Discover TBS professor Louise Curran’s point of view on the effect of COVID-19 on international trade policies.
As COVID-19 has spread across the world it has had major impacts on supply chains. It is reasonable to assume that the impact on trade flows may be even greater than that for the GFC in 2009, where world trade fell by over 20%. Most of this is an entirely natural result of the closure of many production structures around the world. However, some trade impacts are the direct result of trade policy interventions by governments, which presage a more major and long-term impact from the current crisis. Discover more in the video below:
[su_pullquote align=”right”]By Louise Curran[/su_pullquote]
In this paper, written with Michael Thorpe of Curtin University in Australia, we explore the recent evolution of Chinese investment in the wine industries in the Bordeaux region of France and compare them with investments in the same sector in Western Australia (WA).
We found that investments are not as widespread as often implied by the media, although the speed of growth in Bordeaux has been impressive. Several difficulties with the investments, as well as potential synergies, were identified.
Varied situation in France and Australia
We chose to look at France and Australia as they were, respectively, the first and second wine exporters to the Chinese market in 2013. We looked at two regions with rather similar market positioning: both Bordeaux and WA focus on the higher end of the market and specialize in red wine. The phenomenon of Chinese investment in the sector is rather recent in both contexts, although Chinese investment in the wider Australian economy has a longer history. The objective of our study was to explore the extent of investment and highlight any difficulties experienced.
We found that the extent of Chinese investment in both regions was rather low, even if the number of investments in Bordeaux (about 80) was impressive, as was their very rapid growth. Still, less than 1% of Bordeaux vineyards are owned by Chinese investors and many of these vineyards are very small, thus the actual acreage covered by investments was low. The number of investments is even lower in WA (7 vineyards), but the large size of some acquisitions makes their coverage higher (6% of vineyard land area). Indeed the large size of Australian vineyards was a clear advantage for Chinese investors, who favoured large scale production structures which could better cater for the Chinese market.
Difficulties for investors, but also potential advantages
We found evidence of all of the classic difficulties faced by foreign investors which have been identified in other studies, but the most significant was their lack of familiarity with the local context. This was considered to be a particular problem in France, where there is little history of Chinese investment and no significant Chinese diaspora. The usual problems of understanding a foreign culture were compounded by the fact that most Chinese investors come from sectors – including jewelry, metals and petroleum – which were unrelated to wine, or even agro-food. The specificity of the wine sector thus caused them further difficulties. In Australia, we found much less evidence of such problems, mainly because the investors most often had existing business relationships in Australia prior to investing in wine and tended to make their investments in partnership with a local business person, rather than alone. Although most Chinese investors in Bordeaux did not invest together with local partners, they usually retained the existing management to continue the day to day running of the vineyard. There was recognition of the need to build on this local expertise, if their investment was to flourish.
The local institutions in both WA and Bordeaux recognized that there was need to provide support to Chinese investors in order to ensure the success of their endeavors. The Bordeaux Chamber of Commerce and Industry organizes regular seminars on Bordeaux and Hong Kong to ensure that investors are aware of the potential, but also the pitfalls, of such investment. The WA Department of Agriculture organized a similar seminar for Chinese investors interested in the whole agricultural sector in 2014.
Finally, Chinese investors in both regions brought two key advantages. The first was financial capacity. Many of the acquired vineyards were in a poor state of repair and in several cases significant sums have been invested in upgrading facilities and increasing productivity. The other key advantage was their knowledge of the home market and capacity to leverage their business networks to develop that market. China has become a key world market for wine, especially red wine in the last few years. Although exports have fallen from their peak, in 2014 their wine imports were worth $1,4bn. Especially for smaller, lower quality vineyards, the capacity of their Chinese owners to provide support for their evolution on this important market was a key factor in enabling their development.
The future – consolidation rather than expansion
In terms of the future, most people interviewed agreed that the peak in investments had passed and that we were entering a stage of consolidation. There have been far less investments in Bordeaux in 2015 than in 2014 and especially 2013-2. Partly this reflects the fact that the Chinese wine market is maturing and growth rates are now less attractive. Several of those interviewed pointed out that China is not, and indeed never has been, an ‘el Dorado’ for wine merchants, but is rather a challenging and difficult market. The recent fall in investments also an anti-corruption drive in China which has resulted in a significant fall in wine sales linked to gift giving (formerly a key motivation for high end wine sales) and official banqueting (which has been extensively reduced). There was also reported to be concern amongst wealthy individuals that high profile investments in luxury products like wine, could attract unwanted attention from the authorities.
[su_spoiler title=”Methodology”]Our research involved twenty interviews in the two regions studied with institutional agents, consultants and other service providers working with investors, as well as with local company personnel in three companies owned (wholly or in part) by Chinese investors and two Chinese investors, one based in China and one the manager of an Australian investment. The interviews took place over the period December 2013 to October 2014. We also used press reports to identify pertinent investments. [/su_spoiler]
[su_box title=”Managerial implications” style=”soft” box_color=”#f8f8f8″ title_color=”#111111″]Our research indicates that the most successful investors in the two contexts we studied were those that partnered with local business people. It seems that in cases like this, where there are large differences in the institutional and cultural environments between the home country and the country of investment, working together with a local business person provides an important bridge to reduce unfamiliarity. Investors who acquired vineyards without local partners more often experienced difficulties, although many retained local staff and took a rather ‘hands-off’ approach to the production side of the business, which seems prudent given that they frequently lacked knowledge of wine. The most important asset which Chinese investors brought was their expertise and linkages to their home market, so the potential for synergy was significant, provided that understanding and trust was present.
By Louise Curran, Chinese FDI in the French and Australian Wine Industries: Liabilities of Foreignness and Country of Origin Effects. Co-authored by Michael Thorpe, Economics Department, Curtin University Western Australia. Appeared in Frontiers of Business Research in China, Volume 9, issue 3 in 2015. This research was supported by a Research Fellowship awarded to Louise Curran by Curtin University in 2013.
[su_pullquote align=”right”]By Louise Curran[/su_pullquote]
The British vote to leave the EU has enormous implications for both parties, many of which are only beginning to be explored. One of the policy areas which will be most affected is trade policy. For the last forty years, the UK has essentially had no independent policy on international trade relations. Trade policy making was undertaken by qualified majority in the European Council and the resulting consensus became the UK’s effective policy.
Much of the discussion on Brexit has focused on the future trade relations between the EU and the UK. However Brexit will also have important impacts on the rest of the world, which are often ignored in the public debate.
In a recent conference paper, I explored the potential impact of Brexit on Global Value Chains (GVCs) through an analysis of its likely impacts on suppliers which rely on access to the UK market to integrate GVCs. The Brexit White Paper rejects membership of either the European Economic Area or a Customs Union. In this scenario, Brexit will lead to an independent UK trade policy. Thus the UK must create a new trade policy to govern its relations with suppliers (and customers) around the world. Indeed the wish to regain independence on trade policy was a key reason behind the rejection of a Customs Union.
The UK government has made grand statements about their intention to negotiate Free Trade Agreements (FTAs) with a variety of emerging (China and India for example) and developed country (US, Australia…) partners as part of their ‘Global Britain’ vision. They have said precious little about what the shift from the EU trade regime will mean in terms of trade relations with less economically interesting partners. This situation creates huge uncertainty for developing country suppliers which rely on existing trade agreements with the EU for access to the UK market. In this paper I sought to highlight which countries were most vulnerable to policy change.
In order to understand why certain suppliers are vulnerable, it is important to understand that trade policy is not just about FTAs. It is also about a whole structure of EU unilateral trade regimes which have evolved over decades. These provide special market access preferences to developing countries and very high levels of access to the poorest of them. What this means, in real terms, is that if you are an exporter from Bangladesh (classed as a Least Developed Country (LDC) by the UN) you pay no tariffs on your exports of shirts to the EU (and thus to the UK), whereas a Chinese shirt exporter will pay 12%. Similarly, if you are a Pakistani exporter of bedlinen, you will also pay no tariffs on your exports, while India also pays 12%. This is because Pakistan benefits from a special EU access regime for countries which have ratified and applied a long list of international agreements on everything from labour rights to environmental protection (called GSP+).
Over the last twenty years there has been extensive research exploring the evolution of Global Value Chains (GVCs) which seeks to understand why certain GVCs are structured in the way they are. Trade regimes have emerged as being an important factor in deciding where production ‘lands’ in the global economy. They are particularly important in sectors where special access regimes provide high levels of tariff advantages, like textiles and clothing for Bangladesh and Pakistan in the above example. Other sectors where trade regimes have been highlighted as important to the geography of GVCs are fish processing, especially tuna (where Papua New Guinea pays no tariff and Thailand pays 25%) and cut flowers (where Kenya pays zero compared to 8% for Australia).
In addition, these kind of special access regimes are contingent on the goods exported from a given country being considered by the EU to be ‘made in’ that country. The definition of these ‘rules of origin’ is complex and the result of long hours of debate and consultation. Research has consistently found these rules to have an important influence on the geography of GVCs. For example, US rules stipulate that for a shirt to count as ‘made in’ a country, it must be sown from fabric woven in that country, which has been woven from yarn which is also spun domestically. A country which theoretically has free market access, nevertheless needs a functioning, competitive textile and spinning industry in order to avoid paying tariffs. The EU has a more liberal approach to these rules, especially for LDCs like Bangladesh. My own research has confirmed that these rules have had an important stimulating effect on EU imports from both Bangladesh and Cambodia.
In order to identify which countries are most vulnerable to changes in the UKs trade regime, I analysed non-oil exports. I focused on those countries which, on the one had rely a lot on the EU for their exports and, on the other export a large share of their EU exports to the UK. The countries subject to unilateral market access which emerge as most dependent on the UK market are Kenya, Bangladesh, Cambodia and Pakistan. The biggest trade flows are in Bangladesh – which exports over $3.5bn to the UK, much of it clothing.
The continued integration of these developing countries into UK-oriented GVCs post-Brexit requires continued and consistent market access. There is no guarantee that the UK will provide this, although it would be, to say the least, surprising if they abandoned their long standing support for developing countries’ integration onto the world economy. There will almost certainly be a UK special access regime for developing countries after Brexit, however it may not be as generous as the EU’s and at the very least it is likely to differ, especially over time. A key question will be the extent to which the UK retains the very generous access regime for LDCs like Bangladesh and Cambodia and whether it retains something like the current GSP+ regime, which is vital for Pakistan. This uncertainty is unhelpful. Current GVCs have been constructed over time in response to existing trade regimes and their framing rules. The quicker future policy is clarified, the easier it will be for GVC actors to integrate any changes into their strategies and adapt to the new reality. The UK’s Department for International Trade (DIT) is exploring possibilities, but with so many issues to consider in the post-Brexit landscape, developing countries are concerned that they will not be top priority for UK policy makers. Academic research indicates that they are right to be worried.
[su_spoiler title=”Methodology”]The impact of Brexit on trade regimes and Global Value Chains, Paper for the GIFTA seminar: Implications of Brexit: Navigating the Evolving Free Trade Agreement Landscape. Commonwealth House, London, February 6-7 2017 [/su_spoiler]