ECOM AUTO BUSINESS - Essay Example

? ECOM AUTO BUSINESS CASE STUDY: WRITTEN ESSAY This report will try throwing some light on lobbying process and ethical dilemma regarding the process. The essay will dissect lobbying process into responsible and unethical practice. The report will try to analyze lobbying strategy from the fundamental concepts of macro economics. Analyzing import Federal policy from the view point of agency’s interest and government’s interest will be important part of the study. The report will try to analyze ethical dilemma in terms of transparency, common interest and fairness to create sound argument to support Sara’s (V.P. of Sales for ECOM Auto) ethical dilemma. Finally the study will try to establish a valid recommendation by taking help of Nash equilibrium. Table of Contents Table of Contents 3 1.0 Lobbying 5 2.0 Responsible Lobbying 6 3.0 U.S.A Trade Laws- Trader’s View 7 3.1 Import Quota 7 3.2 Tariff Rate Quota (TRQ) 8 3.3 Voluntary Export Restraint (VER) 8 4.0 U.S.A Trade Laws- Government’s View 9 5.1 Ethical Dilemma 10 5.1.1 Fairness 10 5.1.2 Transparency 11 5.1.3 Common Good 11 6.0 Answer 2 12 6.1 Recommendation 12 6.1.1 Nash Equilibrium 12 1.0 Lobbying The exercise of lobbying comes in many forms in terms purpose and functionality. Although establishing theoretical definition of the subject is a complex work but research scholars have tried to underline a theoretical concept of lobbying. They defined lobbying as an act to influence decision of government authority or legislators or public officials for or alongside a particular cause. The process comes in various formats. Various formats can be described in the following manner. 1- Submission of official responses to legislator or government over anticipated legislation. 2- Appointment of professional lobbyists to help the company to move forward in the lobbying process. 3- Participation of associations in membership process with other association in order to lobby for combined interests. 4- The association gets engaged in multi segment partnerships with other partners to promote higher values in lobbying condition. 5- The association creates campaigns in order to elect representative in the lobbying process. Common people or governments perceive lobbying as unethical strategic initiative while lobbying in the field of business is common legitimate activity. Many of the business lobbying can be classified as against the common interest of people and often create hindrance in the way of sustainable development of society. Negative image about lobbying process is garnished by the absence of transparency in the process. Many companies use critical business legal jargons to define lobbying which ultimately creates barrier in understanding for common people. Stake holders and other interest groups do not equivalent influence over objectivity of lobbying process. Business communities are largely dependent on professional lobbyists in order to understand complex procedures of lobbying process. Complex lobbying process demands huge investment of capital and time in the process. 2.0 Responsible Lobbying Government or legislator acts as primary addressees for lobbying and must align the process with unbiased legal procedure in order to achieve sustainable development of the society. Government can accomplish this by implementing rigorous gearstick against ‘improper and unethical influence’ to ensure that the discussion between business agency and them is aimed to achieve sustainable development of the society. Responsible lobbying is emerged as latest trend in the field of lobbying process. Companies use responsible lobbying process to construct successful long-standing relationships with public sector and civil society. Corporate and business agencies are trying to establish more visible and ethical lobbying process from the view point of public interest in order to gain trust from the majority of the society. Business agencies focus on various issues like creating sustainable social development for poor, managing environmental opportunities and preventing unethical trade practice regarding responsible lobbying strategy. For example, business coalition movement in Latin America to increase government capacity can be classified as responsible lobbying strategy. Economists have underlined following characteristics of responsible lobbying strategy in order to create a positive image in front of government. 1- Working closely with government to formulate policies and following legal regulations. 2- Pushing the government to fulfill commitments in order to show their support on lobbying process. 3- Creating public institution in order to implement policy. 4- Encouraging government to increase import capacity and also efficiency in enterprise expansion policy. 3.0 U.S.A Trade Laws- Trader’s View Protectionism aspect federal government trade policy has created sharp rift for the car manufactures in the country. In accordance with USA trade law dumping in terms exporting at a lower price in foreign market or importing at a lower price below the production cost of exporters is an act of guilty. Dumping law of government actually creates mockery of free trade policy and potential threat for automobile industries importing foreign supplies. The government has created price control on $500 billion import quota for various industries. The country has imposed import quota on steel industry since 1960’s. Due to stringent import quota automobile equipments price in the country is much higher than foreign market price. According to Jon Jensen (member of Precision Metal forming Association), price of metal equipment used in the automobile industry is more than twenty percent higher than industry average of European and Asian market (Bovard, n.d.). 3.1 Import Quota According to Professor Hill, import quota can be described as direct restraint on quantity of imported goods. Import quota is directly connected with issuing import licence to business organization or individual. For example, Federal Government has allowed few trading agencies to import cheese in the country but they cannot import the cheese beyond the annual limit pre defined by governments. Following diagram might help to draw a fine line between out of quota and in quota import. Obviously when import quota exceeds government restricted limit then companies need to pay extra tariff to Federal Government as per quantity imported. (Source: Hill, 2011, p. 205-210) 3.2 Tariff Rate Quota (TRQ) This is a hybrid model and according to this model lower tariff is implied on in quota import. This model is more applicable for food grain import and less significant in context to given automobile case study. 3.3 Voluntary Export Restraint (VER) This is a variant of existing import quota model. In Voluntary Export Restraint (VER) model government of exporting country puts quota barrier on export at the demand of government of importing country. VER is more significant in the automobile industry and can be used in context to given case study. Auto importers prefer VER over import quota and tariff rate quota due to punitive effect of these two quota policies. Both the model VER and import quota increases price of domestic automobiles. VER implied by Federal Government increases the price of supply import and as a result forcing domestic automobile manufacturers to sell automobile sat at higher price than industry average of rest of the world. Statistical studies shows VER or import quota implied by Federal Government on automobile manufactures ultimately forcing common people in USA to spend extra $1 billion on automobile purchase. Profit made by exporter due to restricted supply directed by government’s stringent import quota rule is known as quota rent. High quota rent not only increases price of imported goods but increases price of domestic goods also (Hill, 2011, p. 205-210). 4.0 U.S.A Trade Laws- Government’s View According to Federal Government, they use import quota to increase trade welfare and decrease trade discrimination created by various business agencies. Government uses import quota to save domestic small players from monopolization effect created by large players. Federal Government believes import can foster public welfare by limiting international import. Following case can be used to understand government’s interest in import quota policy. (Source: Carbaugh, 2010, p. 158-160) Suppose, S (U.S) and D (U.S) are supply and demand of product X in the USA market. S (EU) notes supply quantity from country EU. Under the equilibrium condition price of product X both in USA and EU is equal to $2.50. Now USA government has put import quota on supply hence supply of product X came down to S (US+Q). Import has reduced seven units to three units while domestic price of the product increased to $5.00. This effect increase production capacity of the country to 3 units and decrease in quantity demanded by the country to 6 units. Although price of the product X has increased to $5.00 but consumer surplus decreased up to $17.50 (area A+ area B+ area C+ area D= $5.00+$2.50+$7.50+$2.50). Area A signifies redistributive effect (distribution of income between producer and consumer), area B signifies protective effect (helping domestic industries to expand), area C signifies revenue effect (increase in revenue for USA government) and area D signifies consumption effect (reduction in consumption by common people) of micro economics (Carbaugh, 2010, p. 158-160). 5.0 Answer 1 5.1 Ethical Dilemma Ethical dilemma of Sara (V.P. of Sales for ECOM Auto) can be understood from the view point of confusion over fairness, transparency and public welfare interest of the lobbying strategy. 5.1.1 Fairness One of the common unethical exercises of lobbying strategy is paying legislator or Federal Government to give verdict against interest of common people. Professional lobbyist can buy government verdict by using their money power. Common people do not perceive lobby process as a fair strategy while joining a team of auto industry executives to lobby the federal government for import quotas on mini-vans will create a negative image of ECOM Auto in the mind of consumers. Lobby professional not only use monetary bribe for buying government’s decision but they uses temptation tickets like free dinner or travel package to buy decisions of local officials also. Joining a team of auto industry executives to lobby the federal government for import quotas on mini-vans might increase relevance of ECOM Auto in USA automobile industry but there is no guaranty that the lobbying process will go in ethical way. The term revolving door lobbyist is used to define unethical lobbying process. Revolving door lobbyists are ex public officials helping unethically private players to influence government decision. Friendship between lobbyist professional and government officials can influence verdict on import quota policy against the interest of common people. 5.1.2 Transparency Lack of visibility of sources to common people is major drawback of lobbying process. There is no guaranty that auto industry experts will discuss every issues of lobbying process with public in order to gain transparency. ECOM Auto had maintained its membership and good standing in a trade association representing suppliers to the auto industry hence people and domestic small players perceive them as responsible suppliers. Participating in a lobbying process lacks in transparency will surely decrease credibility of the company in front domestic players. 5.1.3 Common Good ECOM Auto has responsibility to serve common people of the country and they can’t deny that. Lobbying professional often argues over interest of business agencies and influent government decision unethically. In this whole lobbying process common interest of majority of the society is ignored and it can be classified as crime on the ground of ethics. Sara (V.P. of Sales for ECOM Auto) rightly fears that participating in unethical lobbying process can be judged as criminal offence from the view point of ethics (Nadler & Schulman, 2006). 6.0 Answer 2 6.1 Recommendation The study is trying to understand pros and cons of import quota policy by government in order to recommend either "Go" (join the lobby effort) or "No Go" (decline to participate) strategy for ECOM Auto. Although we need to consider ethical issues of lobbying process in order to align recommendation with interest of common people of society. Following part of the study will analyze import quota police in terms of microeconomics. 6.1.1 Nash Equilibrium Suppose, Federal Government is in dilemma on whether to increase or abolish import quota limit or continue with existing one after they received lobbying petition from domestic automobile industry. This situation is outcome of non cooperative Nash equilibrium (Nash, 1996, p. 4). Government has intention to maximize social welfare by keeping fixed import quota but giving verdict in favor of lobbyist professional might affect interest of small automobile players. Federal government uses international trade policy to set import quota and less aggregated variables like individual income of common people might affect their trade policy. Suppose there are two countries, USA and Japan and for all non negative import quotas USA exports chemicals and Japan exports automobile equipments. Now due to lobbying process import quotas changed but trade pattern remained unaffected. Let P (USA, automobile) is the domestic automobile price in USA and P (World, automobile) is automobile price in rest of the world. Suppose USA changed import quota as result of lobbying process and now they can maximize indirect utility function U= V {P (USA, automobile), M (USA, disposable income)}. M denotes disposable income of common people in USA. As P (World, automobile) maintained in equilibrium therefore domestic price of automobiles depends on Federal Government’s choice of import quota. Stringent import quota will force common people to pay more for the same automobile equipment selling in low price in rest of the world. This choice game can be analyzed by using indifference curve model. Japan’s utility depends on USA’s choice of import quotas and as consequence quota rent is beyond the control of Japan. Hence from the above discussion it is clear import quota should be increased in order to decrease domestic automobile price in the country. Taking help from Nash Equilibrium Sara can recommend “Go” strategy for ECOM Auto to join the lobby for import quotas (McMillan, 2002, p. 22-28). In this case lobbying can be judged as ethical process due to intention to decrease automobile price burden from common people. This type of lobbying process can be classified as responsible act from the business organization. 6.1.2 Economic Impact of Import Quota Import quota decreases import and also preventing the country to understand economic advantage. World Trade Organization has completely nullified the concept of fixed import quota for manufacturing industry due to its adverse effect on common people. Implementing import quota can be seen as ostensible economic welfare offered by government. Surprising fact is that statics shows that fixed import quotas do not help the government to collect consumer surplus due to decrease in purchase ratio among common people. Tariff Rate Quota (TRQ) and Voluntary Export Restraint (VER) are seen as most maligned form of protectionism while import quota is seen as vulnerable government policy. Fixed import quota increases the price of the product in the domestic market and decrease in sales volume of domestic manufacture due to price sensitivity of customers. As a result of price hike in automobile segments customers will counterbalance the effect by decreasing consumption quantity. Many scholars might argue with my point of view on economic effect of import quota. According to them protectionism in terms of import quota saves domestics small players from international competition but fact is that automobile industry in USA is organized and biggest in the world. The industry needs fee trading environment rather taking support in terms of protectionism from government. In the last portion of this report this report will analyze an economic model in order to understand negative impact of Federal Government’s fixed import quota policy and with this economic model the report will strongly recommend ECOM Auto to join lobbying effort of XYZ, INC and other industry partners. Introduction of import quota will increase the domestic price from world price. (Source: Sexton, 2012, p. 858- 861) The recommendation is supported with economic concepts of consumer surplus, domestic manufacturer’s surplus and exporter’s surplus. If government abolishes import quota concept then supply of foreign equipment will be higher than the demand of the country. Obviously price will decrease and ultimately reach equilibrium with world price. Consumers will get the benefit of abolishment of import quota and they can purchase product in accordance with global price standard. The following diagram will show well fare quotient achieved by government after implementing import quota (Sexton, 2012, p. 858- 861). Area Before Quota After Quota Change Consumer Surplus (CS) a+b+c+d+e+f a+b -c-d-e-f Producer Surplus g c+g +c Exporter Surplus 0 e +e Total Welfare a+b+c+d+e+f+g a+b+c+g+e -d-f It is clear from the above mentioned mathematical formulation that lobbying process not only helps domestic manufactures to fight with international players but will diminish price burden from the shoulder of common people of USA. Lobbying process will give importance on two types of corrective action on import quota. Complete abolishment of import quota or increase the limit of the quota. Government can implement Voluntary Export Restraint (VER) instead of import quotas on minivans. References Bovard, J. (No Date). U.S. trade laws harm U.S. industries. Retrieved from http://www.cato.org/pubs/regulation/regv16n4/reg16n4d.html. Carbaugh, R. (2010). International economics. Stamford, Connecticut: Cengage Learning. Hill, C. W. L. (2011). Global business today. (7th ed.). New York City: McGraw-Hill. McMillan, J. (2002). Game theory in international economics: Harwood fundamentals of applied economics. London: Routledge. Nadler, J., & Schulman, M. (2006). Lobbying ethics. Retrieved from http://www.scu.edu/ethics/practicing/focusareas/government_ethics/introduction/lobbying.html#q3. Nash, J. (1996). Essays on game theory. Camberley: Edward Elgar Publishing. Sexton, R. L. (2012). Exploring economics. Stamford, Connecticut: Cengage Learning. Read More