Global Economic Assignment: USA-China Trade and Cross-Border M&A

This assignment report delves into two key aspects of global economics. The first part examines the arguments for trade protectionism adopted by the USA against China, analyzing the impact of tariffs, trade deficits, and import substitution policies on various sectors like manufacturing and steel. It explores the government's justifications, the impact on the service sector, and the goal of self-sufficiency. The second part investigates the factors that influence cross-border mergers and acquisitions, discussing political and economic factors such as political unrest, economic stability, consumer income, and social situations, including age demographics. The report highlights how these factors shape the patterns and success of mergers and acquisitions, particularly in regions like the Asia Pacific.

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GLOBAL ECONOMIC ASSIGNMENT

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Contents
Question 2- the argument for the trade protection of the USA against China...........................3
Question 3- Factors influencing the cross border merger and acquisition.................................5
Reference....................................................................................................................................8

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Question 2- the argument for the trade protection of the USA against China
Globalisation has its foundation on the free trade among different economies of the world.
However, the recent changes in the tariff plans of the government of USA have disrupted the
global trade as it has increased tariff for protecting the economy from EU, Mexico, China,
and Canada. These countries have also reacted with an introduction of higher tariff for the US
products as well. Thus, the global trade platform has suffered a lot (Schuknecht, 2017). The
government of the USA has its justification for the strict trade policies of the country.
One of the biggest reasons for the introduction of the trade barrier is the huge trade deficit of
the USA with the Chinese economy. The trade data of the US economy shows that the export
to the Chinese economy has reduced since the year 2014. On the other hand, imports have
been increasing since the year 2014. The import increased more than that the decrease in the
export of the USA to China. Bonoli (2017) found out that one of the biggest reasons for the
decrease in the export of the USA to China is the export rivalry of EU countries. The USA
mainly exported manufacturing raw materials to China which have now been substituted by
the export from the EU countries. Therefore, the economy of USA got affected by the
changes and suffered in terms of economic performance. Simultaneously, the production and
the cost of the manufacturing sector of the US economy have not been much impressive over
the years. Due to the absence of low skilled labours in the economy of the USA, it has failed
to produce products at a lower cost than most of the other economies of the world. Therefore,
many of the business located in the USA started importing from China to keep their
production cost low (Neumayer, 2017). Consequently, the import increased significantly
while the export reduced leading to a huge trade deficit of the country.
The major argument of the government of the USA for imposing a high tariff for Chinese
imports is that it was affecting the manufacturing sector of the USA. The advocates of the
protectionist strategy of the government have stated that it was the right time to intervene in
the trade of the USA (Dollar, 2017). The government of the USA has been criticised on many
occasions as the trade deficit is not a bad sign for the economy. There are a number of
developed and important economies of the world that have a trade deficit. Therefore, this
strict protection was not necessary for the government and it would hurt the economy of the
USA in the long run. Another major argument of the government of the USA regarding the
imposition of the tariff is that imports from China were harming the domestic counterparts.
Therefore, the government as part of the import substitution policy had to increase the tariff

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to avoid it. However, Nimon and Beghin (2017) different in this case saying that the products
and service being imported from China and the products that are being exported are totally
different. While, the economy of the USA exported mainly service to the economy of China
such as banking, tourism and many more, it imported produced products made in China. The
government, in the long run, could have made the resources mobile thereby making these
sectors better off. Rather the protective tariff that these countries have imposed on the goods
and the services of the USA will hurt the economy in the long run.
One of the major product that the USA imported from China before the imposition of the
tariff is the steel. However, due to the import, the domestic companies suffered and had their
revenue reduced. The government of the USA wanted to boost the domestic steel company
and wanted to become a major steel producer in the world (Handley and Limão, 2017). The
imposition of the higher tariff would allow the domestic company to have a better platform to
flourish in the market. Another argument that supports the protectionism is the fact that,
development of the steel industry of the USA would create more jobs in the economy. The
steel producers of the USA would also be helpful for the companies as the prices would go up
due to the higher demand of the domestic producer of the market and hence the company
would be able to earn higher revenue. In this case, the demand curve would shift to the right
and the supply curve would remain unchanged. The equilibrium of the steel market of the
USA would show higher prices of the steel benefiting the revenue stream of the steel
companies of the USA.
In addition to that, the government also advocates that the boom in the steel industry of the
economy would eventually trickle down in other sectors of the US economy and benefitting
the other sectors as well. Thus, protection is not only important for the manufacturing
industry of the economy but it is also important for the overall betterment as well. The
service sector of the economy of USA has been stagnant over the years due to rivalry from
the economies of Asia Pacific. Therefore the service sector would find its opportunities
within the economy of USA after the imposition of the tariff on steel, aluminium and other
products that were being imported from China. However, Jones (2017) in this case criticised
this view saying that the service sector of the USA economy would not find that much
business within the economy that it used to get in the global economy. Rather, if the service
sector of the economy could have restructured its cost of operation it could have had a better
competitive edge over the rival service sectors like that of Philippines and Singapore.

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Lastly, one of the major and the primary reason for the imposition of the trade protectionism
in the USA against China is the self-sufficiency. The unemployment in the economy of USA
has been increasing over the years. Therefore, the imposition of an import tariff on Chinese
steel and aluminium products can help the domestic industry to find its foot. More domestic
companies would be able to operate in the economy and hence the number of unemployed in
the economy would reduce over the years. According to Spykman (2017), the domestic
companies would be free of fierce rivalry from the foreign companies and hence it will be
able to general income and unemployment for the people of the country. This will, in turn,
impact the national GDP of the company as well as it would help in the development of much
other related industry in the economy of the USA and hence the imposition of the tariff on
some products of China is important (Bown, 2017).
Question 3- Factors influencing the cross border merger and acquisition
Merger and acquisition is a process of expanding a business wherein a larger company buys
the entire infrastructure and the resources of the smaller company. Sometimes, the merger
and acquisition also take place across the border. In this case, the merger and the acquisition
are mainly used as a process to enter a new market. The cross border merger and acquisition
is being used many companies new days as it is a safer alternative for invading a maker. The
country-specific knowledge is mainly held by the domestic company which provides the
expertise and the technological know-how is provided by the foreign company. These two
works together to provide a successful cross border merger and acquisition businesses.
According to the data, the volume of merger and acquisition has increased by 47% since the
year 2000 (Humphery‐Jenner, Sautner and Suchard, 2017).
There is the difference in the pattern of each of the merger and acquisition depending on the
association of each of the companies. Alimov and Officer (2017) stated that the motives of
the companies and their long term goals are important to find out the pattern of merger and
acquisition. When the motive of the foreign company is to develop a market base in the target
market, it licenses the business processes to the domestic company and collects a royalty
from it. Apart from that, strategic involvement can also be among the foreign and the
domestic counterpart when the motive of the businesses is to expand the business with the
help of each other. Albuquerque et al. (2018) noted that this pattern of the merger and
acquisition is most common in the case of the Asia Pacific region. The numbers of customers

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are huge in this region of the world. Apart from that significant growth in the median income
of the middle-class population of the region has attracted a lot of foreign companies in this
region of the world. Apart from that country in the Latin American countries have also
emerged as a great destination for the merger and acquisition.
There are many factors that impact and influences the peace and the pattern of the cross
border merger and acquisition. First and the foremost is the political factor which is deeply
associated with the operation in any kinds of business. Political factors are defined as the
factor which is associated with the action and the policies of the government. One of the
important political factors that influence the business and investment is the political unrest.
Political unrest shows the lack of control of the government in an economy. Ahammad et al.
(2017) highlighted that political unrest is a form of lack of cooperation between the
government and the people of the economy. Political unrest reduces the rate of return of the
investors and hence investment reduces due to the political unrest. Therefore for a peaceful
cross border merger and acquisition, political stability and the control of the government over
the economy is important. Under a situation of political unrest the companies investing in
cross border merger and acquisition may lose their money and hence it can affect the
operation of the business.
Another important factor for the initiation of the cross border merger and acquisition is the
economic factor. The economic situation refers to the performances of the country as a whole
and the income and the wealth generation of the consumers of the market. The economic
status of a country also highlights the purchasing power of the consumers as well. The
companies will be interested in investing in the merger and acquisition only if they can have a
huge customer base in the joint market (Xie, Reddy and Liang, 2017). This is also the reason
for the Asia Pacific to become one of the major places for the cross border merger and
acquisition. The higher the income of the consumers of the market more will be investment
from the foreign company. Apart from that the economic capacity of the country also
influences the pattern of the cross border merger and acquisition as well. For example, when
there is a huge pool of middle-income consumers such as in the case of India and China, the
foreign companies tend to involve themselves strategically with the domestic counterpart in
order to have better control, share and a hence better return from the business (Mescall and
Klassen, 2018).

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Furthermore, the peace and the pattern of the cross border merger and acquisition also
depends on the social situation of the country as well. Reddy and Xie (2017) highlighted that
the social situation of the country is a subset of the political situation. However, its impact on
the cross border merger and acquisition is different from that of the political factors. Age
demographics is a social feature that can influence the decision of the participants of the cross
border merger and acquisition. Apart from that, the age demographics can help the companies
determine the level of association in the cross border merger and acquisition as well. The
foreign counterpart is interested to invade and enter the market when the pool of consumers
of the market are young and have a high-income Khan et al. (2017). The nature of the
company that enters into a cross border merger and acquisition depends on the tastes and the
preferences of the consumers as well.
Empirical studies show that the motive of the companies is the major factor that determines
the structure of the joint company and the management structures. 67% of the cross border
merger and acquisition in the region of Asia Pacific is dependent on the motive of the
company to penetrate the market. The deal specific factor also plays a major role in
determining the involvement of the companies in the market. For example, car companies
such as Hyundai enters the market of Singapore through domestic partnership. That allows
them not only to understand the market of Singapore but also to make the most from the
growing economy of Singapore (Ahammad et al. 2017). The level of involvement of Hyundai
in Singaporean economy is at the strategic level and it retains the stake of the joint company
as the rate of return from the economy of Singapore is very high.
Furthermore, another important factor that ensures peaceful operation and sustainable growth
from the cross border merger and acquisition is the prior experiences and the track record of
each of the companies associated with the merger. Most of the foreign companies that
propose to enter into a cross border merger and acquisition use services from consultancies to
check the track records and the financial performances of the prospective partners. Reddy and
Xie (2017) stated that it is a common tendency to hide the economic and financial
vulnerability of the company in order to get an impressive merger and acquisition deal from
big foreign companies (Chao and Zhen, 2017). This not only leads to an unsuccessful
operation of the cross border merger and acquisition but it also harms the reputation of the
foreign company as well. One of the examples is the cross border merger and acquisition
between the Volvo and Renault which are companies located in Sweden and France
respectively. Renault at that time was a small company and went into a deal with Volvo to

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operate in the market of France and Sweden. However, the cross border merger and
acquisition failed due to cooperation and mismanagement in France due to the lack of
cooperation and financial mismanagement from the side of the Renault. This hampered the
image of Volvo in the market of Sweden as well which eventually resulted in a separation of
the two companies.

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Reference
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