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Global Business Environment

Executive Summary

The issue at the center of the report is a case analysis of how protectionism has affected the global business environment. The report utilized a retrospective study on the elements of protectionism regarding the challenges faced by the GE Oil and Gas outlining how the vice manifested itself under its operation across the world. Moreover, the work includes a literature review on how and why the problem has become of relevance in the current economic era. The rationale for this approach was to ensure that the analysis was based on an informed platform where the variables of interest were better understood. Through analysis, it became apparent that protectionism had risen as a result of the continued dominance of several core members in the global trade. It is this superiority that has led to some countries feeling alienated from the benefits of being a player in the global business and creating barriers that cater to their national interests. It was also clear that continued mistrust among the global trade players was another factor that influenced the policy of some members, particularly the core countries, which perceived free inter-border trade as a threat to their economies. Through the findings, a clear correlation between the rise of protectionism and the decline in global commerce was noticed, which shed light on the fundamental realignments that need to be made to form a more robust global business environment that serves all equally. Moreover, the results of the research are also significant since they clearly define the solution to the problem of protectionism that should be undertaken at both the national and international level for the global business environment to become more balanced and productive. Furthermore, the study findings have enabled the formulation of recommendations on the issue of protectionism that are based on a multi-perspective study thus provide a solution that respects the interests of all involved in the global business.

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Introduction

Background Information

Globalization has become the norm in the world of business where inter-boarder trade has been on the rise. The spirit of globalization is that of ensuring that businesses have access to an expanded market that they can exploit (Wild & Wild 2014) Therefore, in keeping with the spirit of globalization in the field of business, having a barrier-free approach has been a crucial component of the economic policy. It has enabled companies to operate in many areas around the world working closely with hosting governments and local businesses. Moreover, in the line of improving their engagements, multinationals are now becoming involved in joint ventures with the local companies in their area of interest (Ferragina 2014). It is an approach that has been proven helpful in ensuring that the undertakings in the new market are of lower risk and there is little time wasted in exploiting the opportunities. However, all these operations can only be possible if all the governments around the world uphold the spirit of globalization, which facilitates the process of foreign direct investment (FDI). It can be made possible through the provision of a favorable environment for doing business with the foreign companies. However, recently, this has not been the case on the global platform, with many countries choosing to come up with barriers aimed at protecting the local firms from competition from the multinationals. It has caused a major challenge in the global business environment called protectionism that leads a slow fight against globalization (Georgiadis & GräB 2016). In acknowledgment of the new challenge, this report aims at providing a case analysis on how protectionism undertakings are affecting the global business environment with its various associative problems. With the presence of protectionism in many countries, the global business environment has become and will continue to be unfavorable due to the increasing number of national barriers that in most cases are very expensive to meet.

Aim/Purpose of the Investigation

The primary aim of the investigation is to shed light on how protectionism undertakings in some countries are slowly killing the existence of a healthy global business environment. The objective is to analyze the potential impact of protectionism on the international trade environment evaluating how favorable or challenging doing business by the multinationals has become. Moreover, the purpose of the report is also to uncover the potential problems that protectionism has brought into the field of global business and the possible remedy that can help reshape business operations in the spirit of globalization.

Body Outline

The report’s body includes an analysis that elaborates on how protectionism has affected the global business environment. The topic is discussed from various perspectives and a case scenario. It is followed by the recommendation/solution phase where crucial insights on how to deal with the problems are outlined accompanied by a rationale for every proposed solution.

Analysis

Globalization Versus Protectionism

Globalization of business entails allowing the free movement of goods and services between countries. The key spirit of globalization is to have an interconnected and interdependent economy where people are free to sell and buy goods and services from any point of the world (Ferragina 2014). Therefore, the interdependence of the economies is the primary key feature of globalized business operations. On the contrary, protectionism undertakings are aimed at making it harder for foreign companies to enter in certain segments of the market or the whole country at large. The impact of the adoption of protectionism by various countries means that the formerly free movement of goods and services is now subjected to meeting the national barriers around the world (Evenett, Fritz & Wermelinger 2013). Countries are now firmly renegotiating trade deals to include their newly formulated protectionist barriers aimed at cautioning local industry from high-end competition by the multinationals. Protectionism is thus becoming a popular ideology in the global market, and if not checked, it might lead to the death of the healthy spirit of inclusivity in the global business environment.

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Pointing Case Scenario

Through globalization, companies such as GE Oil & Gas have been able to expand their operations in virtually any continent. However, in all of its firms, the common element is their unified approach of utilizing the localization of their operation, meaning the empowerment of the local people through training and the general improvement of the industry at hand through advanced technology (GE Oil & Gas n.d). Hosting governments have responded positively to such an approach, like in the case of a joint venture with GAFI in Egypt, where in response to the use of localization, the GE Oil & Gas received additional 2,000 square meters of land to expand its operations (GE Oil & Gas 2016). Localization was also used in Angola in the joint venture between GE Oil & Gas and Gas Angola Limited where it served as a means of guaranteeing the quality and timely delivery of equipment even to remote areas (GE Oil & Gas 2014). Although this approach was beneficial to GE Oil & Gas, it was still merely a method used by the company for protecting itself from the protectionism ideologies of many governments.

Localization is one of the demands that many countries are imposing on the multinationals as a way of maintaining a long-term benefit. The trained local personnel and the investment made mostly in the form of superior means of production and technology are helpful to the hosting nation. Moreover, it is from the setting of these localized operational units that local people get job opportunities. However, the fact remains that it is very expensive, not to mention that sometimes the locals are not conversant with the nature of technology.

Forms of Protectionism

Tariffs

The local companies enjoy favorable tariffs compared to the foreign companies, which is aimed at ensuring that the former have a higher competitive edge when it comes to selling price. The lower tariffs together with being subjected to the same business environment mean that the local firms face lower operation costs and thus are in the position to quote a smaller price than their international counterparts.

Quotas

It is a form of protectionism action where the hosting government allocates market segments that both the local and the foreign companies can serve. Under protectionism, the local businesses always get the lion share of the industry’s market (Fama 2016).

Discriminatory Rules

Discriminatory rules are mostly utilized when it comes to protecting a firm’s innovation. Foreign companies have to meet higher standards when it comes to copyrights, patents, and intellectual property rights (Fama 2016). In these conditions, domestic enterprises have loopholes that allow them to utilize a similar but not identical form of technology or method of operation. It leads to unfair competition within the hosting country and makes it harder for the foreign company to have a competitive edge comparing to the local firms.

Core Problems of Protectionism and Their Impact

Trade Barriers

It is the primary form of protectionism. The hosting country comes up with strict and stiff tariffs that the foreign investors have to pay. The higher tariffs make it hard for the new entrants to compete on an equal platform. Moreover, the cost of running a business becomes very high, meaning that the price of the product is either at par or greater than that quoted by the local entities (Fama 2016). The corresponding impact on today’s global business environment manifests itself in the loss of interest in inter-border trade since in most cases it is less profitable.

Trade Wars

As every country’s purpose is to ensure own welfare, once a country imposes high tariffs on a company of another nation, there is always a retaliation on the goods provided by the former. This pattern then takes the form of a vicious cycle where a tariff is countered by another one leading to trade wars (Georgiadis & GräB 2016). It is important to take note that countries are now divided into economic regions, therefore, these countering tariffs affect huge economic blocks thus jeopardizing the occurrence of any healthy global business exchange. Trade wars prevent balanced global trade since foreign companies are even sometimes unwelcome due to the existing economic hostility.

Loss of Jobs

Protectionism leads to the loss of jobs due to the reduced levels of exportation that were caused by the high taxes targeted at the imports. As a result, the exporters face enormous costs that make it unattractive to send goods to the countries that are exercising protectionism. The result is that there is a lower demand for exportation, which leads to lower demand for production and leaves export-based companies with no choice but to lay off the untenable workforce (Georgiadis & GräB 2016). Loss of jobs causes reduced levels of output and decreased exports thus undermining the global market environment by limiting the number of the inter-border transactions.

Mistrust and Global Tension

The economic factors are the web holding the world together. Moreover, economic matters are at the core of any government, and when protectionism affects a certain group of countries, there is an instant sense of mistrust between the concerned countries. It is evident in the situation with Brexit and the European Union where the withdrawal of the United Kingdom from EU, which was an excellent example of protectionism, has led to a surge of mistrust between the UK and the European countries. The same case could be witnessed in the recent election of Donald Trump in the USA, where some leaders including the President of the People’s Republic of China, have raised the issue of the need to uphold continued cooperation. With Trump promising to bring jobs back to the USA and putting America first, to a lot of tension and mistrust arose across the globe. One of the key factors in ensuring a favorable global business environment is a high level of tolerance among its players (Ferragina 2014). Thus, mistrust and tension brought about by protectionism undermine the needed tolerance and leads to reduced inter-border trade.

Theoretical Application to the Problems

An in-depth understanding of the occurrence and the impact of protectionism can be attained through studying the Mercantilism economic theory. It is the assertion of the mercantilist school of thought that attainment of national interest is always in conflict with other states’ welfare (Schneiderman 2013). In other words, for a country to experience improved welfare, it must jeopardize the ability of the other nation’s ability to improve its welfare. Similarly, under protectionism, a country is keen on safeguarding the local companies by giving them an unfair competitive edge over foreign rivals (see Fig. 1). Moreover, mercantilism calls for the necessity of prevalence of exports over imports—an assertion similar to that used by protectionism under which imports experience massive taxes (see Fig. 2) (Georgiadis & GräB 2016). Moreover, protectionism is also understood as the reactional force of cautioning from being exploited in the world economic system as it is described in the world system theory. It is the assertion of the world system theory that in a global economic system, there are always the beneficiaries (core members) and the victims (peripheral members) (see Fig. 3). It is thus clear that although protectionism is detrimental to the global business environment, some of its goals are based on fears captured by the economic-theoretical platform necessitating the need to face the challenge with due diligence.

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The rationale for the Choice of Problems

Many problems emanate from the protectionism ideology. However, the issues of interest to the report are those that are universal and largely undermining to the spirit of having a favorable global business environment. In line with this core intention of correlating protectionism and the declining nature of global business, trade barriers, trade wars, loss of jobs, and mistrust and global tension present the major problems that affect world trade. All of these issues are interrelated and lead to a decrease in the exchange of goods and services on the global level. It is all due to a national-centric theory that is contrary to the ideology of inclusivity that is envisaged in the global business. Therefore, for the global trade to be encouraged and the lost trust among the international trading partners to be regained, these problems need to be addressed in a retrospective manner that will yield as a sustainable solution.

Recommendations

Core Recommendations and Solutions

From the analysis, it is clear that protectionism is an ideology that is slowly gaining momentum with two of the major economies (the UK and the USA) and embracing it in respect to their recent vote. Therefore, there is a need to appreciate that the rise of protectionism must be based on a serious problem that exists in the global economy. The key to finding the recommendations and solutions lies in the assertions of the world system theory. The main statement is that in the global economic system, there is a there-three level hierarchy. It consists of core, periphery, and semi-periphery members. The economic system is said to be controlled by the core members who exploit the resources and the labor of the peripheral members. On the other hand, the semi-peripheral countries possess the traits of both the core and periphery members (Schneiderman 2013). Another issue is that after conducting cost-benefit analysis of being involved in the global business, some countries conclude that allowing free trade leads to huge losses for them.

These are the major problems that have materialized in the rise of protectionism. Due to the continued domination of the core players, the majority of countries are now more keen on the national economic matters rather than global ones. On the other hand, the core countries are now feeling threatened by the continued improved access to their markets for both the peripheral and semi-peripheral countries. As long as this mistrust exists, protectionism will remain a hindrance to regaining and upholding a healthy global business environment. Therefore, what are the appropriate ways of handling the problem and how are they going to solve it?

Inclusiveness

There is a need to formulate a more inclusive and rational global business model. It will ensure that the interest of all member states are appreciated and included while trade deals are being enacted. It will help in solving the challenge the peripheral and semi-peripheral countries feeling inferior. Moreover, it will bring forth a solution to the continued feeling of exploitation that is highly visible regarding the trade balance between the core and peripheral countries.

Powerful WTO

There is also a need to provide the WTO with more power to discipline the errant members. Having a stronger WTO will help in ensuring that the laid down trade agreements are followed to the letter by all members despite their economic power. Protectionism heavily lies on the potential mischiefs that a country can manage to ensure it gains an unconventional advantage when it comes to global trade (Fama 2016). Therefore, a stronger WTO will be deterrent enough for those who exploit other members due to their economic supremacy or natural advantage of resources.

Political Good Will

There is a need for the member states to cultivate the culture of a favorable political good will. Matters that deal with the ratification of international treaties by member countries rely solely on the political good will in various states (Das 2016). Similarly, if the global trade is to be uplifted again and the elements of protectionism are to be abolished, then the global politics must speak the same language. It will provide a solution to the challenge of mistrust and global tension that undermines any international trade.

Rationale and Justification on the Choice of Solutions and Recommendations

A stronger global trade and a better global business environment will depend on the existence of a leveled playing field devoid of any element of unfair protectionism. It will demand a stronger oversight body, and it is the reason for the report’s agitation for a stronger WTO. Moreover, in eliminating protectionism, there will be a need to have a global economic system where every member feels appreciated and respected. It will demand the formulation of an inclusive platform — a phenomenon well captured by the report’s call for the creation of an inclusive and rational global trade model. Lastly, solving the challenge of protectionism will also depend heavily on the members trusting one another. It will require political good will across the board where all members believe that the others will follow the set rules.

Feasibility/Practicability of Recommendations and Solutions

The recommendations and solutions are exceedingly practical since they are centered on both the systemic and political backgrounds — two of the major components in world trade. Concerning feasibility, the only expenses are those that will be incurred by the regulation body, WTO, in playing their supervisory role. It makes the recommendations and solutions highly affordable. Moreover, the centralization of the supervision in the hands of a stronger WTO minimizes the extra costs that could have been suffered if regional bodies were to be utilized in ensuring the new demands are followed. The recommendations and solutions are also practical since they view the role of the international organization and the national authorities as crucial in resolving the challenge of protectionism. It is thus clear that the recommendations and solutions are evidence-based, specific, and above all inclusive through the appreciation of the roles of different agents needed in solving the challenge of protectionism.

Conclusion

It is clear that protectionism is slowly spreading with more countries rushing to safeguard their personal interests at the expense of global business. The continued dominance of some countries is one of the fueling factors that has brought about protectionism. Moreover, through protectionist undertakings, the global business environment has become toxic and leads to a low level of inter-border trade. Protectionism has also caused huge challenges that have brought heavy losses to both individual countries and the global economy at large. Besides, it is evident that the existence of protectionism is helping neither the concerned countries, due to lower imports, nor the world economy, which as a result experiences increased number of transactions. The solution to the challenge, therefore, lies in having a stronger WTO that will ensure that all trade agreements are followed. Moreover, political good will is necessary to minimize the element of mistrust and unnecessary tension. Lastly, it is clear that with protectionism, the global business environment has become unfavorable due to the national barriers that mostly aim at discouraging the spirit of free movement of goods and services.

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