Should Human Right be Taken into Consideration When Granting Preferential Trading Rights?

When it comes to international trade, there are two types of trade agreements that can have a direct influence on human rights; preferential trade agreements and trade sanctions. Whereas trade sanctions stop or severely limit the amount of trade between two countries, preferential trade agreements grant certain trade privileges to a particular country, such as very low import taxes. Although the potential effects of trade sanctions on human rights in the sanctioned country are somewhat obvious, the effects of preferential trade agreements can have many of the same negative effects as sanctions, but in a more obscure manner.

Take, for example, a situation involving three countries; A, B, and C. Country A is a wealthy developed country that has decided to give Country B, a developing country with high human rights standards, preferential trade rights in the form of no import taxes. Country C, another developing country with many known human rights violations, may also trade with Country A, but must pay the usual amount of import taxes. Both Country B and Country C export sugar to Country A.

Under these conditions, which country will assume the dominant position in Country A's sugar market? Clearly it will be Country B, since the people of Country A will be able to purchase sugar from Country B at lower prices than from Country C. How will this effect the people of Country's B and C? Those in Country B (who already have higher human rights standards than Country C) will prosper due to their sugar trade with Country A, while the people of Country C (who are already suffering from human rights violations) will suffer even more since their sugar trade with Country A will decrease as a result of Country A's preferential trade agreement with Country B.

As this scenario illustrates, when a developed countries grant preferential trading rights to developing countries who have high human rights standards over those developing countries who do not, the result is that those already suffering from domestic human rights violations suffer even more. Even though the developed country may view the preferential trade agreement as a "reward" to those developing countries who maintain high human rights standards, they may be compounding the negative situation in those low-human-rights developing countries. Essentially, these preferential trading agreements may act as partial (or complete depending on the case) sanctions against competing countries who are not granted the same preferential rights.

The World Trade Organization's policies are not very clear on this matter. "What about trade preferences made conditional upon human rights protection?...General national programs offering lower tariffs for development purposes are allowed, and what’s more, the granting state may require the beneficiary to adhere to certain standards for eligibility. Just how much a WTO Member can decide for itself whether or not to grant preferences is somewhat open – clear discrimination among similar potential recipients would probably be seen as a violation of trade obligations – but it is clear that the use of conditions in the first place is permissible" (Schefer, 2007, 8-9).

Clearly the developed international community should encourage and try to protect human rights in developing countries around the world, and that supporting human rights violating countries via open trade seems to go against this goal. In reality, however, sanctioning trade with these countries, or granting preferential trading rights to their competitors, only hurts those they are trying to help.

Therefore human rights should be taken into consideration when deciding which countries should or should not be granted preferential trading rights, but perhaps the result of such considerations will not be as expected.

Source:

Schefer, Krista Nadakavukaren. (January 2007). Economic Sanctions and Human Rights/Preferential Trade and Human Rights. NCCR Trade Regulation - Swiss National Center of Competence in Research. Reference URL: http://www.nccr-trade.org/images/stories/publications/IP4/ip4%20benefri%20t&hr.pdf

(ps - I really thought this paper was great if anyone else is interested in this topic!)

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What's the Best Way to Enter a Foreign Market?

Scenario: Your US company has come up with a way to produce a computer that is just as good as your competitors but can be manufactured at half the cost. Now you would like to sell these computers in the EU. What should you do?

Option A: Export computers to the EU from the US.

This mode of entry falls under the category of international trade.

Pro: The greatest benefit of exporting is that it does not require a lot of additional investments and it is the least risky of all given options. Because the manufacturing stays within the US, it is not necessary for the company to have foreign employees or to directly invest in any foreign country. The company must decide whether it will choose to export directly, via a separate foreign sales company or a foreign sales division within the existing company, or to export indirectly via manufacturing export agents, export commission agents, export merchants, or international firms. Indirect exporting requires less investment than does direct exporting, and is often the initial mode of exportation (Ball et al., 2006, 431). Exporting also allows for a relatively inexpensive trial run to see how well the computers sell in the EU.

Con: The main drawbacks of exportation are that it requires a lot of paperwork, knowledge of trading laws and restrictions, and the payment of taxes and fees associated with goods leaving and entering various countries. However there are many well known shipping companies that are able to handle these requirements for the company for a fee.

Option B: License a EU firm to manufacture and market the computers in the EU.

This mode of entry falls under the category of transfers.

Pro: Like exporting, licensing requires very little investment capital. The company can grant an already existing firm in the EU the rights to manufacture, market, and sell the computers in exchange for an initial licensing fee and between 2-5% royalties for every computer sold in the EU for the duration of the contract (Ball et al., 2006, 433). This method is inexpensive, profitable, and does not require the company to exert a lot of effort or spend a lot of time on the project once a suitable EU firm has been found and is under contract.

Con: The main drawback to licensing these rights to another firm has to do with the intellectual and financial risks involved, both during the duration of the contract as well as after its expiration. Under this agreement the company will have to divulge its computer manufacturing techniques to the EU firm and must trust that the EU firm will pay the correct amount in royalties to the company. There is always the possibility that the EU firm will not uphold the terms of the contract, making it necessary for the company to sue the EU firm for any unpaid royalties and patent/copyright infringements. This process can be expensive and time consuming. After the contract has expired there is also the possibility that the EU firm will continue to use the knowledge gained from the company to produce competitive computers, and could possibly take over any market share that the company may have gained during the duration of the contract. Furthermore the EU firm may begin to export the competitive computers to the US, where it will have the opportunity to gain market share from the company in its own domestic market (Ball et al., 2006, 433). Lastly, by licensing these rights to an EU firm the company is giving up its control over almost all aspects of the computers, from manufacturing to marketing to distribution. Disputes over any of these processes may arise and the company will have little sway in determining how any of these aspects are handled in the EU.

Option C: Set up a wholly owned subsidiary in the EU.

This mode of entry falls under the category of foreign direct investment.

Pro: The advantages to setting up a wholly owned subsidiary are great in terms of keeping control over the entire production and distribution process. Because the company would own the subsidiary completely, it would be able to oversee all aspects of the business and be able to run the company much like it runs the one in the US. The only necessary changes would be those needed to uphold the laws of the host country. There are also three different ways to set up a wholly owned subsidiary, each of which has its own benefits and drawbacks. For the scope of this post, however, I will simply list the various options; build a new plant from scratch, buy a plant that already exists, or purchase a distributor that already has an established distribution system and market (Ball et al., 2006, 434).

Con: The main disadvantages to this method are that it is very costly regardless of which option is chosen, it is time intensive, and it requires a large investment in human capital abroad such as employees. It is also very risky since a foreign market must be established, without the benefit of a ‘trial run‘ that is possible via the method of simple exportation.

Suggested Course of Action:

Because I do not have any information about the computer company in question, such as its financial status, marketing history, etc., I do not believe it is possible to make an educated suggestion on which option the company should choose to sell computers in the EU. Therefore my decision would be to choose the method that is the least expensive, least risky, and least time consuming - simple exportation to the EU from the US. This way the company would be able to quickly stop selling its computers in the EU if they were not selling well, increase the amount of computers exported if sales are high, and have the ability to move further into the foreign market later on if conditions prove favorable in the EU.

Sources:

Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 431-34.

Stumble It!

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Microloans - A Win-Win for Everyone

Microlending is the process of giving very small loans ranging from $50 to a few hundred dollars to entrepreneurs in developing countries. These relatively small loans, known as microloans, are used to promote grass-roots economic development, and have so far proven to be a very effective means of boosting the standard of living for participating borrowers, as well as the overall economies of participating countries. Although at first the idea of lending money to the poorest people in the world does not seem to make financial sense, in fact, it does.

Microloans are made typically at the prevailing commercial loan rate, and have a repayment rate between 90 to 100%, depending on the particular country (Bell et al., 346-7, 2006). Not only is this good news for entrepreneurs seeking such loans, but for lending institutions as well. With such an attractively high repayment rate, many lending institutions have come to consider microlending as very profitable venture. So far this seems to be one of those rare win-win situations for everyone.

But why do microloans have such high repayment rates, often times higher than repayment rates found in developed countries? Essentially the answer boils down to human psychology, pride, and the importance of feeling productive. In developed countries, repaying a loan is often regarded as a necessary evil, or as part of a larger financial plan. For borrowers in developing countries, however, being given the opportunity to receive a loan is in itself a matter of pride (someone has enough faith and trust in you to lend you money) so repaying the loan is of utmost importance to the borrower’s sense of self-worth.

One well known organization that uses microloans as a way to help women rebuild after war is Women for Women International. In countries like Afghanistan and Bosnia, Women for Women International organizes women into “entrepreneurial groups” that are responsible for repaying microloans after being giving the necessary entrepreneurial education and skills. In this way group members hold each other accountable for repayment and as well as provide support to each other during the process of establishing their small businesses (WomenForWomen.org). This is just one example of what used to be a traditional charity that has now embraced the idea of grass-roots economics by providing such loans.

Another important point that should be noted is many of these microloans are going to women around the world, rather than to men. According to the Microcredit Summit Campaign women are better candidates for microloans in developing countries for a variety of reasons including; being a good credit risk, investing more in their children and families which leads to the better care, education, and social development of the next generation, and raising women’s social status by allowing them to generate household income (MicrocreditSummit.org). By granting loans to women, cultural and societal development is encouraged along with economic development.

Although microlending is not a new concept, in recent years it has grown in popularity due to the ever increasing data that supports its effectiveness. Microlending helps developing nations by giving impoverished people the chance to start businesses, increase their sense of self-worth, boost their economies, and provide secure returns to investors. The idea of “charity,” or simply handing out goods and money, is not as beneficial to developing economies or to individuals as are microloans. For everyone involved, microlending is a beneficial practice that is both economically sound and socially ethical.

Sources:

Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 346-7.

Microcredit Summit Campaign. “About the Microcredit Summit Campaign - Why Target Women?” Reference URL: http://www.microcreditsummit.org/aboutmicrocreditsummit.htm

Women for Women International. “Microcredit Lending Programs.” Reference URL: http://www.womenforwomen.org/mlp.htm

If you would like to get involved, please visit Speak Sexy Online to find out how you can help Women for Women International with just one click!

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How Investing Overseas Can Help Your Domestic Market

Investing overseas can help a firm protect its domestic market in three different ways. The first is to establish foreign operations in countries where the firm has major clients (Ball et al., 61, 2006). For example, if a U.S. firm has many customers in France, establishing subsidiaries in France to service those customers will prevent competition by similar firms in France from acquiring those customers. This strengthens the U.S. firm because they now have the opportunity to prove that they can service customers in France as well. This strategy is not very risky because the domestic firm already has customers in the foreign country. Rather than attacking the foreign market, the domestic firm is just defending itself from foreign competitors.

The second way a firm can protect its domestic market by investing overseas is to attack the foreign market in the hopes that the foreign firm will be so focused on defending its local market that it will lessen its efforts to gain customers in the domestic firm's market (Dell et al., 61, 2006). For example, if Domestic Firm A sells a similar product or service as Foreign Firm B, DFA can begin operations in FFB's country in the hopes of taking away some of FFB's customers, and causing FFB to focus on keeping its own share of its domestic market. While FFB is being attacked in its own country, DFA can work on gaining more of its own domestic market away from FFB. This technique is really one of deceptive distraction and is much riskier than the previous example because in this scenario the domestic firm must spend some resources "distracting" the foreign firm, and some resources on gaining a larger portion of its domestic market. Both of these tactics must be done at once if the plan is to succeed.

The final reason that investing overseas can strengthen a firm's domestic market has to do with costs of production. If a foreign firm can produce the same product at a lower cost than a domestic firm, and sell that product at a lower price (by exporting it) in the domestic country, then the domestic firm is at a disadvantage. One way to become more competitive is to outsource part or all of a firm's production to the "cheaper" foreign country and continue to resell the product in the domestic firm's country (Ball et al., 61, 2006). Outsourcing allows the domestic firm to utilize the lower production costs in the foreign country while remaining competitive in its domestic market. This strategy is also not very risky because it is lowering the firm's costs while defending its domestic market against foreign competition. Rather than spending more of its resources, the aim of this technique is to reduce costs and gain resources.

Although considered controversial, outsourcing continues to be a necessary part of staying competitive in today's globalized world. Two leading countries in the market for less expensive, quality labor are China and India. However, less expensive labor is not the only characteristic firms are looking for when deciding where to outsource services or production. "Deep technical and language skills, mature vendors and supportive government policies" (BusinessWeek Online, March 20, 2007) are also key factors, all of which can be found in India. For countries like the United States, where wages are high, utilizing the people and skills found in other countries and expanding to become an international firm is quickly becoming a requirement rather than a choice.

Sources:

Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 61.

China, India Seen Dominating Outsourcing. (March 20, 2007). BusinessWeek Online. Reference URL: http://www.businessweek.com/globalbiz/content/mar2007/
gb20070320_778394.htm?chan=search

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The Rebirth of Community Spirit

"Personal computing is more and more 'interpersonal' - people use computers to relate to others online" (Crainer quoting Tapscott, 273, 2006).

Written almost ten years ago, Tapscott's prediction that the internet would become a community springboard rather than an isolating phenomena has come true. Commonly referred to as "Web 2.0," this new movement of up and coming websites is all about interaction, communication, and mass customization. Instead of viewing the web as a conglomerate of static pages designed by a group of highly skilled programmers, Web 2.0 sites encourage browsers to make spaces that are all their own (customized templates, backgrounds, music, etc.) while at the same time integrating features that instantly connect like-minded others.

Blogging is just one example of this community trend. Not only are people able to share their thoughts, experiences, and opinions with the world at large, but many bloggers find that the "at large" part isn't as big as many assume. In fact, the ability to instantly post comments on blog posts with links that go back to one's own blog or email address creates a link-web that is often very particular to a certain group of people. The same bloggers find themselves running into each other all over the web, particularly via "web communities" such as MyBlogLog and Technorati. It's very common to find the same group of people chatting together in many different web "places." Rather than being isolating, the web has become *the number one* means of finding people who are similar to you, especially among those who have grown up with it.

One criticism of "cyber-friends" is that they never meet in "real life" so can not really be considered "real friends" or their online interactions as truly "social" events. However, the more the web becomes a place for everyone, the less people are inclined to think those they meet over the web are "weirdos" or "freaks" as was once the stereotype, and the more real life meetings occur. One website in particular, Last.fm, is leading the way for music buffs with similar tastes to meet at concerts. People from all over the world can log in, import local concert times, dates, and venues, and click to list that they will be attending. Other people can then join the list of people attending, and plan to physically meet at the concert. More and more sites are enabling "cyber" friends to become decidedly "real."

What does this mean for the world of business? It means people are no longer afraid to trust those they meet, or do business with, online. Rather than isolating individuals and securing them to their cubicles, the internet has the ability to bring together intellectual resources from around the world. It means that everyone is finally realizing that those little smiley faces and typed words are coming from a very real human being on the other end of the connection. A human being that is physical, is potential, and is giving us the capability to do business anywhere and with anyone. Tapscott was right when he said that community spirit is being renewed, but our community is now the entire world.

Sources:

Crainer, Stuart. Active Learning. (2006).The Ultimate Business Library: The Greatest Books That Made Management (The Ultimate Series). Capstone Publishing Limited.

Tapscott, Don. Growing Up Digital: The Rise of the Net Generation

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