In a previous post I highlighted how a European company could take advantage of the benefits of trade agreements like the Trans-Pacific Partnership (TPP). As long as products are substantially transformed in TPP member markets for shipment to TPP markets, a company can most likely use this trade agreement. The ownership structure or location of the headquarters for a firm is not relevant.
I explained this to a company staff member in my office. The person nodded and said, “Very interesting. But I don’t know who I should even tell about this. I don’t think we have anyone inside our company that pays attention to trade.”
This is a very disheartening statement. I mentioned it later when meeting with an industry association. They promptly leapt up and said, “We agree. Let us show you the organizational chart of our typical member companies in this region.”
On the conference room white board, the association drew a chart that highlighted the following types of corporate functions underneath the regional CEO: manufacturing, procurement, human resources, supply chain/logistics, public relations/corporate communications, government relations/regulatory affairs, marketing/sales, legal, and finance.
I’m sure this is not the whole chart, but the primary point was that trade does not figure in the typical organizational structure. It is not really government relations or regulatory affairs. (An earlier post highlighted that many firms in the region also do not have either position—to the detriments of both firms and governments.)
The supply chain/logistics or procurement departments might be sensible places for paying attention to trade agreements and tracking the benefits offered by one agreement over another. But this does not seem to quite happen in these positions either. Nor are many of the line staff in these departments often in a position to advocate changes for the firm as a whole to take better advantage of trade agreements.
Trade could, of course, be handled by someone back at headquarters. It might be possible to keep up with events from some other location in the world. However, I sit in Asia and focus on trade full-time. I often struggle to keep up to date on what is happening. It’s so complicated that we cannot even agree on how many trade agreements exist that include members from Asia—150? 200? How many more are under negotiation?
I cannot imagine that someone not even in the region would be able to do the job particularly well. Or that someone charged with managing trade across a global company could pay sufficient attention to the fluid nature of trade in Asia as well as other regions.
So, at the end of the day, who in any given company is supposed to pay attention to trade? The answer seems to be no one in particular even at the very largest and most globally competitive firms.
This may not have been a problem as recently as 10 years ago. At that time, alternate trade agreements were limited in number and in scope. Nearly all trade arrangements were global—tariff levels, for example, were set through multilateral trade negotiations and applied to every member of the GATT/WTO. If countries opted to unilaterally adjust tariff rates or to alter applied rates, these changes also applied to every GATT/WTO member.
Hence it was not strictly necessary to have anyone paying attention to trade policy. Whatever policies were announced by governments would apply to your own firm and all potential competitors. Firms could still try to influence future policies, particularly at the domestic and regulatory levels, but ignoring trade negotiations and agreements would not have had significant negative consequences.
However, as trade agreements have proliferated and then became deeper and more complicated, leaving people with trade expertise off the organizational charts of major companies is an increasingly poor idea. The potential economic gains for a firm from using trade agreements well should more than offset the addition of extra headcount.
Savvy firms are reaching out to consultant companies to help them structure supply chains to take advantage of specific trade arrangements. With all due respect to consulting colleagues, most are likely to charge a lot of money and may deliver modest benefits to the firm. This is not because these individuals are not smart, capable people with useful backgrounds, but mostly because they will not have a deep grasp of the firm or the industry sector. Or, the consultants may not have sufficient knowledge of different trade agreements. Technology might be a useful asset, but it also does not negate the need for someone with expertise on staff.
To get the most out of proliferating trade agreements that offer different sets of benefits to firms, companies have to think carefully about all elements of their supply chains and about current and future destinations for goods and services. Factories should be placed, for example, not just in specific locations because they can service the local market but because this location provides additional useful benefits.
For the company that started this chain of thought, it already has factories in Malaysia and Vietnam. Both of these facilities should be planning ahead for potential benefits that could come from exporting out of these locations and into other TPP members once the TPP comes into force. For the factories currently located in Thailand and Indonesia, if the firm chose to push, much of the production in these facilities might be shipped to customers across 16 countries in Asia after the Regional Comprehensive Economic Partnership (RCEP) is concluded.
But—and this is a key point—in the absence of anyone paying attention to trade at the firm, the company is not actively engaged with officials negotiating RCEP. Hence the final agreement may not be as useful for the firm as it might have been. After all, the government officials negotiating in RCEP may not even recognize the importance of opening this sector or know about the specific barriers the company faces.
Although the firm is a large multinational, the factories in all four ASEAN countries source nearly all of their supplies from local producers. Most of these producers are small enterprises or family businesses. Many of the retailers of the company’s final products in the region are also small enterprises. Hence, a trade agreement that smoothes barriers to entry and exit for the firm’s products should bring about substantial benefits to the small firms that depend on the multinational company as a buyer or supplier.
These smaller firms and family businesses will not be explaining benefits of better trade facilitation or connectivity to governments. It falls largely to big companies to make their case. But without anyone in even the larger firms to pay attention to current and future trade issues, many potential benefits will likely be lost.
***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***