Government Policy And Regulation - Executives Need to Know How Trade Deals Shape Their Markets - Sun and Planets Spirituality AYINRIN

 Government Policy And Regulation - 

Executives Need to Know How Trade Deals Shape Their Markets  -  Sun and Planets Spirituality AYINRIN

Laura Schneider for HBR

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Most corporate strategists focus on finding ways to win in the market — that is, they look for sources of competitive advantage based on the customers they serve, the products they sell, the suppliers they use, and so on. But they tend to overlook their nonmarket strategy. Nonmarket strategy means using and shaping the rules of global commerce, such as trade agreements, through legal and political means.

This is a major oversight. After all, we have a rules-based global economy. Never before has so much commerce been covered by international law. And whether America pulls out of the Trans-Pacific Partnership (TPP) or Britain leaves the EU, the global economy is awash in rules and will remain so.

Business needs the legal and political capacity to navigate these rules. The ability of a firm to push into a new market or compete using a tried-and-true strategy hangs in the balance.

Yet many companies still view trade as exogenous, something to which they respond by finessing their market strategy. This is a mistake; trade measures can be game-changers. For example, SolarWorld got relief from low-cost Chinese producers of solar panels by filing in the U.S. and Europe for antidumping duties, insisting that Chinese competitors were selling below their cost of production. Similarly, Cisco used Section 337 of the 1974 Trade Act against Arista to stop import of goods based on infringed intellectual property, taking a page from the Apple vs. Samsung playbook.

Beyond just using rules, firms can also seek to script them. Intel, for example, offered the U.S. government specific suggestions on legal text for either of two chapters in the U.S.-EU Transatlantic Trade and Investment Partnership (TTIP). The return on doing it is this: If Intel succeeds in getting its preferred wording into TTIP, the text will become part of the U.S. template for all future trade deals and as a best practice may even inform how third parties write their agreements.

With so many rules already in effect, and many more in the works, there has never been a greater need for business to build up the capacity to enact nonmarket strategy. Where to start?

The key to deals like TPP is that they go beyond the basic rules established by the World Trade Organization (WTO). If the WTO sets a baseline of legal rights and obligations for its 164 members, then preferential trade agreements (like TPP) build on these, adding coverage that is deeper than, or not included in, the WTO. These are called WTO+ and WTOx provisions, respectively.

First, TPP is WTO+ on a variety of nontariff barriers, such as health and safety standards and technical regulations. This is important because nontariff barriers are less transparent than tariffs. Moreover, while tariffs are a tax on trade, nontariff barriers often result in a ban on trade. TPP goes beyond the WTO in terms of how these regulations are formulated nationally and how compliance is verified.

In prioritizing new market access opportunities, businesses need to focus on these WTO+ and WTOx provisions, keeping in mind that they vary across preferential trade agreements. For example, in financial services, American portfolio managers got permission under the U.S.-Peru Free Trade Agreement to handle public pensions funds, something that Peru had not offered under the WTO. By comparison, TPP’s chapter on financial services goes further, opening up new business opportunities for banking exports across the 12-country pact.

Second, TPP is WTOx in that it has chapters on investor rights, competition policy, and regulatory coherence, among others, offering coverage where the WTO does not. Preferential trade agreements will increasingly be pressed to include WTOx provisions, given that the political support of business for these deals will otherwise become increasingly elusive.

Whether on the offense (export) or defense (import-competing), firms need to explain to government how WTO+ and WTOx provisions can affect their market strategy. Trade officials think in terms of principles of nondiscrimination but do not always know how the same discriminatory policy might be enacted across different industries. For example, both pharmaceuticals and semiconductors are vulnerable to compulsory licensing, but the way an importing government would compel a firm to hand over a patent for a small royalty is likely to vary across the two industries. Only industry can provide this kind of insight.

The global economy is increasingly governed by rules that go beyond the baselines established by the WTO. This means greater competition at home and abroad. It’s a rules-based global economy, but the multiplicity of rules rewards those companies that can navigate the complex web of overlapping trade agreements.

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