Macro-Global Economic Environment

What are the basic principles of international trade? What are trade restrictions, and how do they function? What is free trade, and what is its purpose? What are trade blocks? What are the world’s global economic institutions? How does the World Trade Organization function? What is the International Monetary Fund? How about the World Bank? How do these institutions interrelate with one another or impact multinational enterprises? This chapter provides a basic sketch of the macroeconomic environment that affects and is affected by global businesses.

Basics of Trade Restrictions

All governments restrict foreign trade for the same basic principle: to protect domestic producers from foreign competition. Thus, while there are various trade barriers put in place, they all more or less accomplish the same thing: place some kind of cost on foreign-produced goods, thus somehow promoting domestically produced goods. Free trade, then, is the lifting of those barriers.

1. Tariffs are excise taxes on imports and are used to generate revenue.
2. Import Licenses are permits to import a certain amount of a certain good over a specified period (typically one year). Requiring such licenses limits the outflow of foreign currency while strengthening the domestic economy.
3. Export licenses are documents allowing registered corporations to ship restricted goods (such as chemicals, medicines, artwork, historical artifacts, and dual-use items).
4. Import quotas are regulations that limit the amounts of imports allowed in a certain period of time. Some economists believe that low import quotas may be a more effective protective device than tariffs because tariffs do not limit the number of goods entering a country but simply make it more expensive to engage in the import.
5. Trade subsidies are specifically defined under the Subsidies Agreement and U.S. law (Title VII of the Tariff Act of 1930) as a “financial contribution” by a government that provides a benefit. They can be a direct transfer of funds or liabilities (such as grants, loans, or loan guarantees), foregone government revenues (such as tax credits), or the purchase of goods.
6. Voluntary export restrictions are agreements by a government to voluntarily limit their exports to a particular country (rather than a tariff on an import), so it is not a restrictive trade barrier.
7. Local Content Requirements are government-imposed rules that require companies to use domestically manufactured goods or services to operate within a particular economy. These methods of advancing domestic products and services is increasingly popular in recent years.
8. Embargos or sanctions are trade restrictions imposed as a political measure to apply pressure on foreign governments but nevertheless have a significant economic impact. Embargos are complete bans of trade from one country to another, whereas sanctions are trade prohibitions on particular products, services, or technologies.
9. Currency devaluation is the implementation of strategies intended to cause a downward adjustment of the value of a country’s currency relative to another currency (or a group of currencies, or currency standards). For example, a country may choose to take such an action to gain a competitive edge in global trade or reduce the sovereign debt because a weak currency makes that nation’s exports more competitive in a global market while simultaneously making imports more expensive.
10. Non-tariff barriers can refer to any number of intangible trade impediments, such as unreasonable standards or bureaucratic red tape in customs procedures.

Governments place trade restrictions on particular foreign goods for a variety of reasons. There are several main justifications offered.

First, governments often claim they are placing trade barriers to increase domestic jobs. Trade barriers do, in fact, have the impact of protecting some domestic industries from foreign competition. Often these are placed on incoming foreign goods to drive up the demand for domestically produced goods, which in turn increases domestic jobs. Because the external factor of imposing trade restrictions on a particular good decreases foreign competition for that good, they necessarily drive up the price of that good within the domestic market. Therefore, trade barriers may increase domestic jobs for manufacturing the restricted product, but they also increase the cost of that product to domestic users and consumers. These higher prices could also result in a decrease in the consumption of the good in question, which could ultimately reduce jobs in the industry as fewer goods would be made.

For example, assume the product is steel, and the United States government places tariffs on the foreign import of steel. This tariff drives up the price of foreign steel, making it easier for domestic steel manufacturers to compete. A tariff on a particular product might increase jobs within that specific industry, tariffs have an overall adverse effect on jobs in the economy. If the price of domestic steel goes up, this also increases the price of steel to United States consumers and any other United States industry that uses steel in the products they manufacture. Steel makes up railroads, vehicles, oil and gas pipelines, skyscrapers, elevators, subways, bridges, automobiles, ships, knives and forks, razors, surgical instruments, and many other products. If a trade restriction raises the domestic price for steel, the price of any product that uses steel as a component part also increases. Therefore, if the price of steel goes up, so does the price of vehicles, which adversely affects the profitability of the automotive industry, thus negatively affecting employment possibilities within that market.

Proponents of trade restrictions offer other reasons to justify the restrictions besides additional jobs. Many proponents of trade restrictions argue the restrictions must be put into place to “level the playing field” and create more fair competition. In some cases, this argument is accurate, such as when foreign producers receive unfair advantages (subsidies or an intentionally devalued currency from their own government). If the foreign producer has some sort of unfair advantage, then a trade restriction placed on that good by our government would be an effort to make the marketplace more “fair” for that particular good. This analysis is often complex and requires an evaluation of whether the foreign producer has an advantage and whether that advantage is “fair,” a term that is subjective and difficult to analyze objectively.

A third justification for using trade restrictions is that they raise revenue for the governments imposing them. After all, the tariffs and revenues from quota licenses are paid to the nation’s government that is imposing those restrictions, so they are a tax on the foreign good paid to the government. This argument is not very compelling for wealthy countries such as the United States, where the majority of the government income is derived from personal and corporate income taxes and a very small percentage of the revenue is derived from foreign sellers of goods. It can, however, be a very compelling argument for governments of developing and economically struggling nations because they have much less local income to tax and can raise their tax revenues substantially by taxing foreign producers. Note, though, that in the case of any country that imposes trade restrictions, government tariff revenue represents a transfer of income from consumers to their government, which is not necessarily a good result.

Another argument often raised in favor of trade restrictions applies to particular industries that are critical to national defense. The idea is that if there is a particular industry that is critical to our nation’s domestic security and would be placed under strain in times of war, the nation should protect that industry during peacetime to ensure, from a domestic security point of view, it is stable should war arise. Suppose the United States finds itself amidst another war. What industries would be essential to maintaining its strength amidst that conflict, or more candidly, what industries create the raw materials necessary for modern-day weaponry? Steel once again comes to mind. The argument becomes problematic when one begins to question the premise of what is “necessary” during times of war. In other words, while steel might be necessary to build weaponry, access to food, or clothing, would also be affected in case of significant conflict. Therefore, the argument could be made that nearly any American industry would need protection during times of conflict and therefore should receive protection from foreign competitors in the form of trade restrictions. In recent years, the argument has been broadened from critical to the “national defense” to critical to the “national interest,” which according to the interpretation of some countries, includes moral and cultural protection issues.

A fifth justification for trade restrictions is that they should be put in place for new industries so they are protected until they are in a better position to compete with foreign distributors on their own two feet. This “infant industries” argument is similar in theory to building an incubator for these industries. The concern with this argument is that it is unclear when the new industries no longer deserve external protection. In the United States, this issue was addressed by the International Trade Center, which places objective time limits on trade restrictions for infant industries.

In short, there are many arguments and counterarguments as to why countries might protect domestic producers through the imposition of trade restrictions. Economists are generally supportive of free trade and view economic protectionism as having an adverse impact on nations’ economic growth and welfare. There are, however, economists who believe free trade only favors wealthier nations and is very harmful to developing economies, some even saying it forms the basis of poor working conditions and degradation of natural resources in developing countries.

The World Trade Organization

GATTs, superseded by the World Trade Organization, is essentially a durable code of conduct that is established for global commercial policy and international dispute resolution. It implements mechanisms to lower tariffs significantly, so as to advance and increase free trade as much as possible. To that end, it also has mechanisms in place to diffuse potential trade wars, which are nearly universally understood to be bad for all the countries involved.

The World Trade Organization is also dedicated to expanding trade between developing nations. One of the ways in which it does that is by persuading developed nations to tone down tariffs on developing nations and attempting to bring down barriers to free trade.

We now turn to the World Trade Organization’s dispute and settlement system to understand how trade-related conflicts are resolved at the WTO.

In 2018, President Trump decided to impose tariffs of $247 billion on Chinese goods, among the most severe economic restrictions ever imposed by a United States president. These tariffs were to apply to more than 1,000 products, ranging from air conditioners to iPhone chargers. Remember that tariffs are paid by United States companies that import the products, and of course, they often pass the cost along to U.S. consumers. For this reason, American companies were, by and large, afraid of the impact these tariffs would have on the cost of consumer goods, particularly since the bulk of them were announced in September of 2018, just before the holiday season. For example, Apple expressed concerns that, “The burden of the proposed tariffs will fall much more heavily on the United States than on China.”

In response to these tariffs, the Chinese launched a complaint at the WTO, claiming that the United States violated United States commitments under global trading rules with the new tariffs.

The above chart outlines the process nicely. Country B in this chart is the country that has filed a claim with the World Trade Organization alleging an illegal trade restriction, such as an illegal tariff. Country A is the accused country, the one who has allegedly imposed the illegal tariff.

Step 1 is Country A taking action – imposing the trade restriction. Country A then notifies the World Trade Organization. Note, as evident from the chart, that there is an opportunity both before and after that claim is filed for the two countries to settle the matter – a bilateral settlement as it is described here. If none is reached, Country B requests a panel of judges to determine the dispute.

Panels are the quasi-judicial bodies that serve as tribunals. They are responsible for adjudicating disputes between Members in the first instance. They are composed of three (sometimes five) experts selected on an ad hoc basis. Thus, there is no permanent panel at the World Trade Organization; instead, a different panel is composed for each dispute.

Once the panel is established, there is yet another opportunity to resolve the matter through a bilateral settlement. If that does not happen, the panel hears the case and drafts an interim report of what their opinion will be. Here is yet another opportunity to settle. If there is no settlement, the panel issues its report. Assuming the aggrieved party determines to continue the process, the parties enter the appellate process. Finally, after the appellate review, the panel’s opinion is either adopted, or the appellate body issues its own report, presumably different than the panel report, which is then adopted.

Suppose the ultimate ruling is in favor of country B (the country that brought the action alleging an unfair trade restriction). In that case, this means Country A is found guilty of the allegations and must make a change by implementing the findings of the panel. This could mean everything from easing to eliminating the trade restrictions and could include a monetary award component as well.

Country A now has some decisions to make. It can implement the appellate body report, or it can refuse to do so. If it refuses, it can try to negotiate with Country B – in other words, yet another settlement opportunity, or it can retaliate through lawsuits of its own.

The process, therefore, is lengthy and slow, mostly intended to provide the countries with an opportunity to resolve the matter through settlement.

The table below guides the approximately length of time consumed by each phase of dispute resolution at the WTO level. Essentially, even without an appeal, it can take over a year for the process to result in a decision.

Time Frame of the Conflict Resolution Process

Time	Step
60 Days	Consultations, mediation, Etc.
45 Days	Panel set up and panelists appointed
6 Months	Final panel reports to parties
3 Weeks	Final panel report to WTO members
60 Days	Dispute Settlement Body adopts report (if no appeal)
Total = One Year	(Without Appeal)
60-90 Days	Appeals report
30 Days	Dispute Settlement Body adopts report
Total = 1 Year + 3 Months	With appeal

Returning to the example of President Trump’s tariffs: It took until September 2020 for the WTO to reach a decision. On September 15, 2020, a three-member WTO panel struck at the core of Trump’s trade war with China, ruling in favor of China and holding that the United States violated global trading rules.

What is the effect of this ruling? What happens now? What is the enforcement mechanism? It has not even gone through an appeal yet. But the question can still be answered as follows:

The main enforcement mechanism is our desire to continue to engage in global trade and bilateral as well as multi-lateral transactions across borders. Ignoring international trading rules and rulings of the WTO is very bad for American business. Realistically, this fact, in and of itself, is the core of the enforceability of WTO rules – essentially, the consequences of refusing to comply are too dire from a trade point of view.

In fact, only a few hours after the ruling, the Trump administration suddenly announced it was abandoning tariffs on aluminum from Canada that the President had imposed just one month prior.

IMF and the World Bank

The International Monetary Fund (IMF) and the World Bank are interrelated finance arms of the U.N. The World Bank focuses on financing and investing in developing companies and eliminating poverty, while the IMF primarily monitors exchange ranges, stabilizes international money systems, and fosters global financial cooperation.

The World Bank

Together, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) form the World Bank, which provides financing, policy advice, and technical assistance to governments of developing countries. IDA focuses on the world’s poorest countries, while IBRD assists middle-income and creditworthy poorer countries.

The World Bank’s mission is to fight poverty and inequality by offering money and advice to developing countries. It was first developed in Bretton Woods, New Hampshire, in the year 1944, at the same conference which saw the conception of the International Monetary Fund. However, while the IMG tackles acute crises such as capital flight, sudden dollar shortages and currency misalignments, the World Bank’s goals are to battle chronic long-term problems of deprivation and backwardness. Part of the World Bank’s original mission included, for instance, the rebuilding of Europe’s war-blasted infrastructure, and its first loan was to France.

According to its website, “[T]he World Bank is a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support development. The World Bank Group comprises five institutions managed by their member countries.” It is headquartered right here in the United States, more specifically in Washington DC, and has more than 10,000 employees and 120 offices worldwide.

In addition, according to its website, the World Bank has two main goals, which it aims to achieve by the year 2030:

1. End extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3%.
2. Promote shared prosperity by fostering the income growth of the bottom 40% of every country.

This is the stated purpose, but underlying this purpose is the undeniable fact that the impact participation by developed countries in the World Bank has on their overall power and control of macro-global economic systems, as well as the economic systems of borrowing countries.

The United States holds approximately 16% of shares in the International Bank for Reconstruction and Development, with 14.97% of the voting power. It holds 10.46% of the voting power in the International Development Association, the World Bank’s fund for the poorest countries. Consider the power that the United States has, even when it comes to the internal affairs of lending countries, it takes much less time to execute cross-border transactions related laws and rules.

International Monetary Fund

What is the IMF? According to its website, “The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

The agenda of the IMF is focused on 3 Primary Tasks:

1. Surveillance. The IMF is responsible for monitoring financial and economic activities to develop policies and strategies and recommendations for proactive crisis prevention. Therefore, they monitor all global financial and economic activities. For example, the IMF monitors the activities here in the United States, while also monitoring the economic activities in Greece, Iran, Kenya, etc., then uses that information to develop policies and strategies so that they can try to figure out how to prevent a crisis from happening, such as the collapse of the Euro.
2. Lending. The IMF provides funding for short-term, low-interest loans for macroeconomic issues related to political and& economic stability. Note that the IMF only lends to governments, not the private sector or civil society. Furthermore, all IMF financing is fungible, meaning the loan itself is not tied to any specific project or expenditure, unlike loans by development banks that are often used to support specific projects. Almost all IMF loans come with stringent conditions related to policy changes that governments are required to make to receive the funding. The main purpose of these loans is to distribute them to countries facing difficulty with their payment balances, provide temporary financing where it is needed, and support policies aimed at correcting the country’s underlying fiscal problems. Note that loans to low-income countries are also aimed especially at poverty reduction.
3. Technical Assistance. The IMF provides training and consultation for loan applications, policy reforms, and the interpretation of data. Technical assistance helps countries develop more effective institutions, legal frameworks, and policies to promote economic stability and inclusive growth. Training through practical policy-oriented courses, hands-on workshops, and seminars strengthens officials’ capacity to analyze economic developments and formulate and implement effective policies.

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It was established in 1944, is headquartered in Washington, DC, and it has 190 member countries. It has an Executive Board that is comprised of 24 Directors each representing a single country or groups of countries. Just the staff of the IMF alone represents the nationalities of approximately 150 different countries. It provides surveillance and technical assistance, policy-oriented training, and peer learning worth $330 million. Of course, it also lends money. The total amount the IMF can lend to member countries is one trillion dollars.

In 2008, the IMF also began making loans to countries hit by the global financial crisis. The IMF currently has programs with more than 50 countries around the world and has committed more than $325 billion in resources to its member countries since the start of the global financial crisis. During the Covid pandemic, the IMF provided emergency financing to 76 different countries. Sometimes, countries qualify for and receive a 0% interest rate on their loans. In addition, some low-income countries are also eligible for debts to be written off under two key initiatives.

Finally, further discussion is merited regarding the ownership percentage of the IMF.

Member	Quota (Millions, SDR)	Quota Share (%)	Vote	Vote Share (%)
United States	82994.2	17.46	831407	16.52
Japan	30820.5	6.48	309670	6.15
China	30482.9	6.41	306294	6.09
Germany	26634.4	5.6	267809	5.32
France	20155.1	4.24	203016	4.03
United Kingdom	20155.1	4.24	203016	4.03
Italy	15070	3.17	152165	3.02
India	13114.4	2.76	132609	2.64
Russian Federation	12903.7	2.71	130502	2.59
Brazil	11042	2.32	111885	2.22

Note the significant quota share and vote share of the United States, which informs significantly regarding the power of the United States in international affairs. In addition, it stands to reason the United States’ position as by far the highest controlling interest in the IMF and the World Bank, provides it with a substantial impact on foreign policy, negotiating power, trade deals, economic bargains, travel restrictions, and other international trade and security-related issues. This imbalance of power has motivated other countries, particularly China and Russia, to increase their global power through macro-global economic participation.

Responses to the World Bank – New Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB)

Many countries are looking at the growing power of the United States with concern. They seek some sort of counterpart to the International Monetary Fund and the resulting United States’ global dominance. The two primary results are the New Development Bank and the Asian Infrastructure Investment Bank (or the AIIB). Both are multilateral development banks; essentially global financial institutions backed by governments to provide long-term finance for sustainable infrastructure such as roads, rail, ports, power, and telecommunications. Such infrastructure financing is typically accomplished through loans, equity, guarantees, and other financial instruments.

New Development Bank

The BRICS countries formed the New Development Bank. BRICS is a grouping acronym referring to Brazil, Russia, India, China, and South Africa. These countries are developing nations at a similar stage of newly advanced economic development, on their way to becoming developed countries. The member states collect to discuss finance, trade, health, communication, labor, and issues relating to economics and security. The goal is for the BRICS countries to constantly interact and develop each other’s economies.

Significantly, 43% of the world population resides in these five countries, with 30% of the world GDP, and 17% of all trade controlled by BRICS countries. These five countries are also part of the G20 summit. At the 2015 BRICS summit, there was a decision to create the New Development Bank to support public and private projects through loans, equity, and other debt instruments (proposed by India). This plan became a reality at the 7th BRICS summit in 2015. Its first annual meeting took place in 2016.

The Mission of the New Development Bank

“The Bank shall support public or private projects through loans, guarantees, equity participation and other financial instruments.” Moreover, the New Development Bank has stated that it “shall cooperate with international organizations and other financial entities and provide technical assistance for projects to be supported by the Bank.” At the core of the New Development Bank is sustainable infrastructure development, with a priority to developing renewable energy sources and innovation.

It is headquartered in Shanghai, China, and its first regional office was built in Johannesburg, South. Africa. From its founding, the New Development Bank board of governors was clear that expansion of membership beyond the founding members was a strategic focus of the bank designed to extend its reach and development impact across the BRICS countries and other emerging markets and developing economies. In 2017, the governance board of the New Development Bank approved the terms, conditions, and procedures for the admission of new members. Afghanistan, Argentina, Indonesia, Pakistan, Turkey, Egypt, Iran, Nigeria, Sudan, Syria, Bangladesh, Greece, and others have expressed an interest in full membership.

The initial authorized capital of the bank is $100 billion divided into 1 million shares having a par value of $100,000 each. While this might seem like a substantial sum, recall that the United States contribution to the International Monetary Fund is $150 billion. Therefore, the New Development Bank still has quite a way to go before it can catch up to the impact and influence of the International Monetary Fund. Still, the New Development Bank attempts and is in some measure succeeding, in counteracting the influence of the United States in the global economic lending space.

New Development Bank and Covid-19:

• The New Development Bank is focusing its Covid-19 pandemic relief efforts on its member countries. BRICS countries (Brazil, Russia, India, China, and South Africa) are some of the worst hit by the pandemic. Some claim that the New Development Bank’s involvement during the pandemic validates its existence and creation and that it cemented its place as one of the most critical sources of external financing for BRICS countries. The New Development Bank is providing up to $10 billion dollars for Covid-19 relief (Massdorp 2020).
• The New Development Bank has approved a $1 billion loan to both South Africa and India to combat the Covid-19 pandemic.
• The New Development Bank has approved a $7 billion loan to China to combat the Covid-19 pandemic.
• The New Development Bank approved a $1 billion loan to Brazil for Covid-19 pandemic-related assistance. This loan is New Development Bank’s biggest loan approval to Brazil thus far. Loan approvals from New Development Bank to Brazil constitute 13% of the New Development Bank’s portfolio (New Development Bank 2020a).

“The COVID-19 Emergency Program Loan to Brazil will contribute to the country’s ongoing efforts to strengthen social safety nets and address immediate socio-economic impacts of the COVID-19 outbreak, particularly on the most vulnerable population in Brazil.” – Mr. Marcos Troyjo, President of the New Development Bank. “It also represents an important milestone for the Government of Brazil and New Development Bank in the fight against COVID-19, in coordination with other multilateral development banks and development agencies.”

New Development Bank and Russia:

In September 2020, the New Development Bank approved a $100 million loan to Russia for its transport strategy to increase transport connectivity throughout the country (Russia Briefing 2020). The Toll Roads Program is set to reduce the cost of transportation and easy access to distant cities in the country (New Development Bank 2020). The New Development Bank also approved a $100 million loan to Russia for its Eurasian Developmental Bank for the Water Supply and Sanitation Program, which modernizes water supply and sanitization systems (BRICS 2020). The programs are estimated to take four years to implement.

The plans to open the first New Development Bank in Russia were delayed to 2021 (BRICS 2020).

U.S. Domestic Security/NAFTA

NAFTA vs. USMCA:

In September 2018, the United States-Mexico-Canada Agreement (USMCA) was confirmed to replace the 25-year-old North American Free Trade Agreement (NAFTA). The USMCA officially went into effect on July 1, 2020 (Chatzky et al. 2020). The USMCA shares many similarities with NAFTA, however, some key differences may require businesses and operations to adapt or evaluate their operations.

NAFTA included exemption from tariffs and quotas for eligible products among the United States, Canada, and Mexico. However, because the USMCA implemented new rules, customs administration, and room for interpretation, some businesses have had to reevaluate their products to meet qualifications and preferential tariff treatment. The new rules include:

• Changes in product-specific and process-specific rules of origin
• Increase in the de minimis content threshold for non-originating materials
• Changes to the regional value calculation are used to determine how much of a good’s domestic materials and processing may be considered originating country status.

The origin status of a good is of major concern under the newly implemented USMCA (Assuncao et al. 2020). NAFTA Certificates of Origin are no longer in effect, businesses and manufacturers will have to meet USMCA Certificates of Origin to certify for eligibility. This has already affected the auto industry, as the USMCA requires 75% of each vehicle to originate in the member countries, up from 62.5% under NAFTA. The USMCA mandates that automakers manufacture 40% of their vehicles in facilities where workers earn at least $16/hour (Chatzky et al. 2020). The cost of manufacturing auto parts in Mexico will rise as worker wages rise. Although the purpose is to incentivize automakers to manufacture car parts in America, critics warn that as reliance on inexpensive parts sourced from abroad decreases, production costs will steeply increase. However, Ford, the US-based automaker, applauded the agreement stating that the USCMA will “support an integrated, globally competitive automotive business in North America” (Stuart 2018).

The USMCA eliminated the investor-state dispute settlement mechanism with Canada. In return, Canada will allow more access to its dairy market and several concessions in its favor, such as the Chapter 19 dispute panel which it relies on to protect itself from U.S. trade remedies (Chatzky et al. 2020).

The Regional Comprehensive Economic Partnership Without the United States

The U.S. watches from the sidelines as China furthers its trade and investment partnerships worldwide. The Regional Comprehensive Economic Partnership (RCEP) was signed in November of 2020. The participating countries, which include China, Japan, and Australia, account for about 30% of the global GDP. The pact is intended to reduce trade barriers between signees and facilitate business deals. The RCEP lowers and/or eliminates tariffs on various goods and services between the countries who take part in the RCEP. By making it easier for the RCEP signees to trade with one another, it makes it harder for U.S. companies to compete in Asia. The deal is symbolic of China’s power, and America’s waning influence, in the Asia-Pacific region. Japan, South Korea, and Australia are allies of the United States, however, they moved forward with the RCEP even in the absence of the U.S.

“The trade pact more closely ties the economic fortunes of the signatory countries to that of China and will over time pull these countries deeper into the economic and political orbit of China.”- Eswar Prasad (professor of economics and trade policy at Cornell University, former head of International Monetary Fund China Division).

The RCEP is “the first multilateral trade deal for China, the first bilateral tariff reduction arrangement between Japan and China, and the first time China, Japan, and South Korea have been in a single free-trade agreement.” (Gunia 2020). List of RCEP signatories (McCarthy 2020): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, Australia, China, Japan, New Zealand, and South Korea.

The Trans-Pacific Partnership (TPP) was a part of the Obama Administration’s plan to extend its influence and counter China’s rise in the Asian market. The TPP included human rights, environmental rights, intellectual property and labor regulations that bolster U.S. competitiveness in the Asian market. As China’s major trade partners signed up, the Obama Administration hoped that China would be forced to give in and join as well. However, President Trump withdrew from TPP on his first day in office in 2017, taking an isolationist approach.

With the U.S. out of the picture, the RCEP backed by China does not include labor or environmental standards (Gunia 2020). The U.S. Chamber of Commerce released a statement shortly after the signing of the RCEP in November 2020, stating that the United States “should however adopt a more forward-looking, strategic effort to maintain a solid U.S. economic presence in the region. Otherwise, we risk being on the outside looking in as one of the world’s primary engines of growth hums along without us (U.S. Chamber 2020). China’s already dominant presence in most Asian economies is set to grow under RCEP (Albert 2020).

“The U.S. now has even less leverage to pressure China into modifying its trading and economic practices to bring them more in line with U.S. standards on labor, the environment, intellectual property rights protection, and other issues related to free trade” – Eswar Prasad (professor of economics and trade policy at Cornell University, former head of International Monetary Fund China Division) (Gunia 2020).

Asian Infrastructure Investment Bank (AIIB)

Launched by Beijing in 2014 and established in 2015, and widely understood to be a way for China to expand its influence, the AIIB is a multilateral development bank that aims to support building infrastructure in the Asia-Pacific region.

The bank currently has 74 members as well as 26 prospective members from around the world. It started operation when the agreement entered into force on 25 December 2015, after ten member states (including the U.K.) holding a total number of 50% of the initial subscriptions of the Authorized Capital Stock ratified the bank. While the AIIB has pledged to be “lean, clean, and green,” it is plunged into a variety of mega fossil fuel and hydro projects from its founding. In addition, there are concerns about the minimum oversight and transparency of its practices.

Nevertheless, the AIIB has received the highest credit ratings from the three biggest rating agencies in the world and is seen as a potential rival to the World Bank and the International Monetary Fund. After all, since the end of WWII, the U.S. and Western Europe (along with Japan) controlled most of the business of loaning money to poor countries, loans which often came with strict economic, ethical and environmental behavior, while gaining significant political clout. China (and other superpowers) want a share of that political clout. And it is timing could not be better, since the Trump administration has repeatedly reduced the role of the United States in global financial institutions.

Recent Examples of Asian Infrastructure Investment Bank Loans

Asian Infrastructure Investment Bank and the Middle East:

The AIIB’s funding of new projects and growing interest in the Middle East is alarming the United States and the Western World (Rakhmat 2020). In March of 2020, AIIB provided a $60 million loan to Oman which will allow the country to build its biggest solar power project to date, a greenfield solar power plant. Through this solar power plant, Oman will reduce its reliability on fossil fuels for electrical generation and increase its renewable power generation capacity (AIIB 2020a). Although the AIIB previously approved two major loans for construction projects in Oman, this loan marks the first renewable energy financing for AIIB in the Middle East. For the first time in its history, the AIIB will hold its annual meeting in the Middle East. The AIIB will converge for its annual meeting in the United Arab Emirates (UAE) in October of 2021 (Rakhmat 2020). Some economists claim that these configurations will facilitate the heavy influence of Chinese political and economic interests in the Middle East (Fulton et al. 2019). Unlike the International Monetary Fund, the AIIB does not attach terms and conditions to loans and emphasizes transparency and simplicity. The “promise of no-strings-attached infrastructure financing” plays a major role in the Middle East’s support of the AIIB (AMEinfo 2017). The United States worries that AIIB’s growing presence in the Middle East could result in Middle Eastern countries supporting and participating in Chinese economic and political interests, weakening the power of the United States in the region (Fulton et al. 2019).

Asian Infrastructure Investment Bank and India:

As of 2019, India has become the largest recipient of AIIB funding (BRICS 2020). In October of 2020, the AIIB approved a loan of $500 million for the construction of a rapid transit system. The high-speed rail will allow travelers to make the 82 Kilometer journey from Sarai Kale Khan in Delhi to Modipuram in Meerut, Uttar Pradesh in under an hour (AIIB 2020b). The approval of this loan came just three months after the AIIB approved a loan of $750 million to India for Covid-19 assistance (Krishnan 2020). As of late, tensions between India and China have been high as disputes continue along the Himalayan border region. The two countries have even blocked mobile apps from the other country due to privacy and security concerns. However, the AIIB maintains its stance as an apolitical institution and vows to only look at projects from economic and financial points of view, not a political view. The AIIB maintains that the rising tensions between the two countries will have no effect on its future decisions to approve loans for India (Zhou 2020).

Asian Infrastructure Investment Bank and Covid-19:

The AIIB created a Crisis Recovery Facility in response to the Covid-19 global pandemic. The Crisis Recovery Facility provides financial support to both public and private sector entities at risk of facing significant adverse impacts due to the Covid-19 Pandemic. The Crisis Recovery Facility plans to loan up to USC 13 billion over 18 months (April 2020 – Oct 2021) (AIIB 2022).

As the AIIB acquires several new borrowers through its Covid-19 relief, some economists question whether the distance between China and the AIIB is sizeable enough. However, there has been no proof of the Chinese government manipulation of loans thus far (Ayse et al. 2021).

As of December 2020, the AIIB provided Covid-19 relief to the following countries (AIIB 2020c):

• Pakistan: USD 500 million
• Bangladesh: USD 300 million
• Turkey: USD 100 million
• India: USD 750 million
• Maldives: USD 7.3 million
• Cook Islands: USD 20 million
• Georgia: USD 100 million
• Ecuador: USD 50 million
• Uzbekistan: USD 200 million
• Mongolia: USD 100 million
• Indonesia: USD 750 million
• Thailand: USD 500 million
• Philippines: USD 750 million

How to Succeed Cross-Culturally

In any global transaction, cross-cultural knowledge and understanding are essential. Learning the laws, political differences, differing governmental systems, and cultural differences represented by those involved in the transaction will significantly facilitate a smooth and successful transaction. Dominant societal culture influences the behavior of those within the culture, making culture a significant element in deal negotiation, whether they occur in the context of a merger, acquisition, partnership, joint venture, or other cross-cultural relationships. In other words, it is not sufficient to simply arrive with an appropriate gift or hold the door open for someone. Rather, culture, used in this context, is the broader norms and, as well as the sub-norms and sub-values, of the country, community, and company with which you are dealing. Each aspect is a significant component of successful international transactions and deserves substantial research and evaluation.  Thus, cultural differences between countries, even those that may seem small, carry substantial weight in the global transactions space. They can be the difference between a successful venture and an utter failure.

The chaotic merger of Daimler-Benz and Chrysler serves as a great example.

In 1998 Daimler-Benz and Chrysler announced a merger of the two companies which, at the time, was one of the biggest cross-border industrial mergers. The amalgamation of the two companies initially produced global sales of over $150 billion. Daimler-Benz (a German company) and Chrysler (an American company), foresaw potential cultural differences and attempted to pre-emptively address these issues. Chrysler sent an American team to the Daimler-Benz headquarters in Sindelfingen, Germany to give presentations on differing communication styles between the two cultures. This, however, ultimately proved to be insufficient as diversity in communication styles led to early misunderstanding and conflict, and later structural and procedural differences, which then led to the demise of the original economic strength of the merger.

Just one of the many key cultural differences this case study demonstrates is the significance of seemingly insignificant communication styles.

In the American communication style, the usage of speech is factual but also opinionated and persuasive. Americans often use “hype.” They’re optimistic and present best-case scenarios. They have a “let’s get-on-with-it” approach, show up to business meetings with “Hollywood smiles,” and have an appreciation and usage of humor. A lot of their encounters, even the most serious business encounters, have an aura of casualness about them.

Conversely, in the German communication style, the primary purpose of speech is to give and receive information.  They instinctively react adversely to usage of “hype.” As a general matter, they are somewhat cautious, somewhat pessimistic, and envisioning worst scenarios. They like to appreciate the full context before approaching important decisions, and rather than a Hollywood Smile, they have a more “serious look” in new business meetings. Overall, Germans tend to have a far greater appreciation of seriousness and clarity.

Due to these communication barriers and the structural and procedures issues that arose out of them, DaimlerChrysler’s share price fell from $108 in 1999 to $38 in 2000. While it has since recovered quite a bit, the lesson holds.

When considering the significance of cultural differences, we should include not just social norms, but also political, social, legal, linguistic, religious, and diplomatic considerations.

There are, primarily, two challenges to cross-cultural challenges to overcome when engaged in a cross-border/global deal:

First, Challenges Related to Interpersonal Relationships. In any deal or venue, even (perhaps especially) in an adversarial context, forging relationships is key. Relationships are key to earning respect from your colleagues and adversaries, finding creative solutions to difficult negotiation problems, and overcoming deal failures and obstacles.

Second, Challenges Related to Expectations. Sophisticated actors in the global marketplace understand that they must alter their expectations of results based on where and who they are negotiating/collaborating with. It is folly, for example, to assume the rest of the world moves at the same fast tempo as Americans do when it comes to closing a deal.  Expecting the deal to close at the pace that your cultural standards set might, in fact, endanger the deal from coming to fruition.

To succeed, you should:

• Avoid creating a negative impression
• Endeavour to create a positive impression
• Manage client and supervisor expectation
• Remember that you are in their country
• Remember that the rules do apply to you
• Ensure your entourage understands this as well as you do
• Be the right person/Send the right person
• Do not criticize, even if locals do

The ease of interactions become far easier the more experience one gains with a particular culture. There are, however, many ways to prepare oneself even for a first-time encounter.

The below chart of questions and reflections is a helpful breakdown of the type of information negotiators seek in a cross-cultural context. Understanding these key decision-making influences within the cross-culture context will maximize the likelihood of transaction success, potential partnerships, and post-transaction integrations.

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While the breakdowns above are presented as two opposing alternatives, the reality is that the pendulum will typically fall in some blend of the two extremes and can swing from side to side. Nevertheless, the contradictions help cross-border transactors navigate cultural pitfalls.

Case Study: IKEA

By Deepa Ganesh, Nadia Natt, Theresa Larosilliere, Varun Pradeep Kumar, and Stephanie Chai.

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