheaper) and the U.S. will demand fewer foreign goods (since they’ll be more expensive).   Economists assert that this will result in a shift in exchange rates that will offset taxes: in theory, the dollar will strengthen as a result of increased demand for cheaper American-made products.   As a result of a stronger dollar, American-made products will be more expensive and foreign goods will become cheaper as a stronger dollar increases purchasing power thus, offsetting the import tax”.

Brexit is another complex facet where uncertainty is growing. Theresa May triggers article 50 by the end of next month financial and equity markets embrace for a long stretch of unpredictable negotiations that may take more than two years.   According to many political analysts another key issue remains: immigration.   In any case the EU is not going to allow the UK to enjoy preferential treatment without it (UK) allowing the free movement of people. We are going to see new trade deals between UK and other countries. But the UK is going to lose a huge export market in the form of the EU.

While we read through the tale of the slowdown of global businesses as a whole there exists a business, risk solution to this rise in populism and inclination for protectionism: Political Risk Insurance (or PRI).   Lloyd’s of London, the oldest insurance market in the world, decided to move its subsidiary in Continental Europe after Brexit eventuated. Inga Beale, CEO of Lloyd’s of London, says “. “I wouldn’t be surprised if we start seeing much more political-risk insurance being bought all over the place,” in an interview.   Daniel Wagner, a Managing Director of Risk Solutions at Risk Cooperative, describes in an article for the Huffington Post how he predicted in the 1990’s that the PRI industry will grow in the years to come.   He holds the same view today: “The PRI industry stands at a similar precipice today. With the looming possibility of trade wars, deterioration in investment climates, and ever tightening lending standards, there is every reason to believe that, as much as the industry has grown – and that growth has been dramatic over the past 25 years – it also stands to grow dramatically in the coming 5-10 years.”

Certainly, the world is in the midst of a change. On political and as well as economic front. The global firms, as aforementioned, are already in for a correction. But Mr. Trump’s protectionism, his tweet-tantrums and talks of trade wars and the uncertainty of the British divorce from the EU, which, according to some, bodes ill for the bloc’s future, may accelerate the process of natural adjustment. Such an acceleration is detrimental to the international trade as a whole. We are standing on what seems the first page of this new chapter, let’s hope that there’s a pleasant quirk somewhere ahead.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

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Economy

Business disorder between Europe and U.S.

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The European Union remains cautious in the economic battle with the White House. U.S. President Donald Trump continues to pursue his protectionist policies in international trade system. This has led to raising concerns and serious discontent among the United States’ European partners.

Disputes between the United States and other countries around the world are continuing on trade and economic issues. The fact is that U.S. President Donald Trump intends to exacerbate tensions until the presidential elections of 2020. Many international experts and analysts believe that a major part of the economic approach to the world of Trump has an electoral and political goal.

Many international analysts now talk about the conflicts between the United States and Europe over imposing sweeping steel and aluminum tariffs as a transatlantic “trade war”.

Conflicts that may extend in the near future and affect the widespread relations between Washington and Europe.

On the other hand, the authorities of Germany, Britain and France have not taken a proper approach to the policies of the President of the United States.Though politicians such as Emmanuel Macron, Angela Merkel and Theresa May seek to manage the situation and prevent the exacerbation of tensions with Washington, but people, business owners and European opposition parties are so angry at Trump and the U.S. government that the European troika’s authorities aren’t capable to control or even hide it.

One of the most important reasons for the continuation of Trump’s economic policies in the world is the passivity of European leaders against the White House. Under such circumstances, Europe has threatened to retaliate against the U.S. if Trump imposes steel and aluminum tariffs on European exports.

After Trump made his first announcement on the tariffs, European Commission President Jean-Claude Juncker threatened to put tariffs on American goods in response to Trump’s decision. That could decrease demand for those products inside EU borders and consequently lead to U.S. workers losing their jobs. But practically, European countries did not do anything about this.

Although some European citizens thought that the Chancellor of Germany would have a more determined approach than other European politicians, this was also a mistake!The German Chancellor stated that European Union member states must give the EU trade commissioner a clear mandate for negotiations with the United States over a long-term exemption from U.S. metal tariffs. Markel added: “Of course, we think it’s important that there are exemptions not only for a limited period of time … So far, we have had a very united stance, namely that we view these tariff demands as unjustified and that we want a long-term exemption.”

The fact is that Merkel’s implicit threat, which she didn’t address directly and explicitly because of her conservative policy towards the United States, is the same as the “European countermeasures” against the United States.

For months now, there have been months of anti-European measures taken by the White House and customs duties on European aluminum and steel. However, European countries have preferred to keep Silent instead of confronting Washington!
Indeed, the prolonged U.S.-EU talks on steel and aluminum tariffs is going to increase the dissatisfaction and anger among the European public opinion. It will also affect the performance of American companies in Europe.

First published in our partner Tehran Times

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Economy

Citizen Capitalism: How a Universal Fund can provide Influence and Income to all

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In the face of growing wealth inequality worldwide, more and more people are discussing alternatives to the current laissez-faire capitalism status quo.  Tamara Belinfanti, Sergio Gramitto and the late Lynn Stout offer up their own solution in Citizen Capitalism: How a universal fund can provide influence and income to all.

Our authors have devised up a concept they call the Universal Fund.  It’s like a sovereign wealth fund, but is privately created and funded via private ordering. That means that the Universal Fund is to be created from donations of stocks by companies and philanthropists.  The government would hence be uninvolved; the Universal Fund is not a socialist venture.  Rather, it is in part modeled on the structure of NGOs like the Sierra Club and the Red Cross. The Fund would provide an annual dividend to every citizen, with no maximum income cap.  Though it may seem absurd to send welfare payments to the wealthy, it’s politically savvy framing.  A free public college bill was passed in ultraconservative Tennessee thanks to having no maximum income cap; conservative detractors weren’t able to use the “class warfare” and “welfare queen” arguments. It should be noted that charitable tax deductions, estate tax reductions and lowered tax brackets would act as a de facto government incentive for the wealthy to donate to the Universal Fund.

The goals of the Universal Fund would be to decrease wealth inequality, encourage long-term investment and increase civic engagement in corporate culture.  On the last point, the authors remind us that, “The top 10% [of wealthiest Americans] hold more than 90% of all shares.”  Even in regards to the other 10% of shares owned, most of them are passively owned.  Most small-time investors don’t have time to vote in the annual general meetings of every company in which they are invested in.  Thus, boardroom votes are dominated by two shareholder proxy advisory firms and individual investors who own a substantial percentage of shares, as well as fund portfolio & hedge fund managers.

These Wall Street elites naturally tend to vote based upon their elitist interests.  Thus, they usually make decisions that are insane in terms of employee welfare, long-term corporate growth, executive pay and the environment. For example, `the authors remind us of the recent case of Martin Shkreli, the hedge fund manager who acquired Turing Pharmaceuticals and then raised AIDS medication prices from $13.50 to $750. This is the embodiment of the Reagan-era Golden Rule of maximizing shareholder value.  Not only is this Gordon Gekko truism objectively crazy, it’s actually legally unfounded.  Contrary to what you hear on CNBC or Fox Business, there’s no legal requirement that companies only focus on maximizing shareholder value.  The book relates the following quote from Supreme Court Justice Samuel Alito comments in the recent case Burwell v. Hobby Lobby:“Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.”

CITIZEN CAPITALISM points to the ongoing successes of the sovereign wealth funds of Norway and Alaska, an ultraliberal and an ultraconservative society, respectively.  The Alaskan fund generally provides each citizen with a dividend payment of a few thousand dollars each year, via the state’s oil revenues.  The Government Pension Fund Norway is a more pertinent example, since it’s funded through a $1T stock portfolio.  Norway is not only able to fund its citizens’ pensions through the Fund, but also exert a moral influence on the market.  The Fund boycotts various egregious companies, like cigarette manufacturers, and will sell its shares in a company that gets exposed for abusive practices, like say employing child labor.  Our authors likewise want the Universal Fund to use a carrot-and-stick approach in regards to corporate ethics.

The thesis of CITIZEN CAPITALISM is, as the title suggests, rooted in optimism for capitalism.  Though they write about the success of socialist program in Alaska specifically, a conservative state in the US, the authors are convinced that a sovereign wealth fund bill could never be passed in Congress.  Recent polls and election results, however, show that Americans are starting to overwhelmingly favor ambitious government-program proposals like Medicare for All and a Green New Deal.  As I wrote before, the Universal Fund would mostly be feasible due to tax incentives; these government incentives would likely need to be greatly expanded in order to encourage enough stock donations to build the Fund to a substantial size.  Even America’s greatest philanthropists still stockpile billions of dollars in their offshore bank accounts.  Thus, one shouldn’t expect the Universal Fund or other private UBI schemes to become a replacement for state management of wealth inequality through programs like public school funding and marginal taxation.  Nonetheless, CITIZEN CAPITALISM is a stimulating little primer for rethinking the relationship between Wall St and Main St, managing the looming crises of a rapidly aging workforce and automation, plus the balancing of private and public sectors in regards to solving societal problems.

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Working for a brighter future

Cyril Ramaphosa

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Authors: Cyril Ramaphosa and Stefan Löfven*

We stand at a crossroads as seismic shifts take place in the world of work.

Technological advances are changing the nature of many jobs, and leading to the need for new skills. The urgently required greening of economies to meet the challenge of climate change should bring further employment possibilities. Expanding youth populations in some parts of the world, ageing populations in others, may affect labour markets and social security systems.

On one path, countless opportunities lie ahead, not only to create jobs but also to improve the quality of our working lives. This requires that we reinvigorate the social contract that gives all partners a fair stake in the global economy.

On the other path, if we fail to prepare adequately for the coming challenges, we could be heading into a world that widens inequalities and leads to greater uncertainty.

The issues are complex. As co-chairs of the Global Commission on the Future of Work  we, and our fellow members of the Commission – leading figures from business and labour, think tanks, government and non-governmental organizations – have been examining the choices we need to make if we are to meet the challenges resulting from these transformations in the world of work and achieve social justice.

We call for a new, human-centred approach that allows everyone to thrive in a carbon neutral, digital age and affords them dignity, security, and equal opportunity. It must also meet the changing needs and challenges facing businesses and secure sustainable economic growth.

The opportunities are there to improve working lives, expand choice, close the gender gap and reverse the damage that has been wreaked by global inequality.

But it will need committed action on the part of governments and social partners to turn those opportunities into reality.

So how do we achieve this? Three areas of increased investment are needed:

First, we have to invest more in people’s capabilities: This means establishing an effective lifelong learning system that enables people to skill, reskill and upskill – a system that spans early childhood and basic education through to adult learning. It also means investing in the institutions that will support people as they go through transitions in their working lives – from school leavers to older workers. Making gender equality a reality and providing social protection from birth to old age are also critical. These social investments will not only increase productivity. They will also allow for a more inclusive growth, where informal workers and business can both benefit from and contribute to a sound formal economy.

Second, we must invest more in the institutions of work – including the establishment and implementation of a Universal Labour Guarantee. This will ensure that all workers enjoy fundamental rights, an “adequate living wage”, limits on their hours of work and safe and healthy workplaces. Linked to this, people need to have more control over their working time – while meeting the needs of enterprises – so that they can fulfill the full range of their responsibilities and develop their capabilities.

Collective representation through social dialogue between workers and employers needs to be actively promoted. Workers in the informal economy have often improved their working conditions by organizing. Unions need to expand membership to informal workers, whether they work in the rural economy, on the city streets of an emerging economy or on a digital platform. This is a critical step towards formalization and a tool for inclusion.

We’re also calling for governance systems for digital labour platforms that will require these platforms and their clients to respect certain minimum standards.

Finally, we need to invest more in decent and sustainable work. This includes incentives to promote investments in key areas, such as the care economy, the green economy, and the rural economy, as well as high-quality physical and digital infrastructure. We must also reshape private sector incentive structures to encourage a long-term, human-centred approach to business. That includes fair tax policies and improved corporate accounting standards. We need to explore new measures of country progress to track important aspects of economic and social advancement.

Beyond these critical investments, there is a further opportunity: to place discussions about the future of work at the heart of the economic and social debates taking place at the high table of international policy-making. This could revitalize the multilateral system at a time when many are questioning its legitimacy and effectiveness.

Yet none of this will happen by itself. If change is the opportunity, we must seize the moment to renew the social contract and create a brighter future by delivering economic security, equal opportunity and social justice – and ultimately reinforce the fabric of our societies.

Stefan Löfven, Prime Minister of Sweden, co-chairs of the ILO Global Commission on the Future of Work

ILO

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