H&M Trade Comparative Advantages Essay

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Comparative Advantages

1. The question of whether agreements like OPT should be restricted and apparel retailers be allowed to import from the most cost-effective countries is a false dichotomy. The two are not mutually exclusive. If there is an OPT agreement within the EU, that does not force H&M to buy from EU nations; it simply gives them an incentive to do so. H&M can still trade with other nations, under whatever trade agreements exist between the EU and those nations. If India and China have competitive advantage in textiles, then they will win the trade. But by no means is H&M forced to trade within the EU.

The reality that even with an OPT agreement, EU producers still do not have competitive advantage – that India and China exist as lower-cost producers – certainly calls into question the value of having the OPT agreements at all. The agreements probably served a fairly good purpose at the time – in this case, allowing new EU member states to benefit directly in specific sectors in which they had comparative advantage. But today, those same states might not have the same advantages in the same sectors. Programs like the OPT program for textiles in the EU would serve a short-run purpose of wealth transfer, while has fairly specific benefits for the EU. If evaluated strictly in terms of trade, there is little argument for an OPT in the sense that such deals are not supported by trade theory, that free trade should be fostered. However, there are specific political and social goals that the EU is serving with the OPT policy. For one, it staunches the flow of low-skilled labor from poorer EU nations into wealthier ones, which will help those countries maintain a greater degree of fiscal and social stability. Further, OPT helps the new EU member win immediate gains from membership, something that is likely to bolster political support for the EU in that nation, and likely others as well. So in the short run, OPT is not an economic policy and never really was, but rather a political and social policy. In that sense, once OPT has outlived its social and political useless, the fact that it was always rather useless economically becomes more of a blatant liability.

For its part, H&M should not care all that much. It will buy from the producer with the competitive advantage – the lowest cost producer that can meet quality specs. The OPT only matters to the extent that its existence causes tariffs on textiles from low-cost producing nations to be held artificially high as a means of propping up the OPT. But companies still have the ability to choose, and protecting an industry is unlikely in the long-run to allow it to flourish as it is just as likely as not that the protected industry will be slower to innovate than those that must work harder to compete.

2. To Romanian firms, OPT is beneficial in that it gives them a ready market. They are able to leverage the comparative advantage in labor costs to win this business, and the OPT is specifically designed to leverage that form of comparative advantage. So any Romanian textile firm that takes advantage of low labor costs and specifically competes with OPT-driven business in mind, will likely benefit, at least in the short run when the OPT encourages companies throughout the EU to send their business specifically to Romania. In the long-run, of course, relying on this model is probably not sustainable, because as Romania's wealth grows it might well lose its cost advantage – as appears to be the case today, to India and China among others.

For Romania as a nation, OPT has obvious benefits. The jobs that the policy seeks to attract/create/retain are relatively low-skill jobs in a sector that the Romanian government felt was at risk. The workers in this sector are unlikely to be especially mobile in terms of their skill sets – they might move to other low-paying jobs but that's it. The reality is that the OPT scheme benefits these workers by preserving jobs for them, ideally for the remainder of their working lives. For the country, this is beneficial, especially when juxtaposed against how disastrous the collapse of the USSR was for older Russian laborers. Without jobs, they simply fell into destitution and ruin. The OPT scheme seems designed to help many Romanians escape that same fate. In the long-run, Romania is probably not hanging its hat on OPT, but it needed to buy some time for the younger, better-educated and more technologically-savvy generation to arrive, economically speaking.

3. The Romanian government will probably find ways to prop up this industry. There are a number of options. They will do so because otherwise the government is going to pay out pensions, unemployment or other benefits to these workers, and the jobs will not only cost less but allow the workers to put more money back into the Romanian economy. So the government can do a few things. It can't impose tariffs because it doesn't control its own trade policy, but it can control some of the assistance that it gives the industry in terms of taxation, incentives, and even purchasing textiles on a large scale. One way or another, the Romanian government is likely to find a way to shift some money into the textile industry in order to prop it up, and ideally maintain enough comparative advantage to attract business.

By finding ways to subsidize the industry that do not violate trade agreements – giving away land, low interest loans, or finding other ways to lower the cost of doing business in textiles in Romania, the government can attract FDI into the sector. At this point, it probably shouldn't be pursuing FDI but rather unwinding the sector, and letting the scheme remain as a job creation scheme for older, less-skilled workers. But the reality is that it might not do that – it might try to maintain those jobs even if it means that younger workers have to fill those spots, to their own detriment by getting into an industry that is increasingly unreliable as a source of employment.

The Romanian government would in that situation find ways to lower the cost of doing business – lower interest rates, possible via a business development bank, or by allowing foreign banks to do business in Romania. Weaker environmental regulations, weaker regulations on unions, and lower tax burdens are other ways that the government can attract FDI – showing active support for the industry and working to reduce the cost of doing business across the board will likely have a positive impact.

4. The case is old, but surely H&M is not smaller than Zara. H&M has 4500 stores and does $27 billion USD in revenue; Zara has 2200 stores and does $9 billion in revenue. Still, these companies do not operate in an oligopoly and therefore do not necessarily have to set strategy with the other one in mind. H&M and Zara should compete, as any company operating in a competitive industry, on the basis of their own merits – their own styles, their own retail channels, their own supply chain management, and their own internal cost structures. Either of these firms….....

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