News feature: Trade wars

Protectionism is nothing new, but some in the business community believe the playing field of international trade is becoming more rather than less uneven

Industrial espionage, blackmail and brown envelopes stuffed with cash. No, it’s not the StrategicRISK awards: it’s how some companies – and their governments – do business.

So says Knightsbridge Company Services group chief executive Stuart Poole-Robb, echoing the World Economic Forum and Eurasia Group’s warnings about the risks of a global governance breakdown. The economic crisis is exacerbating the ‘every state for themselves’ mentality, and one of the main fears is a fierce trade war between China and the USA.

There’s little that doubt protectionism is on the rise, but has it reached the extent that Poole-Robb suggests? Opinion is divided.

“The situation of each state looking after its own interests isn’t new,” KPMG head of internal audit, risk and compliance services David Defroand says. “To some extent this has probably always been the case, but perhaps it’s becoming more visible.”

In the case of joint ventures in countries such as Russia, governments appear to be taking more interest in maximising revenues for the state rather than the corporations operating there.

Control Risks global issues analyst Jonathan Wood explains that there has been increased rhetoric, particularly from the USA on its relationship with China. But that is not necessarily resulting in a drastic increase in discriminatory trade measures.

He says: “The rhetoric is linked to the economic atmosphere around the recession. Many manufacturing jobs have been lost in the USA, particularly in key industries, so politicians are faced with a huge employment challenge. China makes a convenient scapegoat.”

USA in the frame

But one European risk manager told StrategicRISK that he considers the USA quite capable of introducing trade discriminatory measures in its political interests. He cites the decision in September 2009 to impose punitive tariffs on all car and light truck tyres from China for three years. “My own business has a higher than average risk of being hampered by legislation introduced with the purpose of protecting the USA’s own trade. It’s very difficult to handle, politicians are highly unpredictable, and perceptions do not necessarily reflect reality,” he says.

Closer to home, how far are European governments prepared to go to protect national interests? In the case of some, very far indeed, according to Poole-Robb. “The EU directives on how companies should behave are being observed by UK plc for the most part. But British companies are playing uphill when it comes to competing against other European multinationals,” he says.

Although these organisations recognise both national and EU regulations, Poole-Robb believes they take the view that if they can find a way around, under or over these laws, then they’re not actually breaking them.

Where tenders for very large contracts are concerned – not just in the defence industry but in sectors such as oil, power and natural resources – Poole-Robb says governments are prepared to step in to ensure success for their country’s companies.

“Confidential negotiations are held on a government-to-government basis. Very little is put on paper for fear of leaks, so there’s little evidence to prove or disprove what government ministers have agreed,” says Poole-Robb. Such awards feature “mouth-watering side deals” – perhaps the provision of educational or medical facilities.

European hard-hitters

Poole-Robb says the governments of France, Germany and Italy, in no particular order, are the most aggressive in trying to influence contracts.

Wood doesn’t see a problem, maintaining that there has always been a political element in the agreement of very large deals between countries. “All governments support their national companies with some incentives,” he says. For example, the UK’s official export credit agency, the Exports Credit Guarantee Department, helps overseas buyers to purchase goods and services from UK exporters. It guarantees bank loans to finance these purchases, as well as insuring UK organisations against non-payment and political risks.

“We haven’t seen companies losing out because of secret government deals, although there is, of course, increased competition as there are more players in the market,” Wood says. But he does note a trend for developing countries to want projects to be staffed by the local population rather than a company’s own workforce, and this can affect the outcome of tenders.

Industrial espionage

Poole-Robb refers to European companies in bidding wars increasingly suffering from industrial espionage, some of it government-sponsored. “They are not necessarily after your technical or industrial secrets. They’re trying to find out how tight your margins are.

Where you pose too much competition, the local competitor will adopt whatever strategy it considers necessary within the framework available to it to put you out of business or for you to be less effective,” he explains.

There is a fine line between aggressive but fair competition and corruption. In the UK, some risk managers are concerned that the Bribery Act, due to come into force in October, may be putting too strict an ethical burden on British companies – for example, in barring facilitation payments to help oil the progress of deals. Poole-Robb says: “It will undoubtedly make the UK far less competitive in world markets.”

Wood disagrees. “We’ve already seen very aggressive enforcement of anti-corruption legislation in the USA and that hasn’t produced a decline in the competitiveness of USA companies. Also, Germany and other countries in Europe are looking to enact similar legislation with an extra-territorial impact, as is Japan.”

Control Risks’ RiskMap 2011 states that corruption will be the most pervasive operational risk in 2011. “The new evangelism with which the Foreign Corrupt Practices Act (FCPA) is being enforced in the USA is likely to intensify. With stringent laws being enacted elsewhere (the UK Bribery Act, which will come into force in 2011, is the FCPA on steroids), corruption should be emblazoned across all corporate risk registers.

“Good intentions are not enough; the new global enforcement regime requires boards to actively demonstrate real compliance through the tangled web of joint ventures, agency agreements and distributors that is the everyday reality of transnational business.”

Corruption aside, how can European risk managers and their companies mitigate the effects of aggressive protectionism? “It’s important for risk managers to help their boards to think through the implications,” says Defroand. “What if not one but three countries slap trade tariffs on your imports, increasing the cost of your products by 30% or 40%? What can you do to manage the impact?” he asks. SR

Barriers to trade

Since 1995, the Trade Barriers Regulation (TBR) has given European businesses a tool for tackling trade barriers in export markets. Businesses can use the TBR to ask the European Commission to investigate restrictions on their sales abroad, discriminatory treatment in foreign markets, difficulty obtaining patents or licences or any other form of unfair barrier to their export of goods or services.

In the past decade dozens of companies or industries have used the TBR to tackle problems in export markets, as well as unfair foreign trade practices that cause injury within the EU internal market. The TBR cases has helped improve export conditions for car manufacturers in Colombia, pharmaceutical companies in Turkey, textile firms in Brazil, among others.

Source: European Commission Trade

Saints and sinners

Transparency International’s Corruption Perceptions Index 2010 grades countries from 9-10 (very clean) to 0.0-0.99 (very corrupt). No EU and Western European countries are ‘very corrupt’ but some are in the lower half of the scale.