1. Suppose the euro strengthens against the US dollar, how would each company below that has payables yet doesn’t have any hedging strategy be affected by transaction exposure? indicate whether each would be better off or worse off, holding other things constant.
1 Retailers Cancel Orders From Asian Factories, Threatening Millions of Jobs After struggling with supply lines amid China’s shutdown, factories now face a drop in demand from U.S. and European clothing brands By Jon Emont, Wall Street Journal, March 25, 2020 Retailers are suspending and canceling clothing orders, threatening millions of factory jobs in Asia just as China shows signs of recovering from the worst of the coronavirus outbreak. Among the first to be hit by the consumer shutdown in the West are suppliers to the world’s “fast‐ fashion” giants, like H&M owner Hennes & Mauritz AB. Their business models depend on being able to get orders from factory floors to retail outlets in a matter of weeks. They are now pausing or canceling factory orders, boding ill for Asian manufacturers of other, slower‐moving consumer goods like cosmetics, smartphones and cars. Associated British Foods PLC, which owns Primark, a retailer with stores across Europe, and Peacocks Stores Ltd., a U.K. retailer owned by EWM Group, have suspended or canceled orders, according to public statements and notices to suppliers viewed by The Wall Street Journal. Mostafiz Uddin, who owns a Bangladeshi jeans manufacturer, said his factory made around 14,500 jeans for Peacocks only to receive a letter saying that the store wouldn’t accept the order. “If they don’t take the goods, it’s a big loss for me,” he said. “What will I do with this?” Mr. Uddin said he is negotiating with the retailer to receive payment for the jeans. Factory owners are usually very reluctant to take legal action because they don’t want to alienate buyers. In a March 17 email to Mr. Uddin, Peacocks described its move as an “extreme measure,” but said “no stock will be allowed to be delivered into this business.” He responded that this “should be a time of support and not turning backs on partnerships.” Peacocks didn’t respond to requests for comment about the status of its clothing orders. U.K. retailer Marks & Spencer Group PLC sent a note to suppliers this week suspending purchase orders that are due to be handed over. “We need to take this urgent action as UK has been instructed to lockdown,” wrote John McClure, who manages sourcing in Asia for Marks & Spencer. He advised factories not to take on raw materials from suppliers in order “to not exacerbate what will be a difficult time for all.” An M&S spokesperson said it was taking steps when possible to defer orders and that it was doing all it could to “support our partners and suppliers.” Primark and H&M say they, too, are pausing new orders. H&M said it is also evaluating “potential changes on recently placed orders.” The company buys from around 1,400 factories globally, with clothing production concentrated in China and Bangladesh. 2 H&M is among the Western “fast fashion” chains pausing orders for new stock. PHOTO: WATCHARA PHOMICINDA/ZUMA PRESS Ulrika Isaksson, an H&M spokeswoman, said “our long‐term commitment to suppliers will remain intact, but in this extreme situation we need to respond fast.” An ABF spokesperson said that “no company could be expected to shoulder financial losses of the scale that would arise without ending these garment orders.” The spokesperson said the company is paying for inventory that is already at sea in transit, and is in talks with suppliers to explore other forms of mitigation. In an emotional video address to clothing brands, Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association, a trade group, called on retailers to pay for goods they had already ordered. She said that if retailers don’t support Bangladeshi factories, 4.1 million Bangladeshi workers could lose their jobs. “This is a social chaos we cannot afford,” she said. Retail experts say the slowdown looks to be significantly worse than the financial crisis of 2008, when brands suffered from reduced consumer spending but could offer cut‐rate sales and other deals to entice frugal customers. Then many factories were kept busy with orders, though overall demand was dented. Times are different now, said Sheng Lu, a professor of fashion and apparel at the University of Delaware, because shops and malls are closed in much of the U.S. and Europe. “This time is a business lockdown,” he said. “The trade impact will be much larger.” Mr. Lu said a 10% decline in exports for a country like Bangladesh could lead to a 4% to 9% drop in employment there, based on an analysis he conducted that correlates export growth with employment, using historical data from the International Labour Organization and the World Trade Organization. “All of this is bad news for factories in Asia,” said Achim Berg, global leader of the apparel, fashion and luxury group at McKinsey. “Many of the big players are focused on surviving,” he said of retailers. Aung Myo Hein, the head of a Myanmar garment industry association, says the industry has already shed 10,000 jobs. He has cut workers’ hours at his own factories but has avoided layoffs for now, he said. In Malaysia, factory owners were optimistic in February when they began receiving diverted orders from China amid that country’s nationwide shutdown. Now Western buyers are sending emails to cancel. 3 “Most of us will be forced to close shop soon,” said Tan Thian Poh, president of the Federation of Malaysian Fashion, Textiles & Apparels, a trade group. Ramiz Khalid‐Islam, a young Bangladeshi factory owner who manufactures Hanesbrands Inc.’s Wonderbra, said he is working through his last order and plans to shut down his factory on April 1 for five weeks, after European retailers canceled orders. Two weeks ago, he was profiled in The Wall Street Journal for a different problem. His factory was struggling to maintain production because its Chinese employees were quarantined, and it couldn’t access raw materials from China. According to Bangladeshi law, he will have to pay his workers around half their standard salary along with housing and medical benefits when the factory is shut down. Mr. Khalid‐Islam says he plans to forgo his own salary for a couple of months. “We don’t know how we’re going to afford this,” he said. —Refayet Ullah Mirdha and Myo Myo contributed to this article. Adidas, Nike, Crocs join more than 200 footwear companies warning Trump over tariffs CNN, Wed August 28, 2019 by Alison Kosik (CNN)More than 200 footwear companies sent a letter to President Donald Trump on Wednesday asking him to cancel new tariffs on Chinese imports ‐‐ including shoes ‐‐ that are set to take effect Sunday. Manufacturers including Adidas, Converse, Crocs and Nike joined retailers like Foot Locker and JC Penney in signing the letter, which was also sent to Treasury Secretary Steven Mnuchin and other top administration officials involved in China trade talks. The letter was also signed by small and independent shoe stores. "There is no doubt that tariffs act as hidden taxes paid by American individuals and families," the letter read. Trump last week promised to ratchet up planned tariffs on $300 billion in Chinese consumer goods imports, including shoes, from 10% to 15%. Those tariffs are set to begin taking effect September 1, though most goods will be duty‐free until December 15 ‐‐ a move Trump made to avoid putting a damper on holiday retail sales. That's on top of tariffs he put in place last year on about $250 billion in imports, chiefly industrial components. Trump said the US will raise tariffs from 25% to 30% on those goods starting October 1. Trump subsequently said that talks with China are still underway but has not yet indicated whether he might hold off on the new tariffs. "It is vitally important that the President knows his new taxes are going to hurt both their employees and families who buy shoes," said Footwear Distributors and Retailers of America president and CEO Matt Priest. "Brands have already said tariffs will dent job growth and shoe stores are saying it's a job killer. We hope the President listens to Americans across the country who are the very people growing our local economies and stops this unnecessary trade war." 4 New Balance Sweats Push to End U.S. Shoe Tariffs Feb. 27, 2013, The Wall Street Journal by Timothy Aeppel Time may be running out for the last American‐made running shoes. New Balance Athletic Shoe Inc., owned by former marathoner Jim Davis and his wife Ann, is the sole athletic‐shoe maker that still has factories in the U.S. Those plants churn out about a quarter of the shoes it sells domestically. The rest are imported. The company has continued to make shoes in the U.S., even though that means settling for less profit. New Balance says the flexibility of its U.S. factories and turnaround times counted in days, rather than weeks, help make up for the higher cost. But a push by rivals to do away with tariffs on imported running shoes, as part of a larger trade deal, could finally tip the scales against its American strategy. "A rapid reduction of the existing [tariff] agreements would put our factories here at significant risk," says Robert DeMartini, CEO of the Boston‐based company, which is fighting to keep the tariffs in place. Shoe tariffs have been around since the 1930s, when the U.S. still had a large domestic shoe industry that it wanted to protect from foreign competition. But today, the U.S. imports 99% of its shoes, mostly from Asia. New Balance, with sales last year of $2.4 billion, views tariffs as one of several factors that keep its U.S. operations viable. The company has invested in new machines and cut out waste at its U.S. plants, which together employ 1,350 people. It also helps that the company's American‐made shoes tend to be pricey, retailing for as much as $275, and include designs first made popular decades ago that have been revived mainly as fashion accessories. But even in its most streamlined form, shoe making remains relatively labor‐intensive. The upshot, New Balance says, is that it still costs 25% to 35% more to produce shoes in the U.S. than it does in Asia. Shoe tariffs, which vary widely depending on things like the materials involved, add about $3 to $5 to the cost of a pair of midprice imported running shoes. While that might not seem much, New Balance says the loss of that buffer would make the economics of its American‐made strategy that much harder. If the tariffs go away, "it puts our competitors in a position to realize an even greater margin than we are," says Matthew LeBretton, a New Balance spokesman, "and they can then reinvest that in their business." The fight over tariffs comes as American manufacturing appears on the cusp of a revival, driven by forces expected to favor companies like New Balance. Wages in China have risen nearly 20% a year since 2007— prompting many producers to shift labor‐intensive work to lower‐cost countries, such as Vietnam. But costs are rising in other parts of Asia, as well. A recent study by the Boston Consulting Group predicts that by 2015 there will be only about a 10% cost difference between China and the U.S. in making products such as machinery, furniture and plastics. But shoes aren't among them. 5 Hal Sirkin, the BCG consultant behind the study, says too much labor is required to justify making all but the most‐customized or expensive shoes in the U.S. "It's unlikely you'll see mass amounts of shoes made in the U.S. again," he says, adding that even two years from now it will be 17% to 20% cheaper to make shoes in China than in the U.S. The cost advantage will be even greater in Vietnam, America's second‐ largest shoe supplier. Opponents of the tariffs say that the proposed trade deal would affect only a small share of U.S. shoe imports. That's mostly because China isn't one of the 10 other Pacific Rim nations, along with the U.S., that would be included in the deal. But the move would benefit Vietnam, which supplies just over 8% of America's imported shoes. Among those fighting the tariffs is New Balance rival Nike Inc., based in Beaverton, Ore. "Lower duties would let us reinvest savings in innovation and in maintaining our global competitiveness, resulting in high‐paying jobs in the U.S.," says Greg Rossiter, a company spokesman. It would also help offset rising foreign labor and material costs. Matt Priest, president of the Footwear Distributors and Retailers of America, an industry trade group, says cutting tariffs would set the stage for lower consumer prices. "There's also a fairness issue," he says. "We're taxing Americans to protect jobs that are no longer here." Carol Guthrie, a spokeswoman for U.S. Trade Representative Ron Kirk, says the Obama administration is seeking an outcome that serves "the broadest possible range of American businesses and workers." The next round of the trade talks take place next month in Singapore. New Balance says its U.S. factories give it some advantages that help justify their higher costs. For instance, the company has developed a growing business in U.S.‐made custom shoes. By going to the company's website, customers can order shoes in any combination of 26 colors of leather and five colors of fabric for nine different parts of a shoe. They also can order embroidered slogans. The custom shoes cost $115 a pair and can be delivered in four or five business days, which the company says would be impossible to do from Asia. Mr. DeMartini, the CEO, says New Balance's U.S. plants—all of them in New England—also are "twice as productive" as any of the company's Asian shoe suppliers. "We learned a lot because we had to in order to survive." The cachet of its pricey U.S.‐made shoes at least partly accounts for New Balance's surprising success in exporting from the U.S. Last year, it sold almost 10% of its U.S. production—about 700,000 pairs of shoes—abroad, up 29% from two years earlier. One of its fastest‐growing markets is China, where the company has 673 retail stores and plans to open 500 more this year. "The type of shoes we make here [in the U.S.] are some of the most craft‐dependent and least widget‐ like, with premium leather and hand stitching," says Mr. DeMartini. To be sure, few companies are as committed to U.S. manufacturing as New Balance, which the Davises bought in 1972, but which traces its origins to 1906, when it started out as a maker of arch supports. At the company's plant in Norridgewock, Maine, a sign near the entrance reads in part: "We were brought up as a manufacturing company. It is our culture." 6 New Balance's factory in Skowhegan, Maine, is typical of its U.S. operations. Spread out over five floors, workers operate machines that cut and stitch fabric and leather. In one section, large automated stitching machines are embroidering the words "Made in USA" on shoe tongues. Many of the plant's 335 workers are refugees from other shoe companies that have closed in the region. Ricky Eaton, 66 years old, has worked at the plant for two decades, cutting leather and synthetic materials. "It's been leather all my life," he says. "I'm a firm believer in working for a one‐man owner," he says. "Otherwise we wouldn't be here now." Like many of the plant's other workers, Mr. Eaton is convinced that what is saving jobs like his is New Balance's status as a privately owned company, less susceptible to some of the pressures of global business. "Once the corporations get it," he says, "it's all about numbers." 1. Suppose the euro strengthens against the US dollar, how would each company below that has payables yet doesn’t have any hedging strategy be affected by transaction exposure? indicate whether each would be better off or worse off, holding other things constant. a. American Airline, a U.S. company that signed a contract to purchase Airbus aircrafts made in Europe in EUR. b. Lufthansa, a German company that signed a contract to buy Boring aircrafts made in the U.S. in USD. c. U.S. companies with euro-denominated debt. 2. according to the assigned reading, what are the popular policy instruments that governments use to intervene in free trade? Explain each with an example. 3. what is meant by “gains from trade”? use the theories of absolute advantage and comparative advantage in your discussion. 4. according to the assigned reading, what are strategic alliances, and what are the advantages of strategic alliances? 5. according to the brief articles, why New Balance want tariffs on shoe imports whereas Nike does not? 6. answer the following questions based on the brief articles. a. for a country like Bangladesh, how is export growth correlated with employment? b. why were factory owners in Malaysia hopeful in February 2020? Why is that situation different now from them? c. why was Ramiz Khalid-Islam planning to shut down his garment factory in Bangladesh? List all. d. from the standpoint of formal institutions, what makes Ramiz Khalid-Islam’s business hit even harder in Bangladesh by the COVID-19 situation?