Posts Tagged ‘Guay’

No Deal: South Korea Trade

Tuesday, November 23rd, 2010

President Obama returned from his Asia trip earlier this month without accomplishing one of his principle goals: negotiating a new free trade agreement with South Korea.

Smeal’s Terrence Guay explains what tripped up the deal and what it indicates about the U.S. and global economies:

President Obama’s November trip to Asia sought, among other initiatives, to finalize a free trade agreement with South Korea. With negotiations concluded and a treaty signed in 2007, the U.S. Congress balked at ratifying the treaty. In effect, President Obama tried to persuade the Koreans to amend the treaty to allow greater access to U.S. automobile and beef exports.  His inability to do so reflects several changes in the domestic and international political economy.

First, South Korea successfully stood up to U.S. pressure to change the terms of the treaty. The Asian country refused to weaken its fuel economy regulations, which are higher than U.S. standards and impose additional costs for U.S. auto companies seeking to expand into the Korean market. Also, due to citizens’ concerns about the safety of U.S. beef (the “mad cow” phenomenon), the Korean government refused to relax its regulations on beef imports.  That two products presented an obstacle to completing a trade agreement with our seventh largest trade partner suggests that American influence on global economic matters is in decline.  For further evidence, see the inability of the United States to persuade other countries at the G20 summit this month to apply pressure on China to revalue its currency, or the nine-year (and counting) negotiations on the World Trade Organization’s Doha round of global trade talks.

Second, the failure to reach a trade deal with South Korea underscores the growing distrust of many Americans and politicians of the benefits of global trade and investment flows, especially during “the Great Recession.” The global economy played virtually no role in the recent Congressional elections, other than the simplistic campaign ads blaming China for our economic problems. And while a Democrat-controlled Congress was wary of approving trade agreements with South Korea, Panama and Colombia for a variety of reasons over the past three years—including concerns about labor and environmental issues in those countries—it is not at all obvious that a Republican-controlled House of Representatives will pursue trade agreements with any greater fervor. Most economists expect modest contributions to domestic job and economic growth should these trade deals ultimately be implemented. But with opinion polls consistently showing an American public wary of globalization, the benefits of free trade, and the increasing global influence of other countries, there is little to be gained by congressional Republicans or Democrats using political capital on an issue where the benefits are not widely acknowledged.

Tags: Economy, Globalization, Guay, International Relations, Politics, Trade
Posted in News | 18 Comments

Open the Skies

Monday, March 29th, 2010

“The European Union and the United States agreed Thursday to expand a three-year-old accord that allows airlines to operate more freely across the Atlantic,” The New York Times reports. “The move will increase access to each other’s markets and narrow differences over environmental regulations, but industry executives were disappointed that no agreement was reached to remove the remaining barriers to foreign ownership and control of airlines.”

In a 2008 op-ed in The Atlanta Journal-Constitution, Smeal’s Terrence Guay argued in favor of allowing foreign ownership of U.S. airlines, calling the ban archaic and hypocritical.

From Guay:

Relaxing the restrictions on foreign ownership would allow British Airways and other foreign carriers to serve U.S. locations that are underserved now. It also would avoid the reduction in routes and elimination of cities served when two U.S. carriers merge. And for anyone dreaming of decent meals and better service—even in economy class—foreign airlines have a lot to offer, as almost anyone who has flown abroad can attest.

So why isn’t this already happening? One reason is that the Federal Aviation Act of 1958 requires that, for airline corporations, 75 percent of the voting interest must be held by U.S. citizens, and two-thirds of its board of directors must be U.S. citizens. Such restrictions seem absurdly arcane 50 years on, in a far more interdependent global economy than was the case during the Eisenhower administration.

… Perhaps most important is the message of hypocrisy that protectionism over the U.S. airline industry sends to the rest of the world. At a time when our own trade representatives are demanding that other countries open their financial, retail, and other service industries to competition from U.S. companies, we refuse to open our airline market to others. Yet this is the best strategy to improve the financial health of U.S. airlines, while allaying the concerns of travelers in smaller cities and their elected representatives who justifiably fear that a merger between any two major U.S. airlines will adversely affect choice and cost. This kind of foreign aid would be a win for the airline industry, air travelers, and U.S. trade policy.

Tags: Globalization, Guay, Hospitality and Travel, International Relations
Posted in News | 1 Comment

A Glimpse of China

Wednesday, March 10th, 2010

Smeal’s first-year MBA students recently completed their global immersion week, in which they spend a week abroad to get a glimpse of the international economy and the particular challenges and opportunities associated with doing business in another culture and under different laws and regulations. Terrence Guay, clinical associate professor of international business, accompanied one group of MBAs as they visited Shanghai, China. He shares a bit of the experience below:

The economic transformation in China is occuring on a massive scale and in light speed.  During the first week of March, I took 27 first-year MBA students to Shanghai to see these changes firsthand. 

We visited one French and eight U.S. companies, almost all of them names that every American would recognize.  Their reasons for being in China vary.  Some, like GM and Johnson & Johnson, are producing for the local market.  Others, like Caterpillar and Alcoa, are utilizing low-cost labor and exporting most of their products out of China.  Some companies have more flexibility in managing their operations, while others like Bank of America and Deloitte face restrictions in competing due to greater regulations in the service industry. 

Most students were surprised that, in a country of 1.3 billion people, almost all companies spoke of difficulties in finding highly skilled workers, especially at the middle-manager levels.  Yet every company was enthusiastic about the opportunities that exist in China.  Goodyear views the country as a blank slate where companies can re-position themselves, while Disney sees a promising future in selling merchandise to the two parents and four grandparents who dote on each child. 

Walking and riding through the streets of Shanghai, one would hardly notice that over half a billion Chinese citizens cannot afford any of the products that these companies sell.  The skyscrapers, lights, and bustle look more like New York or Chicago.  But the few hundred million middle and upper income Chinese consumers are rapidly transforming this country, and taking the global economy along with them.

Tags: China, Globalization, Guay, Outsourcing
Posted in News | 11 Comments

One Year of Blogging at Smeal

Friday, February 26th, 2010

Over the past year, we have discussed everything from the housing industry to Starbucks coffee, thanks to insights from our expert faculty at Smeal. Thank you for your support and readership. We look forward to the year ahead and hope we continue facilitating discussion and producing content of interest to you.

Below is a recap of some of our most viewed posts, addressing several key issues that made the past year a challenging one for business.

Several car companies took a hard hit as the economy tanked and stock prices dropped, forcing them to close plants, layoff workers, and turn to the government for support. In early June, President Obama announced that General Motors filed for bankruptcy and gave Washington a 60 percent stake in the company. Smeal’s Terrence Guay provided a detailed analysis of GM’s history, highlighting the many places they went wrong, in his post, “What Happened to GM?”

The housing industry is slowly on its way to recovery after a volatile year. An unstable mortgage market and a suffering real estate market brought about decreased lending and mortgage defaults. In September, Smeal’s Brent Ambrose addressed the transformation of Fannie Mae and Freddie Mac in his post, “Breaking Up Fannie Mae and Freddie Mac.” In addition, Smeal’s Austin Jaffe outlined ten principles to help navigate the new real estate economy in his October post.

With the Obama administration came the appointment of various czars. One that made headlines was Kenneth Feinberg, the pay czar, proving that executive compensation was a hot topic in 2009 and Smeal’s Don Hambrick, Ed Ketz, and Tim Pollock had much to say about it. In May, Hambrick noted that an increase in CEO’s stock offerings could potentially lead to more risk-taking by the CEO. In his study, he suggests a better way to compensate CEOs. In addition, Ketz recommends giving shareholders more influence over corporate boards in his July post. Pollock goes as far as to say that it is going to take a cultural shift, not a pay czar, to rein in executive compensation.

Retailers had to adjust their strategies given the decrease in consumer confidence and lack of spending. In July, handbag retailer Coach, Inc. aimed to lower prices, while maintaining its luxury image. Smeal’s Lisa Bolton offered various strategies for marketers to position their luxury brands in a weakening economy. Starbucks went through the same dilemma as they adjusted pricing to portray the image of being both an affordable and premium brand. Smeal’s Jennifer Chang Coupland thought this might be a rather risky approach and outlined the reasons why in her August post.

Tags: Ambrose, Coach, Coupland, Executive Compensation, GM, Guay, Hambrick, Housing, Jaffe, Ketz, L. Bolton, Management, Marketing, Pay Czar, Pollock, Real Estate, Smeal, Starbucks
Posted in News | 2 Comments

Climate Responsibility

Monday, December 14th, 2009

“Ongoing climate negotiations were temporarily upended on Monday when dozens of developing countries, including China and India, threatened to walk out in protest, saying that the world’s richer countries were not doing enough to cut their greenhouse gas emissions,” The New York Times reports. 

In an op-ed in yesterday’s Pittsburgh Post-Gazette, Smeal’s Terrence Guay argues that the world’s industrialized nations are ethically bound to do more to combat climate change because they have caused most of the damage:

Tags: Guay, International Relations, Politics, Sustainability
Posted in News | 1 Comment

Cuba Policy Needs Updated

Thursday, November 19th, 2009

The House Foreign Affairs Committee held a hearing today on the federal ban on travel to Cuba. Supporters of the ban claim that allowing U.S. citizens to travel to Cuba would only serve to line the  pockets of Fidel and Raúl Castro, while opponents argue that the ban is an antiquated and failed policy experiment that infringes on the liberties of U.S. citizens.

Smeal’s Terrence Guay agrees with the latter:

U.S. policy toward Cuba is outdated. We have had travel, trade, and investment bans against Cuba for almost 50 years, and they have not achieved their intended purpose—to make the Cuban government more democratic. Economic sanctions usually don’t work unless a large number of countries participate in the process.  But that is not the case with Cuba, where the United States is the only country in the world enforcing sanctions. 

Certainly, Cuba challenged U.S. foreign policy interests during the Cold War, and it would be nice if it were more democratic today.  But the United States allows companies to trade with and invest in dozens of authoritarian countries around the world (China being the most prominent example), and U.S. citizens do not face similar travel restrictions by our own government to other locations.

The policy hurts U.S. interests at two levels.  Economically, it gives companies from other countries (e.g., in Europe and Asia) an advantage over U.S. firms because they can do business in Cuba. Politically, it makes the United States look silly to the rest of the world, particularly in Latin America where the U.S. has important strategic, political, and economic interests.  It would be great to see Congress and President Obama lift not just the travel ban, but all U.S. sanctions toward Cuba.  After all, the belief that economic engagement can lead to political reform has shaped U.S. relations with other countries around the world.  Unfortunately, such a radical shift of policy will be difficult to pull off, even 20 years after the end of the Cold War.

Tags: Globalization, Guay, International Relations, Politics
Posted in News | 1 Comment

Pennsylvania and the G-20

Thursday, September 24th, 2009

With 20 world leaders meeting today and tomorrow for the G-20 summit in Pittsburgh to discuss the health of the world economy, Smeal’s Terrence Guay has penned an article outlining the importance of this meeting for Pennsylvania’s economy. Here’s an excerpt from the article, which appeared in the Patriot-News on Monday, and the Morning Call and Centre Daily Times today:

Why does all of this matter to Pennsylvanians?

The main reason is because the commonwealth’s economy is intertwined in the global economic web. With almost $35 billion in merchandise exports, Pennsylvania sent more goods abroad than all but 10 states in 2008. And it is not just multinational companies that are doing the exporting.

Of the 12,295 companies that exported goods from Pennsylvania in 2007, 10,900 (89 percent) were small and medium-size firms with fewer than 500 employees. Additionally, foreign-controlled companies employed 249,000 workers in Pennsylvania in 2006, the fourth-highest total among the U.S. states, with almost one-third of these jobs in the manufacturing sector.

This means as the global economy goes, so goes Pennsylvania’s economy. The statewide unemployment rate was 8.5 percent in July—the highest in 17 years.

Residents are concerned about the security of their jobs, stability of household incomes and the future well-being of their families. The sooner the global economy recovers, the sooner Pennsylvania’s economy will recover.

Improvement in the health of the global economy will result in more goods and services exported from Pennsylvania to the rest of the world, more investment in the commonwealth by foreign companies, a more stable tax base and more good-paying jobs.

You can hear more on the G-20 summit from Guay and Smeal’s Fariborz Ghadar here.

Tags: Economic Crisis, Economy, Globalization, Guay
Posted in News | 2 Comments

Detroit Bias

Friday, August 28th, 2009

With the U.S. government serving as a majority stakeholder in General Motors and the House of Representatives passing bills that forbid federal agencies from buying cars not made by Detroit, foreign automakers are becoming concerned over a Washington bias in favor of Chrysler, Ford, and GM.

Smeal’s Terrence Guay comments:

Despite rhetoric to the contrary, there is a tendency for all governments to protect strategic industries, although the definition of “strategic” can differ across countries. The automobile industry is considered strategic by most countries that have one (like the United States, Europe, and Japan) or are trying to create one (like China and India). The U.S. automobile industry, including its supplier network, still makes up a sizable part of the U.S. economy, although it has declined over the past two decades.  So it should come as no surprise that the U.S. government is trying to support it in various ways. 

While foreign companies may complain, these policies probably will have little effect on the U.S. industry if it is defined as GM and Ford. Chrsyler is now owned by Italy’s Fiat, and European, Japanese, and South Korean companies now have strong U.S. roots. Two-thirds of all “foreign imports” are built in the United States. CSM Worldwide, an automotive market forecasting group, predicted earlier this year that foreign-based car makers will build more vehicles in the U.S. than the “Big 3″ by 2010—and this was prior to the Fiat-Chrysler merger. 

The point is, foreign automakers will increase their presence in the United State in terms of sales and production regardless of what Washington does to protect the remnants of indigenous companies.  As this happens, the lobbying clout of foreign companies soon may drown out the voices of GM, Ford, and their protectors.

Tags: Auto Industry, Globalization, Guay, Politics
Posted in News | 5 Comments

Stimulus, Part II

Friday, July 10th, 2009

Warren Buffett yesterday joined the chorus in favor of a second economic stimulus package to stem the rising unemployment rate and boost consumer confidence. Smeal’s Terrence Guay, however, argues that the timing isn’t quite right for another round of stimulus:

It’s hard to justify a second federal stimulus package at this point in time for economic or political reasons.  Much of the $787 billion package from earlier this year has not yet worked its way through the economy, so there’s very good reason to give it more time to have its effect.  Even with the unemployment rate just short of double digits, other parts of the economy such as housing and consumer spending appear to be stabilizing.  And growing public concerns over the size of the federal budget deficit, projected to be near $2 trillion for the fiscal year ending in September, would make a second stimulus package politically explosive.  Perhaps most importantly, the Obama administration has more important priorities now, including health care reform and a more serious U.S. commitment to climate change.  Wasting political capital on an unpopular second economic stimulus package just doesn’t make sense this summer, if President Obama is to have any chance of success on these other two issues.

Tags: Economic Crisis, Economy, Guay, Politics, Unemployment
Posted in News | 1 Comment

What Happened to GM?

Tuesday, June 2nd, 2009

President Obama announced yesterday that General Motors has filed for bankruptcy as part of a restructuring plan that will give Washington a 60 percent stake in the automaker while it closes 14 more plants and cuts up to 21,000 more jobs.

“After the factory closings, which will leave 12 in Michigan, GM will have fewer than 40,000 workers building cars in the United States—one-tenth of a work force that in the 1970s numbered 395,000 people,” according to The New York Times.

So what went wrong? Smeal’s Terrence Guay has some answers:

GM’s problems go back at least three decades.  First, the company became complacent in terms of products and customers, assuming that American car-buyers would choose GM vehicles (or at least those produced by GM, Ford, or Chrysler). They didn’t take the Japanese threat seriously, and consequently steadily lost market share to Toyota, Honda, Nissan, and other imports. Quality dropped and though it has improved internally, few GM products are as reliable and as highly rated as foreign vehicles. 
 
Second, GM faced a heavy cost structure. Since the United States does not have a national health care system, many private sector companies began offering health insurance coverage to their workers in the 1950s. GM provided high-level coverage to their workers as well as to retirees and their surviving spouses. The company’s future obligations for retiree health care are estimated at $47 billion. This does not include health coverage for current workers. In 2007, the company reached an agreement with the United Auto Workers (UAW) to pass on the cost of paying retired workers’ pensions to the union. As a result of these and other labor-related costs, GM has not been able to compete well with foreign auto companies that do not have similar health and pension obligations in their home countries, or have chosen to operate factories in lower cost and union-unfriendly U.S. states.
 
Third, GM maintained too many brands (Buick, Cadillac, Saturn, etc.) that overlapped each other and allowed the company to lose focus on those that really mattered. 

Fourth, the company by the late 1990s had focused on higher-margin sport utility vehicles and trucks. When oil and gasoline prices rose a few years ago, GM was unprepared for the rapid switch by consumers to more fuel-efficient vehicles. The company had few products available or in the pipeline to meet the current demand for increased fuel efficiency or green vehicles. It is scrambling to do so now, but it will be difficult to persuade many car-buyers that the company is a leader in such technologies.
 
Fifth, the company’s management, for the reasons described above, is partly to blame.  It took them a long time to realize just how bad the situation at GM really was.
 
GM could have done many things differently, including trimming brands, relying less on SUVs and large vehicles, built more reliable vehicles, and reduced costs through greater production abroad.  The company is successful in some markets today, especially China.  But its main market is still the United States, and it is languishing here. I’m not sure an alliance with Renault, Nissan, or any other foreign company would have changed the company’s fortunes.  Virtually all of its mistakes and problems were internal to the company.

Tags: Auto Industry, Economic Crisis, Guay
Posted in News | 98 Comments