International Trade Finance & Investment
Contents
Standards set by the GATT / World Trade Organization
Regulations governing the financial system
the
economy of emerging countries is growing at higher rates than those achieved in
the West; the internationalization of technology appears to be a fact;
industrial production and international trade are developing in ways that no
longer seem to be determinable by the United States, Europe and Japan; finance
seems uncontrollable; the military strength of many emerging nations is
growing, both in relative and absolute terms; even the military crises - this
is the case in Syria - seem to be able to be faced without the participation of
the USA, a circumstance that has never happened since the end of the Second
World War.
As
a result, politics has taken on unprecedented forms. The institutions of
emerging countries, when they are different from liberal democracy, appear -
and are considered to be - "credible alternatives" and not
"temporary deviations from a one-way road towards global convergence"
2. Indeed, they seem to ensure opportunities for growth and - much more
importantly - the development of the societies they govern; resilience; prompt
response - also thanks to the lesser need to manage consent - to the
solicitations of a globalized system; more assertive behavior in defending the
international role of a country and in managing diplomatic crises.
Introduction
Globalization,
in fact. For many, this is the real efficient cause of the world's loss of
center of gravity, its changed balance or greater imbalance(Grath, A., 2021). In a sort of nemesis of history or heterogenesis of
ends, the liberalization of capital movements, the deregulation of financial
markets, the internationalization of technology and the imposition of rules on
international trade - supported primarily by the British and US governments -
they would end up revolting against those who wanted, built, endowed with
intellectual dignity and defended this system, fragmenting and transferring to
the rest of the world a power that for centuries had been the prerogative of
Western systems.
Standards set by the GATT / World
Trade Organization
The
latter would only have to adapt. Accept the changed course of history that
describes, from both an economic and a political point of view, a multipolar
world dominated by markets, which in turn are not controlled by anyone and
allocate capital and investments where the best relationship between risk and
return is. In this scenario, the only things Western countries can do are as
follows.
A)
Create the conditions to be appreciated by the markets themselves: implement
rigorous public finance policies; "Make sustainable" (often a
euphemism not to say "restrict") the welfare systems; ensure high
returns on capital; support deregulation and liberalization initiatives.
B)
Accept technological and industrial competition with other countries and
systems, adapting labor markets and systems for the development and production
of goods and services to the latter.
C)
Stop thinking that "liberal democracy is the only legitimate form of
government" 3 and accept the existence of other political systems, more
capable than ours of promoting the development of the societies they govern.
Academic
orthodoxy, both of economics and finance as of political science and
international relations, has produced an endless literature in support of these
theses 4. Laura Canali's card
2.
It is not certain that reality corresponds entirely to this representation. If
the essence of globalization is the internationalization of technology and the
freedom of capital movements, the world is traversed by conflicts aimed at
controlling both technological development and financial markets(Rahman, M.M., 2021). The liberalization of trade,
symbolically sanctioned by the transition from GATT to the WTO, has triggered
fierce competition for the control of intellectual property, "the key
brick of the new economy" 5.
When
goods and services are transferable but not technology, the free movement of
goods is reduced in significance: it is as if the hardware were available to
everyone but the software was not. Indeed, it is this restriction that the rich
and developed countries in particular pursue. They do this through the
following policies.
A)
Competitive regulations - and progressively more favorable to companies - in
the field of patents and copyrights as regards the duration, extension,
protection compared to competitors.
B)
Imposition of international standards aimed at limiting the development of
technology in emerging countries. The Trips (Trade Related Aspects of
Intellectual Property Rights) agreement stipulated within the WTO prohibited
the practice of reverse engineering, a driving force for the development of
emerging countries for decades (including Italy after World War II) 6.
C)
Granting subsidies for the production of technology. Think of the US Sbir
(Small Business Innovation Research) program or the innovation tax credits
insured by France, which has also passed a law for the public share control of
high-tech companies (Xiong,
T. and Sun, H., 2021).
Public support inevitably brings with it constraints on the export of
technology (technology transfer); obligations to incorporate a share of
national technology in assets purchased by the government (Buy America, for
example).
D)
Use of legal tools to defend intellectual property. The billionaire patent
lawsuits and arbitrations - as well as the attempts by governments to influence
the appointment of judges in international courts and the definition of
applicable legislation - constitute so many battles of a no-holds-barred trade
war. In which the US Patent Office and the European Patent Office (Epo), based
in Germany, run by a Frenchman, actively participate(Kozlowski, J., 2021). Google and Apple spend more on
acquiring and legally protecting patents than they invest directly in research
and development 7.
The
strategy was successful. In recent years there has been a real "race to
patent": requests forwarded to the Epo increased by 32% in the period
2005-15, those submitted to the American Patent Office by 29%, especially in
the digital communication sectors ( + 47%), computer technology (+ 41%) and
biotechnology (+ 53%). But this is a growth that has mainly concerned Western
countries, which hold almost 80% of the global technological assets. The rest
of the world produces, in relative terms, less intellectual property today than
ten years ago.
The
technological gap - that is, the time it takes for a selected group of emerging
economies to have a technological endowment comparable to that of a basket of
Western countries - has grown from 2005 to today from 12 to 16 years 8.
The
consequences of these phenomena are numerous. The first is a relative increase
in the research and development activity carried out by large companies. Those
with a market capitalization of more than ten billion dollars have seen their
share of investments in research and development rise from 28% to 35% of the
total expenses incurred by the private sector in this activity in the period
2005-15 9.
Impact of World Bank policies
The
increasing returns to scale of new technologies 10 favor processes of
industrial concentration and the creation of monopolies or oligopolies made up
of multinational groups that impose production standards worldwide and
condition the regulatory structures of their countries of origin as well as of
their markets. The cash flows generated by the marketing of high-tech goods
stimulate the acquisitions of companies with a good portfolio of patents but
unable to compete with the most important groups in their sector. Over 65% of
the price 11 at which companies in the high-tech sectors have been acquired in
the last twenty years derives from the valuation of their intellectual property(Clark, R. and Dolan, L.R., 2021). Even the protection of the
latter takes place according to procedures characterized by a growing
asymmetry: the arbitration resolutions of patent disputes - in which large
companies are favored, both for the resources they are able to commit and for
the greater power they have to choose the relevant legislation - in 2015 they
were 38% higher than in 2005. At the same time, the number of judgments held in
ordinary courts decreased where, conversely, the disadvantage of smaller
companies should be more contained. Approximately 70% of the disputes ended in
favor of the larger company 12.
The
world, therefore - rather than a place where companies trade freely and
governments are concerned with minimizing transaction costs, as the rhetoric of
globalization would like - appears as a battlefield where wars are fought for
the distribution of power in the exchange of products and services with higher
added value. And the West has not lost this battle.
3.
A similar phenomenon has occurred on the financial markets. The size of
intermediaries has grown, requiring freedom of capital movements, homogeneous
and less regulated markets in which to seek profit opportunities, necessary to
support the share price and carry out substantial increases in capital, which
are in turn indispensable to finance growth.
Advances
in information technology make it possible to exploit economies of scale and
range that justify the increase in volumes and the geographical presence of
operators(Hamilton,et,al.,2021). The process was completed with
the transition from a direct surveillance system (everything that is not
expressly permitted is forbidden) to an indirect one (everything that is not
expressly forbidden is permitted) and with the introduction of capital ratios
that leave " free intermediaries to take on any risk as long as they have
a capital commensurate with the size of the same "13.
Regulations governing the financial
system
Financial
globalization - an initiative by the US and British governments to impose the
rules and the role of the Anglo-Saxon banking system - has therefore disrupted
relations between countries, between banks and governments, between markets and
businesses.
"Financial
technology", controlled by large Western intermediaries, prevails over
capital. The latter - whose accumulation is now concentrated in emerging
countries - has lost weight and has become a sort of "raw material"(Shafiq,et,al.,2021). As such it is worth little
because the freedom of movement makes it practically infinite, and acquires
relevance only when, to generate an adequate return, it is "worked"
by the banks that incorporate it into financial assets to be placed on the
markets.
The
1986 reform of the UK financial system (the 'Big Bang'); the US Banking and
Branching Efficiency Act of 1994, which lifted restrictions on banking
activities from one state to another; the abolition, in 1999, of the
Glass-Steagall Act which separated commercial banking from investment
activities; the frustration of attempts to implement the 2009 Dodd-Franks Act;
the widening of the possibility for pension funds and insurance companies to
invest in the American stock market are just as many tools for supporting the
Western financial system and controlling capital flows 14.
Impacts on businesses
The
preconditions for a country's well-being and its influence in the world lie in
the ability to govern huge liquidity transfers. Whoever controls the movements
of capital finances the development paths of technology and industrial systems
and therefore the distribution of power on the markets for goods and services.
The
liberalization processes have served the major intermediaries to consolidate
their influence on the markets and acquire global capabilities. In 2015, the
five largest US banks held 45% of US banking assets, up from 25% in 2000 15.
Worldwide, 42 banks - all of Western origin except five Chinese - manage 50% of
global financial assets 16.
The West,
therefore, has not lost power over the rest of the world. If anything, Western
governments have far less. It is certainly true that the economic development
and political strengthening of China, India and other countries are redefining
the center of gravity of the world. However, a significant process of power
distribution has taken place within the West: competition for control of
technology and financial markets has helped to transfer huge shares of power
from governments to major financial and industrial institutions. The former
influence the financial policies of states, public investments - especially in
infrastructure - and the evolution of welfare systems(Khan,et,al.,2021). The latter condition the
technological endowment of a country, its industrial system, the policies for
the labor market, the distribution of production structures.
Financial
and industrial institutions, in the current system, must mainly respond to the
requirements established by the markets (and to think that Forbes magazine, in
October 1951, had defined the heads of large companies as "industrial
statesmen" ...) and have an objective function that does not cross, except
by chance, that of the citizens.
There
are three parts in the play: the financial, industrial and political systems(Hebous, S. and Johannesen, N., 2021). While the financial and
industrial systems are international - that is, they are governed by the rules
of the global market - the political ones are essentially national, sometimes
even local.
Simplifying
but not too much, each system has its own contact person: investors,
shareholders, voters. However, investors and shareholders can "vote with
their feet", that is, move their capital and sell their shares. And they
can do it every day(Rymarczyk,
J., 2021). Voters only
decide when they are called upon to do so and, moreover, exercising their
sovereignty in a much narrower sphere than that in which banks and businesses
operate, at least those that matter. Thus their needs are shattered against a
system over which the policies of individual countries have very little power.
It is
understandable, therefore, the lack of appeal - to which some surprising recent
electoral results can be traced in a certain sense - exercised by liberal
democracy and the consequent significant reduction in the geopolitical role of
the West(Zhan,et,al.,2021). We have become a polarized
society, where wealth and inequality coexist. Mainly due to a technological
process that favors an unprecedented redistribution of income, reducing real
wages, detaching them from productivity and jeopardizing the survival of the
middle class, a true hallmark of Western societies, while everywhere in the
world there are the rich and the poor. Since the beginning of the century -
contrary to what happened in the second half of the twentieth century - about
35% of business income has been allocated to work and 65% to capital, whose
liquidity is ensured by intermediaries.
Finance theories and concepts
The
financial system amplifies the phenomenon. The tendency to ask less solid
countries for rigorous policies that often become recessive, the preference for
corporate liquidity and their short-term results, entrusting our well-being to
the markets are just as many pushes towards a more polarized world: in film
Gran Torino, Clint Eastwood is fired because the pension fund of the neighbor's
company had demanded a restructuring that would increase the profits of the
company for which Eastwood worked.
Compared
to the past, the rich who do not work and the poor who work have grown even
more. Financial wealth weighs more than earned income: the former is
concentrated, the latter insufficient. "We can have democracy or we can
have wealth concentrated in the hands of a few, but we can't have both"
17.
It is not
certain that Western societies can withstand the excessive levels of inequality
that the globalization of finance forces them to(Milsom,et,al.,2021).
A democratic system postulates an acceptable level of equity, without which
social cohesion is at risk, the sense of belonging is weakened and the
principle of sovereignty is emptied. The West is in significant danger: nations
fail when their once inclusive institutions become exclusionary and bend the
economy and rules of the game to the service of the established elites 18.
Democracy,
a typical product of the West, like globalization, is slow - "it doesn't
run", wrote Tocqueville, because "it takes more than a day to decide
on the well-being of citizens". And he thus proves to be less and less
capable of governing global technological, industrial and financial processes,
which tend to empty his institutions of meaning.
Thus
the awareness of our inadequacy grows, reinforced by the senseless and harmful
attempts to export our institutions on the wings of the F18s. Yet we are not
bearers of such laughable instances and values. We have built them in four
centuries of philosophical and religious elaborations, but also of political
initiatives. But we are no longer convinced that we have history on our side.
Our
world therefore seems to be immersed in the second phase of the accumulation
cycle described by Braudel 19. A period characterized by the investment of
capital in financial instruments, the expansion of markets and liquidity that
favor growth based on the wealth effect fueled by bubbles speculative(Wójcik, D., 2021). When these erupt, the accumulated debt becomes
unsustainable and depression is just around the corner.
This
thesis explains why, for example, the ruling classes seem to be less interested
in welfare: the latter was functional to the first of the cycles defined by
Braudel, characterized by a society founded on investment in the manufacturing
industry(Al Hawaj, et,al.,2021). Which required personnel
"supported" by public health and welfare guarantees 20. The lower
demand for labor and the prevalence of the wealth effect over the income
effect, typical of a system based on financial profits, have made the
protection mechanisms less relevant social.
Real business contex
However,
capitalism risks going towards the sunset. Either because of finance - as
Braudel argues - or because "conflicts over the domination of technology
marginalize the capitalist economy and the competition that is its essence,
favoring monopoly" 21, according to Severino. But since capitalism can
exist without democracy while the latter could hardly survive without the
former, it is capitalism that must be saved, partly even by itself .
And
how to save it? Through a process of redistribution of power within Western
systems that gives space to the role and autonomy of governments and gives
value to the concept of popular sovereignty, understood as the commitment of
elected institutions (direct or indirect) to respect - but also to interpret
and make compatible with the «boundary conditions» - the function of preference
of citizens.
This path must start by addressing the most
pervasive and influential issue: the size of the financial markets and the
conditions they impose on the states and companies they govern (Hebous, S. and Johannesen, N., 2021). To be less unstable 23 and
self-referential, more controllable and more compatible with the needs of
society, markets must become smaller. On the other hand, they are not so large.
The
value of global financial assets at the end of 2015 amounted to 741 trillion
dollars 24, only one third of which (249 trillion) was made up of assets
related to the production of goods and services (stocks, bonds, bank loans),
while 492 trillion were represented by synthetic instruments that have nothing
to do with industrial investments or commercial initiatives.
Critical analyse
We
begin by establishing that the introduction of a distinction between long-term
and short-term capital (applied by the OECD until the mid-1980s and then
abolished) and a different tax treatment of their movements would limit
short-term flows - the real cause of excessive size and market instability -
would not discourage long-term investment and would restore the separation
between 'beneficial' and 'harmful' capital.
In
a smaller market it would be easier to introduce forms of operational
separation and functional specialization of intermediaries. Segregating the
activities carried out on its own (proprietary portfolios, loans to customers)
from those on behalf of third parties (asset management); together,
distinguishing securities trading activities from investment financing
activities(Grath, A.,
2021). The average
size of banks, the need to increase managed assets and capital requirements
would be reduced. A reform of capital ratios would be useful in order to
incentivize the financing of industrial investments and limit the propensity to
issue derivative instruments not related to production and commercial
initiatives.
Recommendations
More
generally, it should be noted that indirect regulation of intermediaries alone
is insufficient if not distortive and envision a more effective combination of
direct and indirect surveillance. The equity markets would adopt a more
forward-looking and less unpopular behavior if the management remuneration
parameters were restructured; the purchase of own shares (buybacks) which take
away money from investments should be discouraged; it was forbidden to pay
inter-annual dividends (this would cool the search for short-term profits). And
inheritance taxes were reintroduced, preventing immense fortunes, rather than
being put at the service of new business ventures, from ending up in the hands
of heirs who will live on income and without merit for entire generations.
Wealth would become less influential and therefore less dangerous for
democracy.
A
downsizing of the markets and their greater control would not leave the
battlefield of technology indifferent. In the presence of less aggressive
financial markets, governments could reduce the duration of patents on
technologies developed with the support of public funds and oblige the
beneficiaries of the latter to pay royalties to be used for knowledge
dissemination initiatives.
The
creation of "positive externalities" and the return to society of
part of the public capital invested to develop technologies incorporated in
products marketed by private companies would be favored; "medium"
technologies, capable of developing skilled employment in those economies,
could be transferred to emerging countries.
Furthermore,
since the current technological paradigm leads to the formation of monopolies,
strict regulation of concentrations and the abuse of dominant positions would
reduce the level of conflict between industrial groups and between countries(Khaskheli,et,al.,2021). It would then be possible to
limit by law the use of international patent arbitration, an asymmetrical form
of judgment that tends to protect the private interest and not take into
account the public one.
Conclusion
Finally,
the role of international economic organizations should be re-examined. These
institutes, which until a few years ago have protected the most orthodox
policies, have recently taken note of the need to review some axioms of
globalization. If they are able to be less attentive to the interests of
financial intermediaries and large manufacturing companies, they will be able
to make a significant contribution to making globalization more
"intelligent".
Why,
for example, not require the introduction of an adequately high minimum wage
for all member countries of the WTO? It would be in the interest of the
citizens of emerging or poorer countries, but at the same time it would protect
the workers of advanced nations from downward competition, also contributing to
the less distorted distribution of business income. If the governments of the
latter and the supranational organizations were the bearers of a process aimed
at redistributing the power that an uncontrolled globalization has entrusted to
relatively few institutions, they would contribute to rebuilding the
relationship between governors and the governed, to restore meaning to liberal
democracy and to strengthen the leadership of the West.
Yes,
but who is responsible for this task? Until 23 June 2016, and then maybe even
until 8 November of the same year, we would have said the "North
Atlantic". That overall rather homogeneous set of history, culture, rules
and institutions made up of the United States and Europe. But the US is now led
by an administration that does not seem interested in that "moderate
multilateralism" 25 that characterized the best American leadership of the
post-war period.
So
Europe remains, albeit caught between American neo-isolationism and a
geopolitically ambitious Russia that is unable to govern global processes. Yet
Europe, even alone, can do a lot. It is the largest market for goods and
services in the world, intermediaries almost 30% of global financial assets and
enjoys the largest assets of infrastructures - tangible and intangible - on the
planet.
The
decisions that the European Union takes in terms of patents, intellectual
property, banking and financial regulation, allocation of public investments
condition the choices of companies, banks and governments. The redefinition of
the relationship between politics and markets could constitute that commitment
whose fulfillment - not easy, it is evident - would restore role and meaning to
the EU. The European institutions would no longer be perceived as a harmful and
self-referential superstructure. Thus would begin a new phase in the history of
the Old Continent, marked by the reconquest of a leadership that in the past
had earned with arms and of which it seems to have lost the meaning.
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