Luckily is Russian’s largest oil company and is either the world’s largest or second largest private owner of proven reserves. (Analysis disagree as to whether Luckily or Complexion is larger. Some of the world’s largest oil companies such as Saudi Armco for Saudi Arabia and Proven from Venezuela, and their reserves are government owned, rather than privately owned. ) It controls 19 percent of Russian oil production and refining. In addition to its large investments with Russia, it has been making extensive investments abroad. Map 6. 2 shows the location and types of Illus.’s foreign operations.
For instance, in 2001 it acquired 100 percent of Getty Petroleum in the United States, which gave it a retail network in the mid-Atlantic and northeastern states of about 1,300 gasoline stations. In 2004, it acquired another 800 U. S. Stations for Consulship’s. These are being refrained as Luckily need to export, many analysis have wondered, ‘Vhf does a Russian company see advantages in investing abroad? ” Before answering this question, we’ll examine Illus.’s competitive situation and strategy. Loki must sell in foreign markets if it is to use its capacity adequately and earn sufficient profits.
Since the beginning of the twenty-first century, Russian’s export situation has been generally favorable. Between January 1 999 and September 2000, oil prices tripled because of production cutbacks by the Organization of Petroleum Exporting Countries (OPEC), which Russia never joined; bad weather; and strong demand. Oil prices lost about half this gain because of economic uncertainty after 9/1 1, but they have since increased to all-time highs as a result of such factors as unrest in Venezuela, the war in Iraq, Chinese economic expansion, and production curtailment by OPEC.
The result is that Luckily has been able to sell more oil outside Russia and at a higher price than it could a few years earlier. This favorable market situation enabled Loki to have enough capital to invest abroad if its management reasoned that such investment would help its strategic position. Luckily Was one Of several companies created in 1991 out the Russian State- owned petroleum monopoly. Since then, the Russian government has gradually reduced its Loki holdings. It sold three-quarters of its remaining 10 percent holding to Consulship’s in 2004.
Yet Luckily remains close to the Russian government. Russian President Vladimir Putting even cut the ribbon to open a new Luckily filling station in New York City during his state visit to the united States. Luckily became the first Russian oil company to integrate “from oil well to filling station. ” It has over 120,000 employees and about 1, 100 Russian filling stations. In addition to exporting to use its capacity, Illus.’s management has wanted foreign expansion to get bigger margins and more assurance of full on-time payment than it can get within Russia.
However, why doesn’t Luckily simply export rather than make foreign investments? The answer lies in a combination of factors. First, oil prices have fluctuated widely in the past in spite of their general upward trend since the beginning of the twenty-first century; so has the ability to market Russian oil abroad. On several occasions, oil prices have jumped over 1 Percent in one year and then have plummeted to lower bevels than when the jump in prices began. In fact, in the late 1 sass, a global oil glut and depressed world oil prices hampered Lookout’s ability to be profitable.
So Loki emulated its larger Western competitors and embraced the ideal of forward integration into ownership of foreign distribution. Its first foreign investments were of formerly state-owned oil facilities in the former Soviet satellite countries of Bulgaria and Romania, because these countries were close, familiar, and long-time customers of Russian oil. It has since expanded into other countries, almost entirely by buying existing companies ether than through Greenfield (start-up) operations.
Simply stated, when producing companies invest in distribution, the capture markets that better enable them to sell their crude oil when there are global oversupplies. Further, this integration could potentially reduce Illus.’s operating costs because Loki will not have to negotiate and enforce agreements by selling oil to other companies in these countries. Second, despite having huge reserves in Russia and being a successful exporter, political relations could impair Illus.’s future export sales.
For instance, an importing country could rower it purchases of Russian oil to protest some Russian political policy or simply to diversified,’ its own sources of supplies. Further, within Russia the government owns the pipeline system through which virtually all Russian oil exports pass. Because it allocates quotas among oil companies to use the pipeline system, a competitor might gain influence with Russian political decision makers to pre-empty part of Illus.’s quota. Thus, Luckily sees the need to develop foreign oil supplies and aims to make them about 20 percent of its total supplies.
Third, to be a major global competitor, Loki must come as efficient as the major Western oil companies. To do so, it needs the latest petroleum technology, marketing skills, and operating efficiencies. For example, its administrative expenses and cost of capital have been high compared with Western competitors. Within Russia, these needs have created only minor problems because Lookout’s competition has been other Russian oil companies that also inherited operational inefficiencies from the former state-owned oil monopoly.
However, new competitive threats within Russia have been gaining momentum. BP and Totalitarian bought interests in Russian companies. Thus, Luckily sees advantages in acquiring skills from foreign companies to help it compete better, both at home and abroad. With this outcome in mind, it has put independent directors from Western oil companies on its abroad. The 7. 6 percent purchase of Loki by Consulship’s was partially brought about by Illus.’s interest in tapping Chancellorship’s 2 International Trade: CASES (18) management expertise.
It also sees foreign acquisitions, such as the Getty acquisition in the Unites States, as a means of gaining experienced personnel, technology, and competitive know-how. In summary, both Russia and Luckily deed to export to meet their economic objectives. They see foreign investment and ties to Western oil companies as helping to meet these objectives. QUESTIONS What theories of trade help to explain Russian’s position as an oil exporter? Which ones do not, and why? 2. How do global political and economic conditions affect world markets and prices of oil? 3.
Discuss the following statement as it applies to Russia and Loki. “Regardless of the advantages a country may gain by trading, international trade will begin only if companies within that county have competitive advantages that enable them to be viable traders-and they must foresee refits in exporting and importing. ” 4. In Oilskin’s situation, what is the relationship between factor mobility and exports? 5. Compare the role of the Costa Rican government in the chapter’s opening case with the role of the Russian government in their use of trade to meet national economic objectives. CASE 2 Trade in Textiles- Holding the Chinese Juggernaut in Check Since 1 974, international trade in textiles has been governed by a system of quotas know as the Multi-Fiver Agreement (MEA). Designed to protect textile producers in developed nations from foreign competition, the MFC assigned entries quotas that specified the amount of textiles they could export. The quotas restrained textiles exports from some countries, such as China, but in other cases created a textile industry that might not have existed.
Countries such as Bangladesh, Sir Lankan, and Cambodia were able to take advantage of favorable quota allocations to build significant textile industries that generated substantial exports. In 2003, textile accounted for more than 70 percent of those from Sir Lankan. This is now changing. When the World Trade Organization was created in 1995, member countries agreed to let the MFC expire on December 31 , 2004. At the time, many textile exporters in the developing world exported to gain from the elimination of the quota system.
What they did not anticipate, however, was that China would join the WTFO in 2001 and that Chinese textile exports would surge. By 2003, China was making 17 percent of the world’s textile, but this may only be a start. The WTFO forecasts that China’s share may rise to 50 percent by 2007 as the country’s producers take advantage of the removal of quotas to expand their exports to the United States and European union, displacing exports from many other developing nations. China’s gains re due to its comparative advantage in the manufacture of textile.
Not only does the country benefit from low wages and productive labor force, but China’s huge factories also enable its producers to attain economies of scale unimaginable in most developing nations. Also, the country’s good infrastructure ensures quick transport of products and a timely turnaround of ships at ports, a critical assert in the clothing industry where fashion trends can result in rapid changes in demand. Chinese producers have been able to reduce the order-to-shipment cycle to as low as 60 days, for below the 90 to 20 days achieved by many other producers in the developing world.
In addition, Chinese textile producers have garnered a reputation for reliably delivering on commitments, unlike those in some other countries. Producers in Bangladesh, for example, have a reputation for low quality and poor delivery that offsets their low prices. Fearful that they will lose market share to China, trade associations form more than 50 other textile-producing nations, many of them low-and-middle-incoming nations, signed the “Istanbul declaration” in 2004 asking the WTFO to delay the removal of quotas, but to no avail. Many developing nations now fear that they will lose substantial market share to China.
This could conceivably cripple the economies of countries such as Bangladesh, where some 2 million people, most of them women, are employed in the textile industry. Other developing nations, however, think that they night benefit from the removal of the MEA. They believe that buyers in developed nations will need to diversify their supply base as a hedge against disruption in China. Among this second group are Vietnam, India, and Pakistan, all of which expect rising textile exports after 2004, reaching 40 lion in 201 0, or one-third of the country’s exports.
In developing nations, too, the prospect of surging imports from China causes unease. In the United States, textile producers lobbied the government to impose quotas on Chinese imports after the MFC expired. Under the terms of China’s entry into the WTFO, the Ignited States and other major trading nations reserved the right until 2008 to impose annual quotas on Chinese textile 4 imports if they are deemed to be “disruptive. ” China tried to head off protectionist pressures in December 2004 by announcing it would impose a tariff on textile exports. By raising the costs of
Chinese textile, the tariff was designed to reduce overseas demand. However, the tariffs are modest, ranging from 2. 4 to 6 cents per item, with most at the low end of the range. Many observers see them as little more than a token gesture. The first eight months of 2005 provided a glimpse of what may be to come. Imports of Chinese textiles into the Unites States surged 64 percent compared with the same period in 2004 to El 5. 4 billion. Chinese textile imports into the ELI also rose. However, others notes that total textile imports into the U. S. Manned flat, and that the surge represented a shift from other reducers to China, rather than an absolute increase in the volume of imports. Notwithstanding this, the increase in imports resulted in renewed calls in the United States for quotas on Chinese textile imports. Recognizing reality, in mid-2005 the Chinese entered into bilateral negotiations with the United States to limit imports of Chinese textile. In November 2005, they reached an agreement that capped the growth in Chinese imports into the united States at around 15 percent per annual until 2008, after which restrictions will be lifted.
The E struck a similar deal with China some months earlier. Case Discussion Questions . Was the removal of the Multi-Fiber Agreement a positive thing for the world economy? Why? 2. As a producer in a developing nation such as Bangladesh that benefited from the MFC agreement, how should you respond to the expiration of the agreement? 3. Do you think China was right to place a tariff on exports of textiles from China? Why? Does such action help or harm the world economy? 4. Whose interests were served by the November 2005 agreement between the United States as China to limit the growth of Chinese textile imports into the United States?
Do you think the agreement was a good one for the United States? 5. What kind of trade barrier was erected by the November 2005 agreement between China and the united States? 5 case 3 Trade in Information Technology and U. S. Economic Growth Entrepreneurial enterprises in the United States invented most of the information technology that we use today, including computer and communications hardware, software, and service. In the asses and asses, companies like IBM and DCE, which developed first mainframe and then midrange computers, led the information technology sector.
In the 1 sass, the locus of growth in the sector shifted to personal computers and the innovations of companies like Intel, Apple, IBM, Dell, and Compact, which helped develop the mass market for the product. Along the way, however, something happened to this unique eely American industry?it started to move the production of hardware offshore. In the early asses production of “commodity components” for computers such as dynamic random access memory chips (DRAMS) migrated to low-cost producers in Japan, and then later to Taiwan and Korea.
Soon hard disk drives, display screens, keyboards, computer mice, and host of other components were outsourced to foreign manufactures. By the early adds, American factories were specializing in making only the highest value components, such as the microprocessors made by Intel, and in final assembly (Dell, for example, assemblers PC’s at two North American facilities). Just about every other component was made overseas?because it cost less to do so. There was a lot of hand-winging among politicians and journalists about the possible negative implication for the U. S. Economy of the trend. According to the critics, high-paying manufacturing jobs in the information technology sector were being exported to foreign producers. Was this trend bad for the U. S. Economy, as the critics claimed? According to research, the globalization of production made information technology hardware about 20 percent less expensive than it would otherwise have been. The price declines supported additional investments in information technology by business and household. Because they Were getting cheaper, computer diffused throughout the united States faster.
In turn, the rapid diffusion of information technology translated in to faster productivity growth as businesses used computers to streamline process. Between 1995 and 2002, productivity grew by 2. 8 percent per annum in the United States, well above the historic norm. According to calculations by academic researchers, some 0. 3 percent per annum of this growth could be attributed directly to the reduced prices of information technology hardware made possible by the move to offshore production.
In turn, the 0. 3 percent per annum gain in productivity over 1995 to 2002 resulted In an additional $230 billion in accumulated gross domestic product in the United States. In short, some argue that the American economy grew at a fast rate precisely because production of information technology hardware was shifted to foreigners. There is also evidence that the reduced price for hardware made possible by international trade created a boom in jobs in two related industries?computer software and services.
During the 1 sass the number of information technology jobs in the United States grew by 22 percent, twice the rate of job creation in the economy as a whole, and this at a time when manufacturing information technology jobs were moving offshore. The growth could partly be attributed to robust demand for computer software and services within the united States, and partly due to demand for software and services from foreigners, including those same foreigners who were now 6 making much of the hardware.
In sum, some argue that buying computer hardware from foreigners, as opposed to making it in the united States, had a significant positive impact upon the U. S. Economy that outweighed any adverse effects from job losses in the manufacturing sector. Case Discussion Questions 1. During the 1 sass and 20005 computer hardware companies in certain developed nations progressively moved the production of hardware components offshore, often outsourcing them to producers in developing nations. What does international trade theory suggest about the implications of this trend for economic growth in those developed nations? Is the experience of the United States, as described in the case, consistent with the predictions of international trade theory? 3. What are the implications of the theory and data for (a) government policy in advanced nations such as the United States, and (b) the strategy of a firm in the computer industry, such as Dell or Apple Computer? 7 Case 4 Agricultural Subsidies and Development For decades the rich countries of the developed world have lavished subsidies on their farmers, typically guaranteeing them a minimum price for the products they produce.
The aim has been to protect farmers in the developed oral from the potentially devastating effects of low commodity prices. Although they are small in numbers, farmers tend to be politically active, and winning their support is important for many politicians. The politicians often claim that their motive is to preserve a historic rural lifestyle, and they see subsidies as a way of doing this. This logic has resulted in financial support estimated to exceed $300 billion a year for farmers in rich nations. The European union, for example, has set a minimum price for butter of 3,282 euros per ton.
If the world price for butter falls below that amount, the EX. will aka up the difference to farmers in the form of a direct payment or subsidy. In total, ELI dairy farmers receive roughly $15 billion a year in subsidies to produce milk and butter, or about $2 a day for every cow in the E – a figure that is more then the daily income of half the world’s population. According to the COED, overall EX. farmers receive on the order of $134 billion a year in subsidies. The EX. is not alone in this practice. In the United States, a wide range of crop and dairy farmers receive subsidies.
Typical is the guarantee that U. S. Cotton farmers will receive at least $0. 70 for every pound of cotton hey harvest. If world cotton prices fall below this level, the government makes up the difference, writing a check to the farmers. Some 25,000 United States cotton farmers received some $3. 4 billion in annual subsidy checks. Total agricultural subsidies in the united States amount to some $43 billion a year according to COED figures. Japan is also a large subsidized, providing some $47. 4 billion in subsidies to farmers every year. In relative terms Switzerland, which is not an E member, spent the most.
Subsidies made up a remarkable 68 percent of its farm economy. Iceland was at 67 present and Norway at 64 percent. European Union subsidies equaled 32 percent of that trading bloc’s farm economy, while the United States figure was 16 percent. One consequence of such subsidies is to create surplus production. That surplus is sold on world markets, where the extra supply depresses prices, making it much harder for producers in the developing world to sell their output at a profit. For example, EX. subsidies to sugar beet producers amount to more than $4,000 an acre.
With a minimum price guarantee that exceeds their costs of production, EX. farmers plant more sugar beets than the E market can absorb. The surplus, some 6 millions tons per year, is dumped on the world market, where it depresses world prices. Estimates suggest that if the EX. stopped dumping its surplus production on world markets, sugar prices would increase by 20 percent. That would make a big difference for developing nations such as South Africa, which exports roughly half of its 2. 6 million tons Of annual Sugar production.
With a 20 percent rise in world prices, the South African economy would reap about $40 million more from sugar exports. American subsidies to cotton farmers have a similar effect. Brazilian officials intend that by creating surplus production in the United States that is then dumped on the world market, U. S. Cotton subsidies have depressed world prices for cotton by more than 50 percent since the mid-asses. Low cotton prices cost Brazil some $600 million in lost export earnings in 2001-2002. India,another big cotton producer, has estimated that U. S. Cotton subsidies reduced its 8 export revenue form cotton by some $1 billion in 2001 .
According to the charitable organization Sofas, the U. S. Government spends about three times as much on cotton subsidies as it does on foreign aid for all of Africa. In 2001, the African nation of Mali lost about $43 million in export revenues due to plunging cotton prices, significantly more than the $37 million in foreign aid it received from the united States that year. The global rice market is also badly distorted by subsidies, with overproduction of rice in the United States helping to depress world prices. The United States paid its 9,000 rice farmers some $780 million in subsidies in 2006. An average ton of U. S. Ice cost $240 to sow, tend, and harvest in 2006,but by the time it had left the Lignite States port subsidies had cut the cost to $205 a ton. This has made it impossible for farmers in Ghana, once one Of the largest rice producers in Africa, to survive. It costs farmers in Ghana $230 a ton to produce U. S. Quality rice, but with global prices driven down below that by subsidies in developed nations, rice production in Ghana has collapsed. With incomes falling, local farmers do not have the capital to invest in new farming technology, and they risk falling ever further behind mechanized farming in more developed nations.
Overall, the United Nations has estimated that while developed nations give about $50 billion a year in reign aid to the developing world, agricultural subsidies cost producers in the developing world some $50 billion in lost export revenues, effectively canceling out the effect of the aid. As one LINE official has noted, “It’s no good building up roads, clinics, and infrastructure in poor areas if you don’t give them access to markets and engines for growth Similarly, Sofas has taken the unusual position for charity of coming out strongly in support of the elimination of agricultural subsidies and price supports to developing world producers.
By increasing world prices and shifting production from high-cost, retorted producers in Europe and America to lower-cost producers in the developing world, Sofas claims that consumers in rich nations would benefit from lower domestic prices and the elimination of taxes required to pay for the subsidies, while producers in the developing world would gain from fairer competition, expanded markets, and higher world prices. In the long run, the greater economic growth that would occur in agriculturally dependent developing nations would be to everyone’s benefit.
Although subsidies have been against the spirit of World Trade Organization rules, under the terms of 1995 “peace agreement” WTFO members agreed not to take each other to court over agricultural subsidies. However, that agreement expired on December 31 ,2004. Signed are growing that unless rich countries take steps to cut their subsidies soon, a member of efficient agricultural exporting countries will launch an all-out assault on farm subsidies.