Case Analysis

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Cross-na.onal coopera.on and agreements 2

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Tue, Mar 13 Session 16

INB 302 Dr. Hanek

Learning objec.ves

•  Discuss the pros and cons of global (the WTO), bilateral, and regional integra.on

•  Iden.fy the major characteris.cs of the WTO and NAFTA

•  Compare and contrast different FTAs and their implica.ons for businesses

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The World Trade Organiza.on

•  World Trade Organiza/on (WTO) – The major body for

•  reciprocal trade nego.a.ons •  enforcement of trade agreements

•  General Agreement on Tariffs and Trade (GATT) – Formed in 1947 to reduce tariffs and abolish quotas – Major driver of trade liberaliza.on in the second half of the 20th century

– Succeeded by WTO in 1995

GATT: Predecessor to the WTO

•  Most favored na/on (MFN) clause – trade without discrimina.on •  Once a country and its trading partners agreed to lower tariffs, that tariff cut applied to all member na.ons

•  GATT ran into some problems as trade became more complex, including not being able to enforce compliance with agreements – Led officials to create the WTO

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What does the WTO do?

•  WTO – 159 members, including BRICs – Members account for more than 97% of world trade – con.nues the MFN clause of GATT – provides a mechanism for dispute seblement

•  Doha Round – agricultural subsidies

•  Cri.cized for –  failing to pay enough aben.on to labor and environmental concerns –  undermining global diversity –  benefidng rich at the expense of the poor

Walmart in China

•  Opened its first stores (Walmart Supercenter and Sam’s Club) in China in 1996

•  One of the first foreign retailers to offer big-box shopping and a variety of goods from clothing to food

•  Walmart was China’s biggest super-sized store and had a market lead from 2007-2009

•  In the span of two years (2013-2015), Walmart’s imports into China increased from 212 containers of products to 2,800 containers

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China ager WTO Accession

•  Economic and social gains 10 years later •  2nd largest economy in GDP •  1st largest merchandise exporter •  2nd largest merchandise importer •  1st des.na.on for inward FDI among developing countries •  1st investor for outward FDI among developing countries

Trade in China

•  1st largest trading partner of – Australia, Chile, Japan, South Korea, Hong Kong, Malaysia, Russia, Brazil, South Africa, Saudi Arabia

•  2nd largest trading partner – Argen.na, Canada, EU, India, Indonesia, Mexico, New Zealand, Singapore, U.S.

•  “The Chinese government has always supported trade liberaliza.on and facilita.on, opposed trade protec.onism in any form, strongly supported the mul.lateral trade system and ac.vely pushed forward the Doha round nego.a.ons to achieve success” – Vice Premier, Wang Qishan

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Remaining Challenges: Walmart’s Case

•  Compe.tors –  Foreign: Carrefour (French) –  Domes.c: closer .es to local suppliers

•  Can ogen undercut Walmart’s prices because of beber nego.a.ons with long-standing local partners

•  Poli.cal –  Although three-store limit was liged in 2003, other disadvantages remain •  Government inves.ga.ons into Walmart’s pricing •  Government highligh.ng food scandals

•  Consumers –  Changes in preferences to online shopping

Regional Economic Integra.on

! Regional trade agreements " integra.on confined to a region and involving more than two countries

! Examples include " European Union (EU) " European Free Trade Area (EFTA) " North American Free Trade Area (NAFTA) " Associa.on of Southeast Asian Na.ons (ASEAN) " Common Market of Eastern and Southern Africa (COMESA)

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NAFTA

! The North American Free Trade Agreement (NAFTA) ! went into effect January 1, 1994 "  includes Canada, the U.S., and Mexico

"  Today, the U.S. is Mexico’s and Canada’s largest trading partner "  involves free trade in goods, services, and investments (i.e., not a

customs union or common market) "  As of Jan 1, 2008, all tariffs and quotas were eliminated on U.S. exports to Canada

and Mexico

"  includes countries of different sizes and wealth

NAFTA: Trade Effects

! Sta.c effects ! Canadian and U.S. consumers benefit from lower-cost agricultural

Mexican products

! Dynamic effects ! U.S. producers benefit from growing Mexican market

! Some U.S. trade and investment has been diverted to Mexico ! Moving produc.on from Asia to Mexico ! Also applies to non-member countries

! E.g., Sony in Tijuana

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NAFTA: How Trade Works

! Free trade area ! Each country sets its own tariffs to the rest of the world

" Creates complex rules of origin (in contrast to EU) ! Regional content

" at least 50% of the net cost of most products must come from the NAFTA region

" If these regula.ons are met, a company can manufacture or assemble products in NAFTA member countries and ship to other members duty-free

NAFTA

! Addi.onal provisions " Workers’ rights " The environment

" The largest markets for U.S. exports are Canada (1) and Mexico (2)

" Sedng up produc.on in Mexico allows companies to take advantage of other markets Mexico has FTAs with

" Mexico is becoming an abrac.ve consumer market

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NAFTA: Spurring FDI in Mexico

•  Audi opened its first produc.on plant in Mexico on September 30, 2016 – Exclusive produc.on of the Q5 model

•  NAFTA was one of the major reasons for loca.ng produc.on in Mexico

Walmart in Mexico

•  Prior to 1990, Walmart had operated only in the U.S. •  Walmart opened its first store (Sam’s Club) in Mexico City as a

joint venture in 1991

•  In 1993, Walmart created its Interna.onal Division –  The Interna.onal Division accounts for about 15.2% of sales

•  Today, Walmart operates about 2,363 units in Mexico –  The largest retailer in the country –  The largest private employer in Mexico with 209,000 employees

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Walmart’s Compe..ve Advantage

•  “Everyday Low Prices” •  Cost-cudng measures

–  Sheer size and volume purchases, can nego.ate with suppliers for the lowest costs

–  Advanced informa.on systems allows suppliers to plan produc.on runs more accurately, saving produc.on costs

–  Advanced distribu.on system—Distribu.on Centers (DCs) in central loca.ons

•  Walmart’s biggest challenge to its Mexican opera.ons prior to NAFTA were high import charges

Walmart in Mexico: The Role of Trade

•  NAFTA reduced tariffs on American goods sold to Mexico from 10% to 3%

•  Greater FDI into Mexico – Foreign companies could open factories in Mexico and take advantage of •  Low-cost labor •  Ship to NAFTA’s free trade zone (Mexico, U.S., Canada) •  E.g., Sony’s flat screen TVs sold at Sam’s club

–  In mid 1990’s, TVs were imported from Japan with 23% tariffs for a retail price of $1,600

–  In 1999, Sony built a plant in Mexico, elimina.ng tariffs for Walmart and reducing transporta.on costs, lowering retail price $600

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Walmart in Mexico: The Role of Trade

•  Increased compe..on among suppliers, pushed for more efficient produc.on

•  More products available to consumers, increasing demand

•  Greater economic growth in Mexico and lower rates of infla.on, further adding to the purchasing power of consumers

Walmart: Benefits of Lessons Learned in Mexico in the U.S.

•  Adap.ng to a changing consumer demographic

•  Pilot of Más Club in Houston, TX (2009-2014) •  Incorpora.ng imports from Mexico into American retail

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Regional Integra.on: Why Companies Need to Adapt

•  The case of Walmart in Germany