Information Security Culture

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Part One International Trade And Its
Regulation Implications for Managers. Prof.
Simon J. Evenett www.evenett.com 25 November 2005
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Organisation of this part of the course

• Factual overview of the world trading system.
• Why do nations trade?
• Three simple principles of trade policy.
• How do firms use the WTO and its rules?
• Service sector reform and the WTO.

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What is the world trading system and how has it
changed in recent years?
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Defining terms World trading system

• Misnomer
• World
• Should not connote equal participation by all
  nations.
• Trading
• Should not be taken to mean just trade in goods
  and services FDI and migration are important
  too.
• System
• Should not be taken to mean that there is some
  overarching mechanism or group of people that
  control all of these commercial transactions or
  state-to-state interactions.

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Exports by region in 2004
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Export growth since 2000
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Export growth of selected regional trading areas
since 2000
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World export growth has been much faster than GDP
growth
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Exports of commercial services is now 20 percent
of total exports
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Parts and components trade has grown much faster
than final goods
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FDI inflows 1995-2004
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FDI stocks 1980-2004
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FDI and domestic capital formation (investment)
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Most inward FDI is MA, not Greenfield FDI
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Foreign born workers in OECD nations 1998 and 2003
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Remittances are often larger than aid receipts
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Explanations for the factual record Why do
nations trade? And what are they trading more
than ever?
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Why do nations trade?

• Principle of Comparative Advantage (Ricardo).
• Sources of comparative advantage
• Technological/productivity differences.
• Factor endownment differences.
• Capital rich north and labour abundant south.
• Differences in tastes.
• Product differentiation (Krugman, Helpman.)
• Influence of policies.

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Why is trade growing so fast?

• Death of Distance including
• Falling international transportation costs.
• Ease of communication.
• Recent doubts on the importance of these factors.
• Reductions in trade barriers.
• Types of trade barriers tariffs, quotas, etc.
• Type of trade reform unilateral, regional,
  multilateral.
• Relative importance 2/3 policy 1/3 other
  factors.
• Interaction between technology and trade barriers.

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Tariffs on industrial products in wealthy
countries are generally low
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But more favourable access cannot be taken for
granted!
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Antidumping cases 1995 June 2005
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Lower tariffs etc are good for business, but are
they smart politics?

• Not always.
• Countries tend not to liberalise unilaterally.
  Why?
• Concentrated pain and diffuse benefits.
• When countries liberalise together export
  interests can be galvanised too.
• Explains why we see so many bilateral and
  regional trade agreements, like NAFTA, EU.

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But why do all major governments come together to
liberalise?

• Because regional and bilateral agreements
  introduce discrimination against excluded firms.
• Multilateral agreements provide greater
  certainty.
• Any benefit extended to one country must be
  extended to all.
• Most Favoured Nation principle.
• WTO is the forum where multilateral trade
  agreements are negotiated and enforced.
• More on the WTO later.

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Growth in international migration

• Greater information flows and impact on
  aspirations.
• Large cohorts of younger people in the developing
  world.
• Falling cost of international travel.
• Increased premium on skill in industrialised
  world.
• Greater education opportunities in industrialised
  world.
• Aging populations in industrialised world.

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Growth in FDI

• Death of distance.
• Rise of export platforms.
• Rise of international outsourcing which, in turn,
  reflects
• Falling trade barriers.
• Greater ability to enforce contracts with
  suppliers.
• Changes in management thinking.
• Substantial liberalisation of inward FDI regimes.
• Less aversion to foreign takeovers etc.
• Privatisation and deregulation reforms.

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More nations are liberalising rules on foreign
investment
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Three Simple Principles of Trade Policy.

• Here the reading by Douglas Irwin is relevant.

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What is trade policy?

• Set of policy measures that a customs territory
  or nation uses to discriminate against goods as
  they cross the border.
• Discrimination against imports (or protection).
• Tariffs, quotas, tariff-quotas, anti-dumping
  orders.
• Discrimination against exports.
• Export taxes.
• Discrimination in favour of exports.
• Export subsidies.

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Principle 1 A tax on imports is a tax on exports

• Consult Irwins short book for these principles.
• Nations export to pay for their imports.
• Domestic consumers can be supplied directly or
  indirectly. Both methods require resources.
• Market forces and allowing international trade
  selects the most efficient method.
• Lerner Symmetry.
• A nations own tariffs damage its export
  interests. Why?

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Principle 2 Businesses are consumers too.

• It is well known that personal consumers gain
  from reductions in tariffs on the goods they
  import.
• What is less well appreciated is that firms
  import lots of goods too.
• The prices firms pay for imports directly affects
  their costs and competitiveness.
• International production networks.
• Incentives created for firms to lobby.
• Structure of protection tariff escalation.

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Principle 3 Trade imbalances reflect capital
flows.

• Balance of payments includes
• Current account,
• Capital account, and
• A small balancing terms.
• In gross terms capital account transactions are
  much larger than current account transactions.
• Capital account drives the current account.
• What drives the capital flows? Perceived
  differences in returns on financial assets.

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Three fallacies of import protection.

• Reverse these three principles to understand why
  the following statements are fallacies
• Tariffs affect imports not export
  competitiveness.
• Tariffs protect industries and save jobs.
• Higher tariffs can reduce the trade deficit.
• These arguments apply not just to tariffs but to
  other forms of protection (quotas, antidumping
  orders, etc.)

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Recap what have we learnt so far?

• Factual record on trade flows, FDI, and
  associated policy reforms.
• Why nations trade.
• Why nations liberalise trade together.
• Three principles of trade policyor three
  fallacies about import protection.
• Next we add some firm based specificity.

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How do firms use the WTO and its rules?

• Here the case studies on the course outline are
  relevant.

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Setting the scene

• Four ways in which firms enter foreign markets
• Direct exporting of goods and services.
• Establish subsidiary in a foreign market
  (including joint ventures.)
• Licensing foreign firms to produce.
• Temporary movement of employees to foreign
  customers.
• Long standing discrimination against foreign
  suppliers.

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The WTO

• Established on 1 January 1995.
• Membershipgovernments only.
• Funding.
• Inter-governmental not supra-national.
• Home to 4 main agreements GATT, GATS, TRIPs, and
  DSU. (Get used to the acronyms!!)
• Negotiate agreements in rounds.
• Enforce agreements through dispute settlement.
• See the ITC reading for further details.

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Four basic rules of the WTO

• Protection of domestic industry is through
  tariffsban on quantitative restrictions on
  trade.
• Binding of tariffs.
• Most Favoured Nation (MFN) treatmentban on
  discrimination among foreign suppliers.
• National Treatmentban on discrimination against
  foreign goods once they enter the domestic
  commerce of a country.
• Other rules relate to subsidies, temporary
  measures to help domestic industries, and
  treatment of intellectual property and investment.

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What stake does business have in the WTO?

• Think of a simple form of international commerce
  importing a part or component.
• What could go wrong and how do WTO rules prevent
  or reduce the risks of engaging in international
  trade?
• Assurance that no quota prevents importation.
• Certainty over tariff treatment.
• Protection on customs valuation.
• Protection against discriminatory internal taxes
  and regulations once customs is passed.
• What are the corresponding benefits to exporters?

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Update on the Doha Round.

• Launched in 2001 to much fanfareincluded a
  development mandate.
• Envisaged negotiations on a wide range of areas
  agriculture, manufactues, services, and other
  rules.
• Agricultural negotiations have proved to be a
  sticking point agreement to eliminate export
  subsidies but market access negotiations very
  difficult.
• Stalemate in November 2005. Everything held up by
  agricultural negotiations.
• Hong Kong Ministerial Meeting in December 2005.
• When will this round be concluded?

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How informed businesses use the WTO
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Blocking Chinas WTO Accession AIG

• The interest of a single U.S. company, insurance
  giant AIG, was stopping a final agreement on
  China's WTO membership. Washington Post, 1
  October 2001.
• AIGs wholly-owned subsidiary in China.
• What WTO accession would mean for competition to
  AIG.
• What subsequently happened.

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How informed businesses use the WTO
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Using trade rules for commercial advantage key
factors

• Influence of firm over national trade
  policymaking.
• Necessary? If so, means and extent?
• Mix of firm-control versus official-control over
  key decisions.
• Initiation and termination.
• Threats and payoffs.
• Conflicts with national foreign policy goals.
• Access to best legal expertise.

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Wrapping UpTrade policy and inter-firm rivalry

• Firms operating abroador fighting foreign
  competitionhave a clear interest in manipulating
  trade policies to their advantage.
• There are four levers that influential firms
  can and do pull.
• Remember rivals have access to these leverscalls
  for defensive planning too.
• Many factors determine the effectiveness of a
  strategy based in part on trade policy.

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Service sector reform and the WTO

• Here the Mattoo paper is relevant.

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Preliminaries

• Why is the trade perspective on service sector
  reform potentially important?
• Ongoing Doha round negotiations.
• European Services Directive.
• Other regional trade negotiations.

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Preliminaries

• What are the characteristics of services?
• Intangible.
• Invisible.
• Perishable.
• Requiring simultaneous production and
  consumption.
• Exceptions to these characteristics.
• In what ways, if at all, do they differ from
  goods?

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Which policies affect service sector trade?
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The gains from services trade the case of legal
services
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Economics of reducing discrimination against
foreign service sector firms

• Depends very much on the nature of the
  liberalisation.
• Lowering of a price-based measure.
• Allowing more entry to occur.
• Interactions with public service obligations.
• Substitution across modes of supply as well as
  between domestic and foreign firms.
• Presence of asymmetries of information can have
  non-price-based effects.
• Financial stability and allowing in foreign banks.

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General Agreement on Trade in Services (GATS)

• Negotiated in the Uruguay Round.
• Main points
• Different in structure from GATT.
• At best provides a framework for future
  liberalisation of service sectors at the WTO.
• Yet multilateral trade negotiations have yielded
  little liberalisation to datecodification of
  unilateral reforms.
• Even so, GATS and the principles underlying it
  have defined how many countries structure their
  own domestic reform initiatives.

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Structure of General Agreement on Trade in
Services (GATS)

• Contains a set of general rules on national
  treatment and market access.
• Contains sector-specific commitments from each
  WTO member
• Including a non-exclusive list of measures, some
  of which can be discriminatory.
• For each sector and for each mode of supply, a
  nation specifies in its schedule one of four
  categories.
• Commitments can come into effect at some point in
  the future.

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Market Access commitments under the GATSstill
plenty to do.
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National Treatment commitments under the GATSa
little better.
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Complicating factors

• MFN principle and regional trading agreements.
• Relationship between the GATS and domestic
  regulation
• Regulation can be motivated on social and
  efficiency grounds as well as by protectionism.
• GATS affirms that liberalisation need not imply
  deregulation.
• Difficulties in writing rules that distinguish
  between these motives raising possible
  encroachment of national sovereignty.
• Necessity test use the least distortive
  instrument.

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Example of the GATS-domestic regulation
interface Telecommunications sector

• Two important regulatory matters
• Universal service provisions.
• Access to network technologies.
• Could regulations on these matters have a
  discriminatory effect?
• What would the necessity test say here?
• Alternatives to current regulations.
• (Non-binding) telecoms reference paper.

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Chinas accession to the WTO Implications for
service sector firms.

• China joined the WTO on 11 December 2001.
• Accession negotiations differ from negotiations
  during trade rounds.
• Existing WTO members have strong leverage.
• In service sector this often amounted to haggling
  over the number of licenses to be granted to a
  trading partners service sector firms.
• China made substantial commitments to open her
  service sector markets, see next tables.

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Chinas Market Access commitments exceed other
poor WTO members
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The same is true for Chinas National Treatment
commitments.
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Chinas WTO commitments in the telecoms sector

• Unclear commitments on mode 1 (cross-border
  supply.)
• No commitments on mode 2 (consumption abroad).
• On mode 3
• Mobile voice and data service providers face
  restrictions on geographic coverage of operations
  (until 2006) and on equity shares (less than 49
  by 2004).
• Similar restrictions apply to fixed line
  providers.

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Lessons for firms from Chinas WTO accession

• The window of opportunity presented by Chinas
  WTO accession is now closed.
• China appears to be very reluctant to make any
  more concessions in this areahas implications
  for her role in current WTO trade negotiations.
• There is a real premium for firms on following
  closely these issues at the WTO.
• Implications for Russian WTO accession
  negotiations.

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Wrap up on service sector reform and trade
negotiations.

• To date the main WTO agreement on service sector
  trade has not led to many new commercial
  opportunitiesyet it has help protect overseas
  service operations.
• But WTO accessions provide important windows of
  opportunity to gain licenses and more favourable
  treatment.
• Regional trade negotiations provide another
  vechile for securing greater market access.
• Variety of regulations affecting service sector
  suggest that securing market access is not
  enoughsecuring national treatment is very
  important but very sensitive.
• Harmonisation and mutual recognition of internal
  regulations become very important in this context.