International Management

1

This simulation is designed to develop skills in cross- cultural negotiations with an emphasis on multi-stake- holder dialogue and exchange.

Synopsis

On August 18, 2003, members of the World Trade Organiza- tion (WTO) met in Geneva to hear a U.S. request for a full-blown dispute-settlement proceeding regarding Euro- pean Union (EU) restrictions on the import and sale of goods produced with or containing genetically modified organisms (GMOs). In late 1996, Monsanto exported the first geneti- cally modified soybeans to Europe, assuming that consumers would accept them as Americans had. The timing was not good, however, as the GMO issue became linked in the minds of Europeans with “mad cow” disease, an outbreak that was first thought limited to animals but eventually killed several humans. Neither GMO companies nor European authorities were prepared for the reaction, as public senti- ment immediately turned against the technology. Britain’s Daily Mirror ran a front-page headline in 1998 warning against “Frankenfood.” In 1998, five European countries said they wouldn’t process any more applications for genetically modified crops, and the EU upheld this decision. 1 In May 2003, the United States filed a complaint with the WTO in hopes of getting the ban lifted. In response, in the summer of 2003, the European Parliament passed ground- breaking legislation that would require detailed labeling of all food products containing as little as 0.9 percent of genet- ically modified ingredients, and would require origin tracing in order to gain approval. Although these steps were designed to move toward lifting the moratorium, many in the United States charged that these rules would be unworkable, would be discriminatory toward imports, and would violate WTO sanitary and phytosanitary (SPS) agreements. 2 Paradoxically, both sides claimed to be concerned about public health and environmental safety. The U.S. government and industry argued that the EU was in violation of WTO provisions requiring nondiscriminatory treatment of like or similar goods. The Americans contended that uninformed Europeans were spreading unfounded fears about GMOs. 3 In addition, the U.S. government argued that requiring labels for GMO products would result in segregating GMO foods from non-GMO foods and, in so doing, limit their consumer appeal. Furthermore, the threshold of 0.9 percent was far too restrictive, according to U.S. officials.

Description of Exercise

This exercise provides an interactive case simulation in which you will be assigned to a group that will assume

the role of one of several stakeholder groups in the actual dispute between the United States and the EU over trade in GMOs. In this case, the U.S. government, on behalf of U.S. farmers and the biotech industry, argued that the EU is in violation of global trading rules. Europe responded that it has the right to protect the health and safety of its population and domestic crops, given the uncertainties over the effects of GMOs on humans, animals, and plants. This simulation assumes that the United States and the EU proceed through the WTO dispute-settlement proce- dures, and it places participants in the roles of the various disputants: the U.S. government, the European Union, a consortium of GMO companies, a group of interested developing countries, a group of NGOs, and a WTO Dis- pute Settlement Panel.

Genetically Modified Food

According to some estimates, over half the world’s soy, a key ingredient in products ranging from candy bars to ani- mal feed, comes from genetically modified strains. In 2005, about 8.5 million farmers in 21 countries were plant- ing genetically altered seeds. 4 The global market value of genetically modified crops in 2006 was $6.15 billion. Yet genetically modified food has quickly become as contro- versial as cloning. The central feature of a GMO is human alteration of the DNA of an organism through the use of biotechnology. Proponents and opponents in the genetic- modification debate have been eager to weigh in on the benefits and risks associated with using GMOs. Each side has identified a number of key arguments to support its position:

Benefits • Increased yields. • Herbicide-tolerant crops encourage less tilling/soil

erosion.

• Insecticidal crops encourage less use of harmful pesticides.

• Virus-resistant crops. • Development of drought-resistant crops.

Risks • Possible allergic or other health responses in humans/

livestock.

• Creating new or more vigorous pests and pathogens.

1. “Frankenfoods” or Rice Bowl for the World: The U.S.–EU Dispute over Trade in Genetically Modified Organisms

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2 Skill-Building and Experiential Exercises

according to Robert B. Zoellick, the U.S. trade represen- tative, uninformed European attitudes continue to spread unfounded fears in developing countries, where the need for the increased yields offered by genetically modified foods is greatest. 9 In addition, according to the U.S. govern- ment, GMO technologies would help developing countries dramatically increase export earnings. The U.S. govern- ment is not only concerned that Europe will prevent the use of GMOs, but also that the EU model could serve as a blueprint for other countries, including those in the developing world, that plan to regulate GMOs. In its recent WTO dispute with the EU, the United States argued that the EU’s ban on GMOs violated inter- national trade rules. In February 2006, the WTO dispute panel ruled in favor of the United States, Canada, and Argentina, deciding that the EU and six member states had broken trade rules by banning the import of geneti- cally modified foods. The ban caused “undue delays” in the approval of GMO products, thereby violating the SPS Agreement. 10 Along with continued criticism from Europe, the GMO cause has experienced some setbacks in the United States as well. For example, Aventis CropScience, developer of StarLink corn, was forced to pay $10 million to Iowa farmers and grain elevators in premiums and compensa- tion for losses tied to growing and handling genetically modified grain that contaminated the grain supply. Although the government had approved StarLink for use in livestock feed, it was not cleared for human consump- tion after possibly allergic reactions were reported in people who consumed the protein that StarLink produces. Hundreds of food products were recalled in 2001 after testing showed residues of the StarLink protein in taco shells and other food. Some estimates suggest costs could eventually exceed $200 million. 11 Anti-GMO activists in the United States continue to make progress. In 2007, rice producers in California called for a moratorium on trans- genic rice in the state, and a USDA ruling could stop the production of genetically modified alfalfa throughout the United States. 12

The EU Position

For most Europeans, the debate over genetically modified foods is closely intertwined with cultural, environmental, and health issues. Earlier surveys suggested that nearly 80 percent of Europeans do not want to consume products with GMOs, 13 although European opinion about GMOs seems to be getting more optimistic. A 2006 Eurobarom- eter survey reported that, of those with a decided opinion on “green” biotechnology, only 58 percent discouraged it. This brings European opinion on GMOs close to that of Canada. 14 At the heart of the debate over genetically modified products is the growing disagreement between the United States and Europe over what steps are necessary to protect

• Harm to “nontarget” beneficial species. • Unwanted gene flow. • Irreparable changes in species diversity and in genetic

diversity within a species.

Genetically engineered products are not new. Insulin used in medicine is an example of genetic engineering. The insulin gene from the intestines of pigs is inserted into bacteria. 5 The bacteria grow and produce insulin, which is then purified and used for medical purposes. Other genetically engineered products include the chemi- cal compound aspartame, used as a sugar substitute, and the hepatitis B vaccine. A large barrier to the acceptance of GMOs worldwide is the fuzzy international law regulating GMO trade. The Agreement on Sanitary and Phytosanitary Measures (SPS Agreement), part of the 1994 agreement that established the World Trade Organization, requires that food safety regulations be based on scientific risk assessments. 6 Most studies to date seem to point to the conclusion that foods containing GMOs are safe for human consumption. But the fact that a majority of these studies were conducted by or for U.S. biotech firms independent of any third- party overseers suggests to some that the findings are suspect. In 1997, the United States won a complaint with the WTO against the EU concerning an EU ban on hormone-treated beef, but the EU continued to enforce the broader ban on approval of newly introduced GMO prod- ucts because a large majority of Europeans are steadfastly against the use of GMOs. The United States, along with Canada and Argentina, filed another complaint with the WTO in 2003, claiming that the EU’s ban on genetically modified products vio- lates international trade rules. In 2006 the WTO ruled in favor of the United States, claiming that the EU had indeed violated recognized trade rules. Now the EU is seeking to limit GMO sales through tougher approval processes.

The U.S. Position

In the United States, 86 percent of soy and more than 40 percent of corn are genetically modified. The U.S. gov- ernment argues that the EU ban on genetically modified food not only is hurting U.S. commerce but also is dis- couraging developing countries from growing genetically modified crops for export. The U.S. government believes that genetically modi- fied products could reduce hunger and poverty in the world’s poorest nations, and that by restricting the use of GMOs, the EU is aggravating starvation in the developing world. 7 Biotechnology, according to U.S. policy makers and biotech executives, offers the prospect of crops that are more resilient, require less water, and give higher yields. Thus, the EU ban on genetically modified foods indirectly contributes to starvation by denying access to more efficient agricultural techniques. 8 Furthermore,

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In-Class Simulations 3

public health and the environment. 15 A major obstruction to settling this argument is deeply embedded in European culture. Food and culture are closely linked in Europe’s historical and contemporary life. Many European regions celebrate their unique food traditions and local produce. Unlike Americans, whose food choices are driven by accessibility and convenience, Europeans try to limit the influence of corporate food companies on their food choices. Respecting their preferences, global food compa- nies such as McDonald’s, Burger King, and Coca-Cola have pledged to keep all products for sale in Europe free of GMOs. 16 Another obstacle to the use of GMOs is the fact that, in recent years, Europe experienced several health crises— notably the outbreak of bovine spongiform encephalopa- thy (BSE), commonly known as “mad cow” disease—that alerted people to the possible dangers lurking in the food supply. Experts agreed that beef from cows with the dis- ease was perfectly safe; then dozens of people died. Bio- tech firms will have difficulty convincing Europeans to consume GMOs in the absence of long-term statistical evidence from third parties supporting their safety claims. Exacerbating the issue is the persistent view in Europe that the United States continues to engage in a unilateral— some would say imperial—foreign policy. Regardless of the ongoing battle over GMOs, many people in Europe support challenging U.S. positions as a matter of princi- ple—as a demonstration of European strength and cultural unity. These strong views will continue to influence European consumer choices no matter the outcome of the current dispute. Resistance by European customers to all U.S. foods could overshadow any GMO benefits to the U.S. economy if, for example, the labeling provision is not upheld. The EU also argues that U.S. corporations are squeezing farmers around the world through their control of exporting and processing activities with the goal of developing a lower-cost, vertically integrated global supply chain. European and North American protesters have been seen with banners calling genetically modified products “Frankenfoods,” a label that deliberately associates them with frightening and unpredictable risks. Europe formally adopted a “precautionary principle” (described below) that takes a cautious approach to the approval of new bioengineered food, assuming that there may be unfore- seen effects unless proven otherwise. The EU argues the United States is motivated exclu- sively by economic considerations and that the U.S. gov- ernment is responding only to the agribusiness and biotech firms that stand to gain financially if current restrictions are lifted. For example, in 2003, ten agricultural conglom- erates, many of which are active in GMOs, owned almost 40 percent of the world’s seed market. 17 According to Martin Rocholl, director of Friends of the Earth Europe, “The U.S. Administration, funded by the likes of GMO

giant Monsanto, is using the undemocratic and secretive WTO to force-feed the world foods containing GMOs. Decisions about the food we eat should be made in Europe and not in the White House, the WTO or Monsanto’s HQ. We welcome the European Commission’s commitment to fight this aggressive U.S. policy and ensure that Europe’s wildlife and people are protected from the threats of GM crops.” 18 Since the WTO’s 2006 decision, which ruled the EU’s ban on genetically modified products illegal, the EU has fought to control the presence of GMOs on its own turf. Under the SPS Agreement, the EU originally banned all genetically modified products on the grounds that they could not be proven “safe.” However, the WTO decision claimed that enough evidence is now available to perform adequate risk assessments of genetically modified prod- ucts and, furthermore, that most existing risk assessments do not provide enough of a reason for banning such prod- ucts. 19 The EU’s new authorization process will likely be the stage for new disputes regarding the international sale of genetically modified products. GMOs are starting to become more prevalent in Europe, with GMO crop area expected to increase over the next decade. “It will be slow but within 10 years GMOs will have reached the point of no return,” said Jean-Michel Duhamel, Monsanto’s director for southern Europe. 20 But common anti-GMO sentiment is still strong. Some European companies, such as Unilever, produce genetically modified products, but they don’t sell those products in Europe because of consumer opposition. Germany’s Metro AG chain, like other major European grocery stores, doesn’t allow bioengineered ingredients in its store brands. 21 Labeling rules proposed to replace the ban have generated heated responses from European GMO opponents. Greenpeace promised to marshal thou- sands of volunteers throughout Europe to police grocery stores in the weeks that follow the launch of labeling. “If consumers start buying it and get used to it, we will lose,” says Dan Hindsgaul, the head of Greenpeace’s effort. In 2006, Greenpeace sent a petition, calling all EU member states to alter their GMO-labeling rules to include prod- ucts such as meat, eggs, and milk, which come from ani- mals that are fed with genetically modified products. According to Greenpeace, the typical diet of a farm ani- mal in Europe consists of up to 30 percent GMOs. 22

Substantial Equivalence and

the Precautionary Principle

The issue of scientific proof has been a major point of contention. At the heart of the debate are the concepts of substantial equivalence and the precautionary principle. The term substantial equivalence was first mentioned in a 1993 Organization for Economic Cooperation and Development (OECD) report on the safety of biotechnol- ogy. Members of the OECD agreed that the most practical

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4 Skill-Building and Experiential Exercises

opinion tend to oppose GMOs.) In the United States, genetically modified crops, including corn and soybeans, are now planted on millions of acres of farmland. If cur- rent restrictions on genetically modified foods aren’t lifted, American farmers will lose millions of dollars from unusable crops. In March 2004, the American Soybean Association (ASA) stepped forward to take a lead role in preparing the WTO challenge of the EU’s labeling ban. In addition, the ASA claims the labeling threshold of 0.9 percent is too stringent and lacks statistical backing. Also worsening the farmers’ plight is the fact that world- wide commodity prices have dropped over the past decade. 24

Developing Countries

In developing countries, farmers have been resisting pres- sure to grow bioengineered crops—even if they could improve their productivity and reduce hunger—for fear of losing their European market. GMO supporters believe that the modified organisms can resist certain viruses and extreme temperatures, enabling crops to survive with less energy than is nor- mally required with nonmodified seeds. This ability could be very useful in regions that don’t have much fertile soil and lack other usable resources. More abundant yields would help feed the large population in most developing countries. For example, yields could be increased by growing insect-resistant crops in regions where bugs have seriously restricted outputs. Proponents believe that foods containing GMOs will be able to alleviate starvation and hunger in needy places. The United States insists that GMOs do not pose a risk to developing nations because the seeds are destined for consumption, not planting. 25 GMO crops are also considered by some to be better for regions such as Africa where lack of education and train- ing in the use of fertilizers and other modern farming techniques hampers agricultural development. Transgenic crops make up for this lack of education because the tech- nology to control insects is already packaged in the seeds and farmers just have to plant them. Skeptics argue that the skewed food distribution sys- tem, not lack of access to GMOs, is responsible for food shortages in developing countries. According to this view, developing countries are underfed because most of the food that they generate is sold in the export market to the wealthy developed nations. Furthermore, they question how poor developing countries will be able to afford the genetically modified seeds. U.S. agricultural firms own the patents, and the suspicion is widespread that U.S. companies will limit the availability of nonmodified seeds in order to support the sale of modified ones. Also, many people in the developing world remain skeptical about the health effects. In late June 2002, Zambia’s minister of com- merce, trade, and industry, Dipak Patel, proclaimed that African nations would not accept genetically modified food until it has been proved safe for human consumption. 26

approach to determining the safety of foods derived by biotechnology is to consider whether they represent a “substantial equivalent” to analogous traditional products. The term substantial equivalence was borrowed from the U.S. Food and Drug Administration’s (FDA) definition of a class of new medical devices that do not differ materi- ally from their predecessors and thus do not raise new regulatory concerns. However, after considering the pos- sible unseen effects of foods that contain GMOs, the EU argues that it is difficult to directly apply the FDA defini- tion of substantial equivalence in this case. The concept of substantial equivalence was applied for the first time to a GMO in the safety assessment of the Flavr Savr tomato before it went to market in 1994. Data collected revealed that the modified tomato was equivalent to the nonmodified parent plant, and genetically modified toma- toes were accepted under FDA rules. The EU adopted an approach to health and safety risks known as the “precautionary principle.” In common par- lance, this approach may be summed up as, “Better safe than sorry.” Under this policy, new products are not assumed to be safe unless scientifically shown to be so. According to some in the EU, there is little scientific, third-party evidence that shows foods containing GMOs are safe for consumption. The precautionary principle thus provides justification for restricting GMOs unless they can be shown to be safe in all respects.

Biotech and Agricultural Firms

Because of their international reach, several large U.S. firms, including Monsanto and Du Pont, that support bio- tech and use biotech crops in their products have pressed the U.S. government to take a strong stand on the issue. The United States is the largest agricultural exporter in the world, and U.S. officials argue that trade restrictions of any kind will only undermine an already sluggish global economy. At stake for large biotech multinationals is a substantial amount of future commerce. These firms have claimed huge losses since the EU ban was put into effect in 1998, projecting that the ban has cost them close to $300 million annually. U.S. government policy has been supportive of biotech firms and a strong advocate of their ability to help alleviate famine in developing coun- tries by producing more abundant yields in areas notori- ous for infertile soil and a lack of other resources. The reluctance of key foreign trading partners—the EU, Japan, and other nations—to import genetically mod- ified products has become a significant problem for Amer- ican farmers as they compete in the international market- place. (In 2003, Australia joined the United States as a third-party supporter in the WTO dispute against the EU over the ban on GMO products. Australia is a minor pro- ducer of GMO crops, including cotton and carnations. 23 Support for GMOs in Australia primarily comes from the national government, while state governments and public

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In-Class Simulations 5

South Africa, one of only a few African nations that allow the planting of genetically modified crops, is expected to test a strain of genetically modified maize in late 2007. The prospects for GMOs in Africa, especially maize, could be on the rise since the 2006 maize streak virus, which destroyed anywhere between 5 and 100 percent of African farmers’ crops. 27 In Brazil, controversy surrounded President Lula da Silva’s Provisionary Measure 131, which authorized the commercialization of genetically modified soy. Oppo- nents of GMOs in Brazil suggested that the governing administration, notorious for bribery and scandals, was influenced by its relationship with Monsanto, which owns the patent on the most popular genetically modified soy. Brazilian legislators agreed and proposed that genetically modified soy in Brazil be burned and replaced with con- ventional crops beginning in February 2004. Later, under pressure from some farming interests, the legislators reversed position, and genetically modified crops and seeds are now permitted. The UN Cartagena Protocol, an agreement intended to educate emerging-market countries about the benefits and risks of genetically modified products, was activated in June 2003 when the Republic of Palau became the 50th country to ratify the bill. The agreement is designed to help educate emerging-market countries about the risks of proliferated GMOs.

Simulation Instructions

You will be assigned to one of six groups:

1. The U.S. government. 2. The European Union. 3. A consortium of companies that manufacture or use

GMO products, including Monsanto and Cargill.

4. A group of interested developing countries. 5. A group of nongovernmental organizations (NGOs)

opposed to the exchange of GMO products.

6. A WTO Dispute Settlement Panel.

Participants should spend 20 to 30 minutes reviewing the case and formulating arguments that advance the agenda of their group. Refer to the “GATT/WTO Princi- ples” section below and to the background material above for information. After the initial session, groups whose interests may be similar may consult with each other for an additional 10 to 15 minutes to coordinate presentations and minimize duplication. For example, the consortium of GMO companies might consult with the U.S. government. The WTO Dispute Settlement Panel is composed of “judges” and should be treated respectfully. Each group should make an opening presentation of no more than 10 minutes to the WTO panel. The presentation should sum- marize the main points of the argument and urge a par- ticular decision by the panel. Panel members may then

ask questions of the groups for an additional 15 minutes. After each group presents its argument, the WTO panel will deliberate for 20 minutes and present its findings. The issue for decision by the WTO Dispute Settlement Panel is whether the EU prohibition on imports of genet- ically modified products is consistent with WTO princi- ples. Depending on the ruling in this matter, the WTO panel may offer specific remedies for how the ruling should be implemented. Further, the panel may wish to consider whether the proposed labeling and origin requirements (which in theory would allow the resumption of imports of genetically modified products) would or would not resolve the dispute, and whether this ban itself would be consistent with WTO principles.

GATT/WTO Principles:

General Obligations

The General Agreement on Tariffs and Trade (now the World Trade Organization) was founded after World War II to establish rules for international trade practices and to resolve disputes among nations. Two fundamental prin- ciples govern most GATT/WTO provisions: most-favored- nation treatment and national treatment. National treat- ment refers to the obligations of the contracting parties to treat the nationals of foreign countries no less favorably than they treat the nationals of their own country. A more common term for this obligation is “nondiscrimination.” The GATT/WTO also requires that the parties extend most-favored-nation treatment to other parties, so that some countries are not treated more favorably than others. Dispute settlement resolution (when one or more coun- tries accuse another contracting party of violating GATT/ WTO rules) is carried out by three- to five-member panels that render reports (decisions).

Exceptions The GATT/WTO provides for limited exceptions to the above-mentioned obligations. For example, preferential trade agreements such as the EU and NAFTA are permit- ted to extend better than most-favored-nation treatment to their members under certain conditions. There are also “general” exemptions, which excuse otherwise illegal actions if they are designed to protect public morals, pre- serve national heritage, and limit commerce in goods made with prison labor. Although the word environment is never mentioned, the GATT/WTO does offer a basis for deviating from GATT/WTO principles in support of envi- ronmental protection. Specifically, Article XX holds that the GATT/WTO does not prevent contracting parties from taking actions (1) necessary to the protection of human, animal, or plant life or health and (2) relating to the con- servation of exhaustible natural resources—provided trade measures affecting international commerce are joined by restrictions on domestic production or consumption.

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6 Skill-Building and Experiential Exercises

cultures similar, and in what ways do they differ? How might the differences influence approaches to disputes like this one?

3. Why would an approach emphasizing “substantial equivalence” result in an outcome different from the outcome of a policy driven by the “precautionary principle”?

4. How might the United States and EU resolve differ- ences such as this in the future?

Source: © McGraw-Hill Irwin. This simulation was prepared by Professor Jonathan Doh as the basis for class discussion. It is not intended to illustrate either effective or ineffective managerial capabil- ity or administrative responsibility.

■ Notes

1. Scott Miller, “EU’s New Rules Will Shake Up Market for Bioengineered Food,” Wall Street Journal, April 16, 2004, p. A1.

2. Kerry Capell, “The Genetically Modified Food Fight,” BusinessWeek Online, July 21, 2003, bw.com/news/941856.asp?0dm5C18LB .

3. Elizabeth Becker, “U.S. Contests Europe’s Ban on Some Food,” New York Times, May 13, 2003, p. B4.

4. Nina V. Fedoroff, “Genetically Modified Foods: Making the Earth Say Beans,” Sci- ence Journal, Penn State Eberly College of Science, vol. 26, Spring 2007.

5. Bacillus thuringiensis,   www.bt.ucsd.edu . 6. John Hulsman, “Cherry-Picking: U.S.

and European Relationship,” Heritage Foundation, www.heritage.org/research/ tradeandforeignaid/tst061103.cfm .

7. Mark Drajem, “EU Pledges to Begin Approving Gene-Modified Crops This Year,” Bloomberg News, June 17, 2003.

8. Jeremy Rifkin, “The Fight over GMO Crops Exposes the Weaknesses of Globalization,” The Guardian, June 2, 2003, p. 16.

9. Becker, “U.S. Contests Europe’s Ban on Some Food.”

10. Regulatory Compliance Systems, LLC, “Pre- cautionary Principle will ‘Run in Place’ in 2007, Trade Expert Predicts,” Pesticide.net Insider eJournal 4, no. 2 (January 30, 2007).

11. Jerry Perkins, “Iowa StarLink Costs $9.2 Million—Aventis CropScience Pays Claims to Farmers, Elevators,” Des Moines Register, September 15, 2001.

The Uruguay Round agreement established agree- ments on the application of sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT). SPS measures are those necessary to safeguard human, animal, and plant health. Typically, when applied by an individual country, they are designed to safeguard its citizens, animal and plant industries, and environment against the risks posed by exotic pests and diseases, and against general threats to health entering from outside, and to control the incidence and spread of pests and dis- eases already present. These agreements established the basis for reducing or eliminating nontariff regulatory barriers unless they respect scientifically substantiated and internationally recognized standards and conformance procedures and technical and labeling regulations. As applied to international trade, SPS protocols include a range of control measures— for example, import requirements; methods of treatment, manufacture, handling and packaging, and storage; inspec- tion and certification requirements; and in some cases outright import bans on some products from certain areas. The major areas covered are plant quarantine measures, animal quarantine measures, and food safety standards. Thus, governments may restrict imports of products that have been found to pose health or safety risks, based on sound, scientific evidence. Specifically, SPS measures must be designed to accomplish one or more of the fol- lowing objectives:

1. To protect animal or plant life or health within the territory of the member from risks arising from the entry, establishment, or spread of pests, diseases, disease-carrying organisms, or disease-causing organisms.

2. To protect human or animal life within the territory of the member from risks arising from additives, contaminants, toxins, or disease-carrying organisms in food, beverages, or feedstuffs.

3. To protect human life or health within the territory of the member from risks arising from diseases car- ried by animals, plants, or products thereof, or from the entry, establishment, or spread of pests.

4. To prevent or limit other damage within the terri- tory of the member from the entry, establishment, or spread of pests.

Questions for Discussion After

Conclusion of Simulation

1. How does your solution compare to your expecta- tion of the likely actual outcome? What is different or similar in the two approaches?

2. How would you characterize the cultures of Europe (France and Germany) and the United States in terms of Hofstede’s scheme? In what ways are the

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In-Class Simulations 7

12. The Center for Urban Education about Sus- tainable Agriculture (CUESA), “News about Our Food’s Genes,” Weekly Newsletter, March 3, 2007.

13. Sara Fitzgerald, “Putting the EU in Its Place: Why Filing a GMO Case with the WTO Is Crucial,” Heritage Foundation, www.heritage. org/research/Europe/em855.cfm .

14. GMO Compass, “Majority of Europeans Believe Biotech Will Improve Quality of Life,” June 20, 2006, www.gmo-compass. org/eng/news/messages/200606.docu.html .

15. John Connor, “GM Corn Variety Classed as Safe,” New Zealand Herald, July 7, 2002, p. A6.

16. Becker, “U.S. Contests Europe’s Ban on Some Food.”

17. John Schoen, “Is This Biotech Boom for Real?” www.msnbc.com/news/930313. asp?0dm=L1BmB , June 23, 2003.

18. Press release from Friends of the Earth Europe, www.foeeurope.org/press/2003/ AW_18_Aug_GMO_trade_war.htm , August 18, 2003.

19. Regulatory Compliance Systems, “Precaution- ary Principle will ‘Run in Place’ in 2007.”

20. Sybille de La Hamaide, “Europe GMO Area to Surge over 10 Years: Monsanto,” Reuters, June 25, 2007.

21. Miller, “EU’s New Rules.” 22. “Better GMO Labelling Backed by a Million

Europeans,” Euractiv.com , February 5, 2007.

23. “Australia Struggles to Win Support for GMO Crops,” Reuters, March 10, 2005.

24. Interview with Keith Dittrich, president of the American Corn Growers Association, June 12, 2003.

25. Arpad Pusztai, “Genetically Modified Foods: Are They a Risk to Human/Animal Health?” http://www.mindfully.org/GE/GE2/Pusztai- Risk-To-Health.htm .

26. Daniel Levine, “Mapping a New Plan for Biotech,” San Francisco Business Times, March 10, 2003, p. 12.

27. Crystal Davis, “Genetically Modified Crops May Boost African Agriculture,” Earth Trends, World Resources Institute, January 16, 2007, earthtrends.wri.org/updates/node/142 .

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8

This simulation is designed to develop skills at interna- tional negotiation with an emphasis on cross-cultural communication and negotiation.

Case Summary

During the NAFTA negotiations, many U.S. firms were concerned about the reduction of U.S. tariffs on flat glass, which averaged 20 percent, and the perceived competitive advantages Mexican glass firms would have in the event these tariffs were removed. In the fall of 1991, in the midst of the NAFTA negotiations, Vitro S.A., the $3 bil- lion Mexican glassmaker, signed a tentative $800 million joint venture with Corning Inc. Two mirror companies were established—Corning–Vitro and Vitro–Corning— and each company took an equity stake in each of these joint-venture firms. In addition, the two parent companies agreed to a series of marketing, sales, and distribution relationships to support the activities of each of the new companies. 1 Two years later, the joint venture was in dis- tress, and some of the interested parties were suggesting that it be dissolved. This simulation provides participants with an opportunity to undertake negotiations designed to resolve these differences.

Background

Vitro Sociedad Anonima is a 100-year-old Mexican com- pany with roughly $3.5 billion in sales and 40,000 employ- ees. As Vitro positioned itself to take advantage of the emerging North American market, CEO Ernesto Martens- Rebolledo described the tightrope the company must walk: “We don’t want to lose our identity as a Mexican com- pany with a unique culture and relationship with our employees, but we don’t want to be battered in the world marketplace either.” 2 In 1989, Vitro completed a hostile takeover of Anchor Glass Container Corporation, and in 1992, Vitro laid off some 3,000 workers, an unusual move in Mexico at that time, given traditional notions about labor-management relations and job security. Corning, an upstate New York maker of glass, traces its roots back to the mid-1800s. In recent years, Corning has diversified into fiber optics and other high-technology applications of glass, ceramics, and composite materials. During the 1980s, Corning’s business increasingly relied on sales of fiber optics to telecommunications firms. These firms were beginning construction of the new infra- structure to support high-speed voice and data transmis- sion. At the same time, sales of household, flat glass, and other traditional glass products remained important to the company.

NAFTA and Glass 3

During the early part of NAFTA negotiations (1989–1991), U.S. makers of household and flat glass products expressed concern about their ability to compete against cheaper Mexican imports, and some even accused Corning S.A. of unfair trading practices. Guardian Industries Corp., a Michigan-based manufacturer of float glass—the high- quality flat glass used in mirrors, insulated windows, fur- niture, and automobiles—complained that Vitro, the only Mexican producer of float glass, was engaged in anticom- petitive practices by trying to intimidate a Mexican glass distributor that was considering buying a product from Guardian. Vitro exported approximately $120 million in float glass and related products to the United States in 1990. Other glassmakers argued that even with present U.S. duties averaging over 20 percent on household glassware from Mexico, the after-duty prices of the Mexican products were significantly below those of U.S. producers, owing in large part to considerably lower labor and energy costs. In February 1991, the International Trade Commission (ITC) issued a report on these allegations. Vitro Crisa (an operating subsidiary of Vitro S.A.) allegedly priced its glass beverageware at about 20 to 30 percent below that of U.S. producers in the U.S. market. Vitro Crisa’s lower productivity relative to U.S. industry, said the ITC, was offset by considerably lower labor costs (about $1.50 an hour versus $15 an hour in 1987 in the United States), which constituted nearly half of the production costs of the U.S. household glassware industry. The cost of natural gas, another major production input, was about 15 percent lower in Mexico.

Problems Arise 4

“Vitro and Corning share a customer-oriented philosophy and remarkably similar corporate cultures.” This was the characterization of the joint venture offered at the time by Julio Escamez, a Vitro executive. Both companies had long histories of successful joint ventures. Corning Inc. had been an innovative leader in foreign alliances for over 73 years. One of the company’s first successes was an alliance with St. Gobain, a French glassmaker, to produce Pyrex cookware in Europe during the 1920s. Corning has formed approximately 50 ventures over the years. Only nine failed (dissolved), an impressive number considering one recent study found that over one-half of foreign and national alliances do not succeed. From 1985 to 1990, Corning’s sales from joint ventures were over $3 billion, contributing more than $500 million to its net income. Corning enters into joint ventures primarily to gain access

2. Cross-Cultural Conflicts in the Corning–Vitro Joint Venture

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In-Class Simulations 9

underscores the difficulty of transferring a culture across the border. Sinkin’s own experience bears that out. He is bilingual and often works in Mexico but finds that it isn’t always easy to get paid because the Mexican view of con- tracts differs markedly from the view commonly held in the United States. In Mexico, the terms of a contract “are kind of ideal things that you strive to achieve,” Sinkin said, “while in the U.S. they are law.” In general, corporate style is more formal in Mexico than in the United States. Titles are common, and nearly everyone is “licenciado,” which loosely refers to having any professional training. Forget- ting the honorific can be seen as a serious insult. In Mexico, executives can expect the unquestioned loy- alty of employees, but outsiders are often viewed with mistrust. Horace E. Scherer, director general of Hobart Dayton Mexicana, the Mexican subsidiary of the Hobart Corporation, said his salespeople must often make four trips to complete one transaction because of that lack of trust. To sell the company’s scales and other equipment, a salesperson starts with a visit to the client’s top official. If a sale is made, a representative of the company itself must deliver the goods because the customer won’t accept delivery from DHL or some other service. If all the papers are in order on delivery, the company representative is told to come back on an appointed day to present an invoice, in person; if the invoice is accepted, an appoint- ment is made for the rep to return to receive payment. Many companies that have formed joint ventures end up creating their own new corporate culture, taking bits and pieces from each side. At Vitro-Whirlpool in Monter- rey, assembly-line workers have a long tradition of taking what in Mexico is referred to as “el puente,” or the bridge, which commonly extends a formal holiday into a mini-vacation. When, for instance, Mexico’s version of Mother’s Day fell on Tuesday, May 10, workers did not show up on Monday, bridging the gap to the holiday. (If an American holiday falls on a Tuesday, of course, absen- teeism will be high on Monday, but in Mexico the custom is far more entrenched—and can even shut a plant down.) The company now allows workers to take the “puente,” but only if they agree to work an extra hour each day for eight days beforehand. Because their corporate conversations can be filled with so many feints and pleasantries, Mexicans often use memos to convey dissatisfaction. When Labatt’s (the Canadian brewer) Mexican manager, Noel Trainor, decided to cut back employees’ lunch from two hours to one, he had to do it in a memo that all 30 employees had to sign. Trainor said he abided by a strict holiday policy, priding himself on the degree to which his compatriots had been able to adapt to the expectations of the United States and seemingly only half aware of the degree to which he had compromised. “We only give what we are obligated by law to give,” he said, “and of course half a day on Mother’s Day.”

to markets that it cannot penetrate quickly enough to obtain a competitive advantage. In addition, both compa- nies were globally oriented, and both had founding fami- lies still at their centers. Yet the joint venture became sub- ject to a series of cultural and other conflicts that began to undermine this vision.

U.S.-Mexico Alliances 5

“There are many reasons why corporate marriages between Mexican and U.S. companies fail,” says Richard Sinkin, managing director of InterAmerican Holdings, a consul- tancy based in San Diego, California, that advises U.S. companies doing business in Mexico. Sinkin says that U.S. and Mexican companies often get together for the wrong reasons. Unless the two partners contribute essential qual- ities to the marriage, the alliance soon founders. The sec- ond difficulty is corporate control. “Most Mexican firms are still run as family businesses,” Sinkin says, “and these firms are often reluctant to share control with an outside investor.” In the case of the Corning/Vitro JV, Corning managers said that they were sometimes left waiting for important decisions about marketing and sales because in the Mexican culture, only top managers could make them and at Vitro those people were busy with other matters. Vitro’s sales approach was less aggressive than Corning’s, the remnant of years in a closed economy, and was sometimes at odds with the pragmatic approach Corning had devel- oped over decades of competition.

NAFTA and Alliances 6

To varying degrees, such cultural issues have plagued many mergers and alliances with their roots in the North Ameri- can Free Trade Agreement. “Mexico initially appears to be the United States except that people speak Spanish,” said Harley Shaiken, a labor economist who often works in Mexico. “That’s just not the case, which everyone finds out in the short term rather than the long term.” The trade pact may have created false expectations about how much like the United States Mexico has become. In discussing cul- tural differences, it’s difficult not to slip into stereotypes about “mañana”—Mexicans who move at a slower pace. But what the gap separating the two business cultures really amounts to is a different approach to work, reflected in everything from scheduling to decision making to etiquette. In the Corning venture, the Mexicans sometimes saw the Americans as too direct, and Vitro managers, in their dogged pursuit of politeness, sometimes seemed to the Americans unwilling to acknowledge problems and faults. The Mexicans sometimes thought Corning moved too fast; the Americans felt Vitro was too slow. Cultural differences generally, said Richard Sinkin, the corporate consultant, are “the No. 1 problem for doing business in Mexico.” That may be an exaggeration, but it

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10 Skill-Building and Experiential Exercises

over whether to stay in or dissolve the JV. Groups 1 and 3 should consider the following:

1. The logic and original rationale for the JV.

2. How that logic may still hold.

3. How the JV could be made to work better.

Groups 2 and 4 should consider the following:

1. What caused the JV relationship to sour.

2. Why the partner has not lived up to expectations.

3. What the terms of dissolution should be.

Each company agrees on a position to bring forward to the partner. This position need not necessarily be a demand to maintain the joint venture or to dissolve it; rather it could be a contingency laying the conditions for maintaining the relationship, or demands for how it should be dissolved. Once each company has decided on its position, representa- tives from each Corning group (two to four representatives total) will meet with their counterparts from the Vitro groups.

Negotiation 2 Each company must decide, collectively, through negotia- tion, whether to remain within the joint venture or dis- solve it. The representatives from each company have 60  minutes to reach some resolution. They must consult with the remainder of their company throughout the nego- tiation to ensure support for the outcome. The main issues for consideration include:

1. The logic and original rationale for the JV. 2. How that logic may still hold. 3. How the JV could be made to work better. 4. What caused the JV relationship to sour. 5. Why the partner has not lived up to expectations. 6. Whether the JV should be terminated and, if so,

what the terms of dissolution should be.

Ultimately, issue 3 or 6 must be resolved. Any solu- tion, whether to maintain the JV, dissolve it, or some hybrid approach, should be comprehensive and address

these elements:

• Financial structure: Terms for financing existing or new ventures under the arrangement or payments for dissolution of the relationship.

• Governance: Board, management, or other top-level changes in ownership and leadership under the present or revised relationship.

• Marketing: Agreements about marketing, distribution, and sales relationships either under the current arrangement or in any new structure.

• Competition/cooperation: Changes in the way in which each company operates in the other’s territories or markets.

Financial and Commercial

Concerns 7

Added complications emerged from the relatively strong peso, increased overseas competition, and a reconsidera- tion of marketing strategies by both companies. The joint ventures suffered from the different administrative prac- tices of the two companies. “Managing from two coun- tries was more complicated than we anticipated,” said Corning. “There were different (management) structures, styles and accounting systems.” Corning said the different needs of customers in the United States and Mexico com- plicated the integration of sales and distribution. Corn- ing’s U.S. customers, especially the large discount stores, expect the timely and regular delivery of products pack- aged in a certain way; Vitro’s Mexican customers are less demanding. In 1992, Corning-Vitro had sales of approximately $700 million, and Vitro-Corning achieved turnover of about $230 million.

Issues for Decision

As a result of cultural clashes, failure to integrate com- plementary product lines, and disappointing sales, both Corning and Vitro are contemplating dissolving the joint ventures. Within the two companies, however, there are those who support maintaining the relationship, and oth- ers who oppose it. Corning and Vitro must first decide on whether they want to remain in the joint ventures and, if they do, under what conditions. If they decide to dis- solve the relationship, they must negotiate the terms of the dissolution. If they decide to remain in the arrange- ment, some changes must be made to address the grow- ing problems.

Simulation Instructions

You will be assigned to one of four groups. The groups are ad hoc. Each group represents an ad- hoc committee appointed by the CEO of each company to make recommendations about the future of the alliance. The groups’ initial positions can be characterized as follows:

1. Vitro—supports keeping JVs 2. Vitro—against keeping JVs 3. Corning—supports keeping JVs 4. Corning—against keeping JVs

Negotiation 1 The initial negotiation occurs within each company. Hence, Vitro Groups (1 and 2) discuss their differing posi- tions, and Corning Groups (3 and 4) exchange their views with each other. Each pair of groups (1y2 1 3y4) should decide whether their company wants to remain within the joint venture or dissolve it. Each pair of groups has 45 minutes to negotiate within the respective companies

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In-Class Simulations 11

Questions for Discussion After

Conclusion of Simulation

1. Compare your solution to the joint venture’s prob- lems with the actual outcome. What is different or similar in the two approaches?

2. How would you characterize the Mexican and U.S. culture in terms of Hofstede’s scheme (see Table 1)? In what ways were the cultures similar and in what ways were they different?

3. Compare Corning-Vitro’s problems to those of some of the other international joint ventures described in this simulation. How were they similar, different, and more or less challenging?

4. How have other companies in Mexico and Latin America addressed these cultural divisions in the recent past? How should they do so as they go for- ward with comprehensive regional Latin American strategies?

Source: © McGraw-Hill Irwin. This simulation was prepared by Jonathan Doh of Villanova University as the basis for class discussion. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

Table 1 Hofstede’s Cultural Ratings for the United States and Key Latin Countries

Power Uncertainty Distance Avoidance Individualism Masculinity

United States 40 46 91 62

Mexico 81 82 38 69

Canada 39 48 80 52

Argentina 49 86 46 56

Brazil 69 76 38 49

Colombia 67 80 13 64

Peru 64 87 16 42

Venezuela 81 76 12 73

Spain 57 86 51 42

Portugal 63 104 27 31

Source: Geert Hofstede, Culture’s Consequences: International Differences in Work-Related Values (Beverly Hills, CA: Sage, 1980).

■ Notes

1. “Glassmakers’ Complaints Aired in NAFTA Hearings,” LDC Debt Report/Latin American Market, September 9, 1999, p. 10.

2. Nancy A. Nichols, “From Complacency to Competitiveness: An Interview with Vitro’s Ernesto Martens,” Harvard Business Review, September–October 1993, p. 162.

3. “Glassmakers’ Complaints Aired in NAFTA Hearings.”

4. Anthony Depalma, “It Takes More than a Visa to Do Business in Mexico,” New York Times, June 26, 1994, sec. 3, p. 5.

5. Leslie Crawford, “Anheuser’s Cross-Border Marriage on the Rocks: Modelo Deal Is the Latest U.S.-Mexican Partnership to Be Soured by Disagreement,” Financial Times, March 18, 1998, p. 46.

6. Depalma, “It Takes More than a Visa.” 7. John Holusha, “Corning to Buy Northern

Telecom Assets,” New York Times, December 16, 1993, sec. D, p. 4.

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