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Changing World Will Impact Contracts & Negotiation

April 1, 2010

I wrote earlier this week about the recent IACCM conference session on ‘What Did We Learn From The Recession?’ One topic that was not mentioned – but should probably be the key learning – is the dramatic shift in economic power towards Asia.

Of course this shift is not the result of the recession, but it has been emphasized and accelerated as a result of it. The reality is that economic power is rapidly moving to China and India – and this will result in many traditional assumptions and relationships being challenged. Take just two examples that have been highlighted this week – one related to the pricing of iron ore and the other to Middle East oil supplies.

In the case of iron ore, the negotiation of annual fixed price contracts has been scrapped. The move to spot pricing and the inclusion of shipping charges at actual is expected to add some 30% to steel prices in 2010. Of course, over time it may lead to massive price fluctuations up and down, very similar to the pattern of oil prices over recent years. The primary cause of this change has been the dramatic increase in Chinese demand and the refusal of major suppliers to operate on the old fixed price basis.

Similar surges in Chinese demand (and to a lesser extent that of India) now means that Opec is switching its attention eastward. Demand form the US and Europe has remained relatively static – with the result that countries such as Saudi Arabia now find China is a bigger customer than the US. This inevitably means a continuing loss of influence over supplier loyalty and broader commercial practices.

Moving away from the world of commodities, I discovered this week that even in areas such as electronic commerce, Asia is now pushing ahead of the ‘developed’ economies. In fact, in 2009, the number of internet users in Asia was not far behind the North American and European numbers combined. With 42% of worldwide users, Asia lags by just 7% and that gap is likely to close by 2011.

Clearly the recession has severely damaged Western credibility and influence. Of course, in many ways this is merely a symbol of the inevitable shifts in global power that have occurred throughout history. But with those shifts come a whole host of other consequences, in particular with respect to trading patterns and methods. And it is in those areas that contracts and commercial practitioners should be paying attention.

Among the most obvious consequences will be a sustained shift in buying and negotiating power. The ability of Western companies to impose their terms on either buyers or sellers will steadily diminish. They must expect a steady reduction in the extent to which customers or suppliers in Asian markets are prepared to accept things such as creditworthiness or choice of law. But at a more fundamental level, there will be growing push-back on other practices, such as negotiation style or assumptions on contract models. Today, for example, international contracts are typically based on Common Law principles; it would be foolish to assume that this will remain unchallenged, especially in areas such as liabilities, indemnities, intellectual property and confidentiality.

 Of course, change will not occur overnight. But although gradual, I think we can now expect that it will be rapid. Contracting experts – from commercial , procurement or legal – must start thinking about these changes in the context of their markets and industry, and must develop a strategy that responds to the emerging new world order.

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