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National Research University Higher School of EconomicsIQNewsCountries Coming Together and Standing against the Dictates of Investors

Countries Coming Together and Standing against the Dictates of Investors

States are forming alliances to stand against the dictates of international capital and also to successfully attract this capital to their markets, argues the head of HSE’s Department of International Affairs, Maxim Bratersky, in his report “Political Functions of Regional Trade Agreements.”
May 19, 2014

A Union of Vague Purpose

The tendency to create enormous regional associations of a continental size is more noticeable in the modern world, Maxim Bratersky notes. This concerns the zone under the North American Free Trade Agreement (NAFTA), the European Union, and new projects like the Asia-Pacific Economic Cooperation (APEC) and the Transatlantic Free Trade Area (TAFTA). The Eurasian Union being created by Russia, Belarus and Kazakhstan can also fall under this category.

It is true that the creation of regional alliances cannot always be explained in the context of classical economic theories. “Russia, Kazakhstan and Belarus have said on multiple occasions that they are building [something], but no one ever explained why. There are only general statements about how the economy will advance further. Exotic explanations exist that some technological chains will be restored that are left over from the Soviet Union,” Bratersky states. These explanations, however, are not sufficient, experts say.

Contemporary economic theories – Bratersky is referring to Paul Krugman's textbook on global economics – links the creation of regional alliances with the necessity to remove trade barriers, use economies of scale or create a currency zone.

On top of everything else, in conditions of low average tariffs around the world for the majority of goods, the creation of customs and currency unions and free trade zones does not lead to a more significant drop in tariffs and does not generate a notable increase in trade. As concerns the Eurasian Union, trade flows for member states are focused largely on foreign markets, and therefore “it is not very clear which gains from global trade can be taken from this [union],” Bratersky says.

Former U.S. Secretary of State Hillary Clinton viewed the creation of the Eurasian Union as an attempt to form a new USSR, Bratersky notes. It is also possible to assume that integration should help countries participating in the blocks to boost their influence within international trade and financial institutions.

States vs. Transnational Corporations

All explanations as to why states form gigantic regional unions are logical in their own way, but one should not consider them to be exhaustive, Maxim Bratersky says. He suggests another possibility – the necessity to stand against the dictates of transnational capital is pushing countries toward unification.

Beginning in the 1980s, a “massive liberalization” has been taking place in the global economy. The global market and global capital have become mobile, while countries have stayed the same as they were before. Countries are no longer able to keep capital within their borders using traditional methods, and they also cannot chase capital around the world. There is only one option left – bring this capital into their country. States now have to compete with each other for foreign capital, as well as for investments, the construction of new factories and the creation of jobs.

This circumstance has changed the nature of cooperation among states. Over the last several decades of the 20th century, smaller and medium-sized countries began fighting for global investors, and this competition brought about a clash amongst many future members of the European Union. “Governments, particularly those of a smaller size, turned out to be equal in the midst of colossal globalization. They are all competing with each other for the fruits of globalization,” Bratersky argues. How can this competition be won? It is possible to lower taxes, worsen conditions for a country’s own workers, or turn away from various kinds of regulation in order to provide international capital with the best conditions; but it is also possible to act in another way.

When Size Matters

There is a general rule that the largest entity will win in a global competition for international capital. A situation has arisen over the last 10-15 years in which transnational capital simply cannot afford to be absent from large markets, no matter what the costs.

China was an example of this, Bratersky believes. Over the last 10 years, the majority of foreign companies that have entered the market of the Celestial Empire have been operating without remarkable gains. “Companies are building their market strategies in another way, [and] are focused on other stimuli,” Bratersky says. Global companies such as Microsoft and Volkswagen are marketing platforms. They purchase technologies, ideas, patents, knowledge, and production facilities; and they do this on credit. And international corporations borrow money for their future capitalization. “They show that for this money they expect to occupy, let’s say, 10% of the Chinese market or 15% of the European market, or 7% of the NAFTA market. This is where their market future lies. It is under the promise of occupying this market niche that they get capital, which helps [them] form their production chains,” Maxim Bratersky says, explaining the logic behind the process.

It turns out that if a country – particularly a smaller one – operates on the global market alone, it becomes an object that the world market controls, telling it what to do and how to do it. But if a state is able to form a large consumer market with other states, then participants of this union firstly ensure that foreign investors will arrive, and secondly, are able to dictate the terms under which they are prepared to allow these investors to enter the market. In addition, a foreign investor is unable to refuse this offer for it is specifically on taking hold of consumer markets – or a share of these markets – that the investor’s business strategy is based. For that reason, the idea of creating regional alliances can be valuable in and of itself. “If you have a huge market, then capital will not dictate under which conditions it will enter, but you will explain to the capital under which terms you will let it in,” Bratersky says.

“I believe it is necessary to reconsider the transatlantic project, the Pacific project, the European project and even the Eurasian project from this standpoint as well,” Bratersky notes. This does not, however, rule out all the other economic and political factors for forming regional alliances.

Bratersky calls the proposed hypothesis a “fragment of a puzzle” that completes the overall picture and helps us understand why enormous regional and interregional unions are currently taking shape in the world.

 

Author Гринкевич Владислав Владимирович