Global Supply Chains Benjamin Graham Lecture 25: IPE and War Benjamin Graham

Today’s Plan No reading quiz today Today’s topics: Global supply chains Lecture 25: IPE and War Benjamin Graham

Housekeeping Papers are due now. Lecture 25: IPE and War Benjamin Graham

Comparative Advantage: Looking back Lecture 25: IPE and War Benjamin Graham Comparative advantage: MRT: relative cost of producing two different finished products in two different countries Assumes both products are made entirely in-country Doesn’t consider the mobility of capital and labor Nothing is made that way anymore Global supply chains

Not just where but who Lecture 25: IPE and War Benjamin Graham Make vs. Buy Transaction cost economics Industrial organization Vertical integration Large MNCs vertically integrate multiple processes across multiple countries.

Footloose Firms and Law Enforcement Lecture 25: IPE and War Benjamin Graham Laws are enforced nationally Extradition treaties exist, but investigation overseas is hard Intelligence sharing & law enforcement cooperation is hard Foreign Corrupt Practices Act extends the reach of U.S. anti- corruption laws Does it violate other countries’ sovereignty? Reciprocity. Should China be able to throw Mark Zuckerberg in jail if Facebook violates Chinese law?

Global Supply Chains & Regulation Lecture 25: IPE and War Benjamin Graham Food fraud: scary and very common Detection has actually gotten easier But punishment has gotten much harder b/c suppliers are dispersed across countries Also, limited liability companies (LLC) Anonymous ownership What should firm responsibilities be for labor and environmental practices in their supply chains? Sometimes hundreds of inputs to trace back to the source – this is not cheap for firms to do.

Global Supply Chains & Regulation Lecture 25: IPE and War Benjamin Graham Conflict Minerals Well-intended rules to make firms responsible for their supply chains. High value. Few inputs to track. High stakes

Global Supply Chains & Regulation Lecture 25: IPE and War Benjamin Graham If I am a major diamond cutter and jewelry distributor, which of these source countries makes it easiest and cheapest for me to certify that my product is conflict free? A. Angola B. Democratic Republic of Congo C. South Africa D. Canada

Footloose Firms and Taxation Lecture 25: IPE and War Benjamin Graham Taxes are collected by national and local governments Taxes are usually levied on earnings But WHERE do earnings occur? Transfer pricing: What one affiliate charges another for goods and services Inversions & profit-stripping Double-Irish with a Dutch Sandwich New U.S. rules on inversions just blew up a $160 billion Pfizer/Allergan merger What is a tax haven anyway?

Tax Havens Lecture 25: IPE and War Benjamin Graham

Why is the U.S. a major cotton exporter? Lecture 25: IPE and War Benjamin Graham A. The U.S. is better suited geographically for growing cotton than other countries (i.e. we have a large advantage based on land) B. Modern cotton farming is capital intensive, not labor intensive C. U.S. cotton farmers are heavily subsidized D. The U.S. has a long tradition of cotton farming E. All of the above F. Mostly B & C

Why is the yarn spun in Indonesia? Lecture 25: IPE and War Benjamin Graham A. Labor is relatively cheap B. Labor is skilled and the government is stable C. Indonesia is close to Bangladesh and other major textile manufacturers. D. All of the above E. Mostly A&B

Why is the t-shirt sewn in Bangladesh? Lecture 25: IPE and War Benjamin Graham A. Labor is super cheap B. Labor is skilled and the government is stable C. Both A & B about equally

Why are labor costs dominant at the sewing stage? Lecture 25: IPE and War Benjamin Graham A. Yarn spinning machines are more expensive than sewing machines B. Sewing takes more labor than spinning yarn C. Bangladesh has weaker labor protection laws than Indonesia D. All of the above E. Mostly A & B

Choices Lecture 25: IPE and War Benjamin Graham Group assignment: Assume you are an American firm (i.e. the capital in question is American) and you want to produce beer to sell in the Mexican market.. 1. Identify the three most important raw materials. Pick the country you should source each from. Why? 2. Identify the two most important processes to make your can of beer. Pick the country in which you should conduct each. Why? 3. Which parts of this change if you are a Mexican firm that wants to sell beer in the U.S.?

Choices (2) Lecture 25: IPE and War Benjamin Graham Next steps Assume you are an American firm that wants to sell beer in Mexico and the U.S. 1. What are your preferences regarding free trade between the U.S. and Mexico, assuming any tariff increases or decreases are likely reciprocal? 2. What are your preferences regarding U.S. immigration policy? 3. What are your preferences over investment treaties between the U.S. and Mexico? 4. Which of the three above items would you focus your efforts on? Why? 5. Assume your U.S. workforce is represented by a union. Does that union differ from your policy preferences in any of these areas?