Global Markets in Products, Semi-Products, Services and Technologies

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The Threat of Protectionism

As far as international institutions influencing global trade are concerned, the World Trade Organisation (WTO), seated in Geneva, is among the most important. It has replaced the former GATT, but its essence has stayed identical: its global regulation framework stands or falls on multilateral agreements with states (and integrating blocs). The negotiations about customs duties and technical conditions of trade are difficult, because the confined interests of the governments and regional blocs collide. Despite the declared prevalence of arguments for liberalising global markets, the temptation of protectionism has lingered, not to spare even the wealthiest countries, provided they lag behind in efficiency on a given market (see the protection of the US steel industry, the EU textile industry, both US and EU agriculture, with even stronger incidence in Switzerland – the seat of the WTO). The question of global trade stability, nonetheless, is essential to further economic progress. The Bibliography section includes a reference to a volume of proceedings edited by a Czech emigrant and WTO Senior Adviser in Geneva, Dr. Zdeněk Drábek (also a foreign member of the Charles University Faculty of Social Science Scientific Council).

The Vertical Integration Problem

Apart from trade in products and services, attention must be paid to trade in semi-products, parts, and spare parts, because they are also now run on a global scale, part of them being included in the intra-holding co-operation within the multinational corporations, i.e. between subsidiaries of a single ownership group operative in the various tax and customs systems of different countries and continents. A significant problem arises here concerning the pricing of such transactions: the market, normally generating the price information, is put out of order in this case by ‘vertical integration.’ OECD, associating thirty of the most developed countries in the world, advocates the ‘arm’s length’ principle of applying the same measures to everyone, which binds multinational corporations and their divisions to use ‘prices comparable to market’ when pricing their internal transactions, i.e. such prices that they would apply if they did not belong to the same ownership group. This principle – threatened by lack of information and the ever-present opportunism – is relied on to ensure a fair share on taxes for the states in which the subsidiaries are based. It is, however, a normative principle, saying how things should be. For discussion of the ‘tax optimisation’ temptation the multinationals are subject to, see chapter 2.2 above.

The Intellectual Property Problem

The difficulties associated with protecting intellectual property (patents, inventions, trademarks, licences, know-how) have been among the important factors that have encouraged the evolution toward multinational corporations. As a response of the private domain to these difficulties, a growing ‘internal licensing trade’ can be spotted within multinational corporations, along with direct investment related to the diffusion of technological progress. It is estimated that approx. 80% of all international fees for technologies are classified as ‘internal trade’ within transnational corporations. Controlling and regulating these so-called ‘transfer prices’ is even more difficult for national governments than it is on product and semi-product markets.