The mode of distribution of economic benefit among parties in the international economic negotiation

Nội dung text: The mode of distribution of economic benefit among parties in the international economic negotiation

1. THE MODE OF DISTRIBUTION OF ECONOMIC BENEFIT AMONG PARTIES IN THE INTERNATIONAL ECONOMIC NEGOTIATION Assoc. Prof. Nguyen Thuong Lang1 Abstract: The paper analyzes the modes of distribution of economic benefit (MDEB) among the international economic negotiating parties by the supply–demand model in economics that called the economic benefit in negotiation. Negotiation benefits are distributed among them in a variety of ways, including one party acquires a full benefit and the other makes a full loss, one gets benefit and the other owns the break-even-point, and both parties are mutually beneficiary. Based on MDEB, the paper provides 5 possible scenarios in the international economic negotiation. Key words: Mode of distribution of economic benefit (MDEB); parties; international economic negotiation. 1. INTRODUCTION International economic negotiation is the bargaining to achieve the agreements upon the policy adjustment and co-ordination among countries in the field of trade, investment or other economic relationship. It is a kind of negotiation making the long-term and wide scale commitments and the general effect that differs from the business negotiation done by enterprises to sign the short-term, narrow domain and local effect contract. By nature, it is a process of distributing benefit among countries within the framework of established relationship. In order to achieve the purpose, all of the related parties have to estimate in detail the gained economic benefit and possible loss from negotiation. Hence, the full estimation of benefit distributed among negotiation parties is the reliable basis to build the negotiation scenarios in both strategic and tactic dimension. The international economic negotiations occur in term of its increased quantity at the bilateral, regional and interregional level in association with the tendency of widened globalization, increased international competition and deepened trade liberalization. They have been organized be related parties on the strict and professional basis to establish the sharp and comprehensive international commitments. However, the detailed analysis of the benefit distributed among parties has been undertaken in the a systematic way making difficult for the related parties to select the appropriate scenarios, lengthen the waste time of negotiation and increase the cost of related parties. The paper is conducted to achieve 3 purposes: (i) identifying the economic benefit of the international economic negotiation, (ii) analysing the economic benefits allocated among parties, (iii) providing the possible scenarios for all of the international economic negotiation. 2. Literature review, theoretical framework and research method 2.1. Literature review Generally, the international economic negotiation is the negotiation at the governmental level to adjust all-related-parties policies of commercial nature that have the long-term, wide-ranging implications for many areas such as the trade in goods, trade in service, investment, intellectual 1 National Economics University. Email: langnt@neu.edu.vn. 153
2. properties, government procurement and dispute mechanism so the economic benefit received from negotiation is of primary concern. The result of the negotiation is the agreement at the bilateral, multilateral level or of the new generation and other kind of signed agreement. The quantitative assessment on the impacts of the agreements upon the related parties namely the economic benefit of negotiation is conducted at the overall, industrial and welfare aspect (Plummer, Cheong & Hamanaka, 2010) and provide the estimated gains on output, trade, wage, employment and product (MUTRAP, 2011). However, the actual gain from trade or economic benefit does not completely coincide with the benefit of negotiation. Negotiating trade policies among nations should avoid protectionism, which distorts the interests and make unfair treatment among parties (Alfredson & Cung, 2008) in violation of the basic principles of trade liberalization like non-discrimination, freer trade by negotiation (WTO, 1995). So far, the researches on the international economic negotiation have rarely addressed the modes of distributing economic benefit of negotiation among parties with having different nationalities. The negotiation is influenced by the concerns of all related parties. They may be their underlying cause, value, desire and target of position improvement (Gregory, 2011). It is needed for all of the negotiation parties to separate people from the problem of negotiation and to focus on its interest including the shared, private and conflict interest in which the conflict one is of the biggest attention paid to by the parties (Fisher & Ury, 2011). And, it should identify the zone of possible agreement (ZOPA) between the buyer and the seller that can be understood as the zone ranging between two points of reservation owned by each side to avoid the situation in which one side makes full loss and other side makes full profit or both sides are mutually beneficial. Coburn (2011) defined the conflict interest is a kind of interest that gained by one side and lost by the other. Based on combining two dimensions of the negotiation – relationship between the parties and the nature of the interest conflict among them, five possible negotiation forms against the conflict interest are suggested that contain the competition– one is winner and the other is loser, co-operation – both sides are winners, accommodating – this side is loser and the other is winner, avoidance – both sides are losers and compromise – combining all of the forms together. The best alternative to negotiated agreement (BATNA) has been also highlighted to set the basis for selecting the appropriate form of negotiation. The economic benefits achieved by negotiation are the economic impacts of negotiated commitments on the related parties like the rate of economic growth, the increased level of export– import volume, investment, employment and institutional improvement. Such these benefits are the final results of negotiation. However, the economic benefit distribution among parties in the process of negotiation has not been clearly studied from economics perspective to overly build the model and apply it into analysing, evaluating, measuring benefit and its distribution among parties in a given context. 2.2. Theoretical framework The benefit of international economic negotiation is explained by the theory of comparative advantage (Ricardo, 1817). It is the gain from trade only in the potential and static form under the liberal, fair and transparent conditions. The losing party would refuse developing the economic relationship with the other party even deleting the negotiation organized by both parties. The theory also points out the exchange ratio between two countries to be mutually beneficial that ranges within two domestic exchange ratios of both of them (Salvatore, 2013). The domestic exchange ratio of each party reflects its domestic equilibrium showing the position of the country in the negotiation, and 154
3. provides the base to distribute the benefit among parties brought from trading to each other to get the international exchange ratio or international relative price. The bargaining theory (Stăhl, 1972) proposes the way to negotiating between parties to maximize the overall economic benefit and to protect the core benefit of each party. The overall economic benefit takes the stable form and it is distributed among parties by bargaining in line with the common principle that the buyer wants to buy at the cheap price and the seller wants to sell at the expensive price. The benefit of negotiation may be changeable around the gain from trade and the bargaining capacity of each party can make change of the distributed benefit. The economics analyses in detail the benefit of the buyer and the seller (Mankiw, 2005). The benefit of the buyer is measured by the consumer surplus and the benefit of the seller is measured by producer surplus. The domestic supply–demand equilibrium at which the buyer’s benefit and the seller’s benefit meets to each other within the country shows the negotiation position of each country with the others. However, the economics only provides the visual analytical instruments to estimate the benefits of the parties as a whole but not the possible modes of negotiated benefit distribution among them. All these theories are complementary to each other in explaining about the economic benefit brought from negotiation to the parties. The theory of comparative advantage analyses the potential benefit made by the trading partner on the fair and transparent basis, the bargaining theory points out the adjusted benefit by the parties through their bargaining power, and the economics provides the instrument to estimate the benefit among them. 2.3. Research method and data The method of demand–supply analysis by geometry in the economics in combination with the model for aggregate demand and aggregate supply in the international trade with the case of 2 small countries called exporting and importing ones (goods, capital and services) is applied to determining the international equilibrium. Departed from the equilibrium as the position of each party, all of the parties would select economic benefit in negotiation to prepare the scenarios of negotiation to achieve its. The data used in the paper are gathered from the Textbook “Economics” by G. Mankiw, the Textbook “International Economics” by D. Salvatore and others. 3. The result and discussion 3.1. The economic benefit brought from international economic negotiation may be identified upon the domestic equilibrium, international equilibrium and the welfare of exporting and importing countries The domestic equilibrium or the position of the exporting and importing countries is their starting point of negotiation. The equilibrium is also called the reservation point (Fisher & Ury, 2011). In Figure 1, these points are E1 and E2 in the left and right panels respectively that represents the highest prices of exporting and importing countries to be acceptable by both and are simultaneously noted at point A and point B in the middle panel. For simplification, the assumed world only has 2 countries and each country completely specializes in exportation and importation. The benefit received from negotiation and the gain from trade is completely identical. In the context of trade liberalization, both countries freely export and import their goods and service in accordance with the law of comparative advantage, the international 155
4. equilibrium Ew is the point intersected by the world supply curve and demand curve Sw and Dw respectively, and it builds the international equilibrium price at C. The world demand curve (Dw) is determined by the supply–demand gap in the importing country and the world supply curve (Sw) is determined by the supply–demand gap in the exporting country. The international equilibrium represents the agreed state by the parties and it is placed somewhere between two positions of negotiation. The economic benefit or to a greater extent, the welfare of international economic negotiation is brought from the gap between the domestic equilibrium and international one. For importing country, the benefit is measured by the area of triangle MNE¹ or the consumer’s surplus caused by the importing at the price that is lower than domestic equilibrium price. Similarly, for exporting country, the benefit is measured by the area of triangle IKE² or the producer’s surplus caused by exporting at the price that is higher than domestic equilibrium price. The aggregate negotiation benefit or aggregate welfare under the agreement of all parties is measured by area of the triangle ABEw equalling to the total area representing the benefit earned by both exporting and importing countries. Figure 1: Benefit of exporting, importing countries and the aggregate negotiation benefit Benefit of importing country Aggregate benefit Benefit of exporting country Source: Salvatore (2013) and author Clearly, this analytical method explains more clearly about the economic position and benefit of all parties than “ZOPA” method that takes advantage of the reservation point of the seller and the buyer as the starting point to determine the zone of possible agreement. Such the reservation owned by all parties is used by their owners during the negotiation process to get the agreed point ranging within two points of reservation. However, the nature of the position of the reservation has not been made clear then it is impossible measure the economic benefit of the negotiation in the visual and specific base. It is the most important limitation of “ZOPA” method. Moreover, the common and fundamental concepts of economics such as the supply, demand, equilibrium, production surplus and consumption surplus, deadweight loss as the effective economic analytical tools have not been used in it, hence, the nature of the economic benefit of international negotiation cannot be interpreted in the clearest way. The limitations of “ZOPA” method can be overcame by the method of economics analysis on the economic benefit in negotiation (EBIN) that explains clearly about the relationship between the volume of increased benefit of each party and the summation of increased benefit of all parties as a whole that has not been made clear in the famous Textbook “International Economics” written by D. Salvatore (p. 86). 3.2. During the process of negotiation, there are 5 modes of benefit distribution among parties that can be used to build 5 scenarios of negotiation Assume that all of the negotiated parties trust each other and all of them mobilize all of their efforts to protect and maximize their benefit within the conflict benefit. The negotiated benefit earned 156
5. by parties depends on their agreed positions namely the supply– demand equilibrium price. Along with 5 different levels of price, there are 5 scenarios of negotiation chosen by all of the parties. Mode 1: The negotiated price is higher than the equilibrium price of the importing country. The exporting country, if offered such the price, would receive the benefit going beyond the threshold restrained by conflict benefit (Figure 2). The importing country can face with loss making, refuse negotiating to import goods or service then convert towards purchasing the domestically produced products to economize the cost. The bigger import volume is at the higher price than international equilibrium price, the more loss making happens. At the same time, importing country, possibly, looks for other trading partner to negotiate at the reasonable price. The negotiated price at F is higher than the equilibrium price of importing country at A. The exporting country receives benefit being equivalent to producer’s surplus measured by the area of the triangle FGB including consumer’s surplus in the fair negotiation (area of triangle ABEw) and cost for importing country (area of polygon FAEwG. The area of trapezoid FAHG represents the increase of producer’s surplus caused by that the negotiated price is higher than that of importing. It is the proof of a very successful contribution of negotiation to the exporting country’s benefit. Figure 2: The negotiated price is higher than equilibrium price of importing country Source: Mankiw (2005) and author Mode 2: The negotiated price equals to equilibrium price of the importing country or importing country takes the break–even point (BEP) and the exporting country earns its big benefit going beyond the conflict benefit. The maximum benefit earned by exporter is brought by maximizing the producer’s surplus with the restraint that importing country still accepts it (Figure 3). The negotiated price is at A that equals to equilibrium price of importing country. The benefit received by exporting country is measured by the area of triangle ABH including consumer’s surplus in fair negotiation (area of triangle ABEw) and the cost for importing country (area of triangle AEwH). The importing country can accept such the negotiated price, not to delete the negotiation or to look for another trading partner to substitute the current partner. Figure 3: The negotiated price equals to equilibrium price of importing country Source: Mankiw (2005) and author 157
6. Mode 3: The negotiated price lies between two domestic equilibrium prices of two countries. Both exporting and importing countries have their own benefit and it brought from the difference of equilibrium prices or gap of their negotiation position. The importing country brings its benefit due to buying goods and service at the lower price than domestic price. The exporting country brings its benefit due to selling goods and service at the higher price than domestic price (Figure 4). This is the most optimal mode of economic benefit distribution because it ensures of earning economic benefit for all related parties. The negotiated price is achieved at C within 2 equilibrium prices noting A and B. The exporting country received benefit in term of production surplus measured by the area of triangle BCEw. The importing country received benefit in term of consumption surplus measured by the area of triangle ACEw. The volume of economic benefit received by 2 countries measured by the area of the triangle ABEw and the negotiation is conducted to distribute benefit between two sides in the most effective way. Both two sides are active to negotiate together to go to the final result. Figure 4: The negotiated price is between 2 equilibrium prices Source: Mankiw (2005) and author Mode 4: The negotiated price equals to equilibrium price of the exporting country or exporting country takes the break–even point (BEP) and the importing country earns its big benefit going beyond the conflict benefit. The maximum benefit earned by importer is brought by maximizing the consumer’s surplus with the restraint that exporting country still accepts it. For exporter, it can be considered as the way to consume the products, to avoid the situation of over inventory and price falling or to ensure of domestic employment (Figure 5). The negotiated price is at B that equals to equilibrium price of exporting country. The benefit received by importing country is measured by the area of triangle ABI including producer’s surplus in fair negotiation (area of triangle ABEw) and the cost for exporting country (area of triangle BEwI). The exporting country can accept such the negotiated price, not to delete the negotiation or to look for another trading partner to substitute the current partner. Figure 5: The negotiated price equals to the equilibrium price of exporting country Source: Mankiw (2005) and author 158
7. Mode 5: The negotiated price is lower than the equilibrium price of the exporting country. The importing country, if accepted such the price, would receive the benefit going beyond the thredhold restrained by conflict benefit (Figure 6). The exporting country can face with loss making, refuse negotiating to export goods or service then convert towards selling the domestically produced products to economize the cost. The bigger export volume is at the lower price than international equilibrium price, the more loss making happens. At the same time, exporting country, possibly, looks for other trading partner to negotiate at the reasonable price. The negotiated price at T is lower than the equilibrium price of exporting country at B. The importing country receives benefit being equivalent to consumer’s surplus measured by the area of the triangle ATR including producer’s surplus in the fair negotiation (area of triangle ABEw) and cost for exporting country (area of polygon TBEwR). The area of trapezoid TBIR represents the increase of consumer’s surplus caused by that the negotiated price is lower than that of exporting. It is the proof of a very successful contribution of negotiation to the importing country’s benefit. Figure 6: The negotiated price is lower than equilibrium price of exporting country Source: Mankiw (2005) and author All of the modes of benefit distribution among negotiators above point out clearly the volume and the ways to distribute the total economic benefit in negotiation. They provide deeper and more specific economic analysis than the way of approaching to 5 types of negotiation in term of interest conflict (Coburn, 2011) being on the general and qualitative base. The results of analysis, on the one hand, are complementary to the current researches; on the other hand, go further to the modes of analyzing the economic benefit of international economic negotiation which is greatly differed from that of the international business negotiation. In additions, among 5 modes of distribution of economic benefit in negotiation, only in mode 3, both parties bring theit own benefit from the deadweight loss related to no negotiation, meanwhile in remaining 4 modes, one party brings their own benefit which contains some part of benefit losing from the other. The mode 3 may be the best explanation about the fair distribution of the economic benefit in negotiation based on the optimal combination of two dimensions: the relationship development among negotiators and problem solving of negotiation. That may be called as a kind of BATNA. Based on the modes of benefit distribution, there are 5 basic scenarios for international economic negotiation selected by all related parties such as loss–win, zero–win, win–win, win–zero, win–loss. Departed from these scenarios, it may be aware of more clearly about the parties’ attitude to negotiation like refusing, possibly negotiating, very high, high or medium willingness to negotiating. The willingness to negotiating is very high if the benefit brought from negotiation is great and vice versa. 159
8. And, the probabilities to success of negotiation range in different levels such as high (scenario of mode 3), medium (scenarios of modes 2 and 4), low or failure (scenarios of mode 1 and 5) (Table 1). This finding partially contributes to make clear the nature of the economic benefit in the international economic negotiation or the economic benefit is the core content of negotiation. Table 1: The negotiation scenarios under the modes of distribution of economic benefit Modes of Negotiation parties Scenarios Negotiation parties Probability benefit Importing Exporting of Importing Exporting of success of distribution country country negotiation countries countries negotiation Mode 1 Full loss Full profit Loss–Win Refuse Very high Low willingness Mode 2 BEP Big profit Zero–Win Possible High Medium willingness Mode 3 Profitable Profitable Win–Win Willingness Willingness High Mode 4 Big profit BEP Win–Zero High Possible Medium willingness Mode 5 Full profit Full loss Win–Loss Very high Refuse Low willingness Source: Author 3.3. The economic benefit distributed among parties depends on negotiation capacity and skills of the negotiator The modes of distribution of economic benefit are built from the position of the parties and analyzed on the static base meanwhile negotiation is flexible that comes with all of parties’ calculation, consideration and application of several strategies and tactics in all of phases of negotiation. The negotiation is greatly influenced by reasoning techniques (Fisher & Ury, 2011) over its position. The negotiation skills may be considered as the key for success of business doing (Chebet, 2015). Hence, all of the pre–negotiation economic benefits analyzed, calculated and evaluated are potential not realistic. They need to be discussed in detail by all parties to get final agreement. The negotiation capacity and skills of the negotiators play a decisive role in determining the negotiation benefit of all parties to build the commitments. If the negotiators were equipped with good knowledge, legal understanding and well–prepared at negotiation professional skills like skill for information processing, reasoning, influencing, conflict settling, etc., the result of negotiation would be better and vice versa. All of the negotiation members should be trained and worked as much as possible with the practical case to continuously improve their capacity and acquire the effective skills. In real world of negotiation, some countries with their great position and remarkable influence in almost international economic relationships have not concluded the agreement in negotiation. For example, negotiation between the United States and European Union (EU) – two economic super regions with Gross Domestic Product (GDP) of around 18–19 trillion USD negotiated to sign Transatlantic Trade and Investment Pact (TTIP) for some years to enhance the trade and investment ties between them have taken failure although both parties have built a big–sized and long–time trade and investment relationships. In other words, the difference in economic benefit of both parties is very small that accounts for 2–3% of their total trade transaction value being equivalent to the total trade 160
9. value transaction of a small country. According to the modes of distribution of economic benefit in negotiation (MDEBN), the proposal offered by each party makes harmful for the benefit of the other and vice versa so both parties have not accepted the offer from other as the mode 1 and 5 in line with the win–loss and loss–win scenarios respectively (Table 1). Until last minute, the Pact has not been signed by both parties as expected (Jeffries, 2015). 4. CONCLUSION The economics approach to analyzing the MDEB in international economic negotiation provides 5 modes of distribution of economic benefit in negotiation. In line with those 5 modes, there are 5 scenarios of negotiations such as loss–win, zero–win, win–win, win–zero and win–loss respectively. At the same time, the probabilities of the success of scenarios are high (scenario 3), medium (scenario 2, 4) and low (scenario 1, 5). Such probabilities for success of nehotiation are calculated. The paper still has the limitations such as that it does not link much to big countries in negotiation and lacks of the model to quantify the economic benefit in negotiation in term of economic growth, change of trade volume or investment among negotiation partners. REFERENCES 1. Alfredson, T. & Cungư, A. (2008), ‘Negotiation Theory and Practice: A Review of the Literature’. Available at: –5_Negotiation_background_paper_179EN.pdf. 2. Chebet, W.T., Rotich, J.K., Kurgat, A., (2015), Negotiation skills: keys to business excellence in the 21st century? European Journal of Research and Reflection in Management Sciences, Vol. 3 No. 3, 23–31. 3. Coburn, C. (2011), ‘Negotiation Conflict Styles’. Available at: 4. Fisher, R. & Ury, W. (2011), ‘Getting to yes without giving in’. Available at: 5. Gregory, M. (2011), ‘Multi–dimensional tool: Effective Negotiation Strategies & Techniques’. Available at: –Articles/2014Additions/ Multi DimensionalToolsMediation.pdf. 6. Jeffries, S. (2015), What is TTIP and why should we be angry about it? Available at: –what–why–angry–transatlantic–trade– investment–partnership–guide. 7. Mankiw, N. G. (2005), Economics Textbook. Available at: file:///E:/2018Bi/Kinhtehocj/MankiwChapter07SolutionsProblems%20 (1).pdf. 8. MUTRAP (2011), Báo cáo đánh giá tác động của Hiệp định thương mại tự do ASEAN– Hàn Quốc đối với nền kinh tế Việt Nam. Vietnamese language. Available at: 9. Plummer, G.M, Cheong D. & Hamanaka, S. (2010), ‘Methodology for impact assessment of free trade agreements’. Available at: 10. Salvatore, D. (2013), International Economics, 11th Edition. Available at: – International%20Economics(www.Iranidata.com).pdf. p.86. 161
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