India Under Pressure from the U.S. on Trade Policy
Author: Edward Gardner, Economist
Date: June 5, 2018
India has not escaped the scrutiny of the Trump administration when it comes to the two countries’ trade balance. India’s trade surplus in goods and services with the U.S. fell from USD 31 billion in 2016 to USD 28 billion in 2017. Although this was welcome news for the U.S., which wants to improve its overall trade balance with India, the reduction was not seen as large enough.
In recent months, the U.S. has put pressure on India over its trade policy, which it considers unfairly benefits Indian exporters at the expense of foreign producers. This comes at a time when the Indian external sector, which has benefited for years from supportive trade policy, is already under strain. India’s merchandise trade balance, for example, is expected to deteriorate to a record low this fiscal year, largely due to rising oil prices boosting imports. Moreover, delayed tax refunds and tighter trade credit standards are seen hitting exports.
On 28 May, a dispute commenced at the World Trade Organization (WTO)—the body responsible for the legal underpinning of international trade—between the U.S. and India. This is because the two countries failed to reach an understanding during the consultations that the U.S. requested in March over India’s export subsidy programs. Under WTO law, countries are permitted to subsidize exports until they reach a certain level of economic development. India surpassed that level in 2015, but the U.S. accused India of continuing those programs. Moreover, in May, the U.S. notified the WTO’s Committee on Agriculture that India appears to have illegally over-subsidized its rice and wheat farmers. Together, these cases point to an assertive U.S. stance against India.
Meanwhile, the U.S. pressured India in other ways in April. First, it announced that it was reviewing the low import tariffs granted to India under its Generalized System of Preferences scheme. Second, it continued to place India on its annual watchlist of countries with concerning standards of intellectual property protection. And, finally, it announced that it would begin monitoring India for possible currency manipulation practices. Furthermore, when the U.S. imposed its global steel and aluminum import tariffs in March, India, like most countries, was not exempt.
All in all, the U.S. appears to be turning up the heat on India over its trade policy practices, mainly to help reduce the large trade deficit it has with the Asian giant. Although this is unlikely to hit the competitiveness of Indian exporters in the short term, the greater concern for them lies in the longer-term consequences of potentially decreased government support and more competition from abroad. The overall effect on the already-poor trade balance is a concern for the broader economy.
Economic Snapshot for the G7 Countries
March 28, 2018
Trade war threatens to derail stellar global growth momentum
A complete GDP dataset revealed that global growth lost some steam in the fourth quarter of 2017, despite remaining robust overall. The global economy expanded 3.4% annually in Q4, which was a notch below both the 3.5% rise estimated last month, and the 3.5% expansion recorded in Q3 2017. The slightly lower figure was the result of weaker-than-expected growth in Latin America, particularly in Brazil. Conversely, newly released GDP data for India came in above market expectations. Data for Q1 signals that the economy continues to sail smoothly, propelled by largely accommodative monetary policies, tight labor markets and robust global trade. Against this backdrop, our analysts expect the global economy to expand 3.5% in Q1 on improved dynamics in both advanced and emerging market economies.
Despite the solid economic backdrop, the threat of rising protectionism has dominated headlines in recent weeks. Notably, the United States announced on 22 March its first set of punitive actions against China by proposing tariffs on up to USD 60 billion of imports from the Asian giant. Although China showed readiness to retaliate by announcing tariffs on USD 3.0 billion of goods, the U.S. decision leaves room for negotiation before implementation, an opportunity Beijing is unlikely to ignore in a bid to prevent further escalation. The risk remains that if negotiations fail, U.S. protectionism will spiral out of control and cause an all-out trade war with China, which would harm both economies and throw a wrench in the works of the global economy.
The U.S. decision to impose trade restrictions on China came only two weeks after the Trump administration announced tariffs on steel and aluminum products, citing national security grounds under Section 232 of the Trade Expansion Act. That said, many economies were given temporary exemptions before the tariffs came into force on 23 March, including the European Union and NAFTA partners Canada and Mexico. Negotiations over the North American trade agreement are still ongoing, and, although progress is painfully slow, the U.S. recently softened its stance on rules of origin in an unexpected sign of goodwill. All told, while the U.S. has turned more belligerent on the trade front in recent weeks, it has also taken a less aggressive stance in some areas.
On a more positive note, eleven countries signed the Comprehensive and Progressive Agreement for Trans-Pacific partnership (CPTPP) on 8 March, a trade liberalization deal that removes most tariffs for a bloc representing nearly 500 million people and more than 13% of global trade. The bloc—from which the United States withdrew last year—should stir trade flows across the Pacific and fuel stronger economic growth in all the countries involved. The CPTPP is expected to go into effect two months after most of the participants have domestically ratified the agreement
In the European Union, a whirlwind of political news has kept analysts on their toes. On 4 March, parliamentary elections in Italy yielded a hung parliament, with anti-establishment parties gaining over half of the seats and traditional parties being relegated to a state of political limbo. Despite signs of rapprochement between the North League and the 5-Star Movement, the country is unlikely to find a way out any time soon, heralding a period of political uncertainty ahead. Conversely, Germany put an end to over five months of political gridlock following the formation of the second consecutive alliance between the Social Democrats and Angela Merkel’s Christian Democratic Union.
Ongoing negotiations over Brexit have also grabbed headlines, with a draft withdrawal agreement reached on 19 March finally signaling progress in EU-UK talks. The draft establishes a transition period that will kickstart once the UK leaves the EU in March 2019 and last until 31 December 2020. This should provide more certainty to businesses and prevent an outflow of capital from the UK, although thorny issues remain largely unaddressed, mainly regarding the border with Northern Ireland.
Global economy to accelerate marginally this year despite growing protectionism fears
The sweet spot in which the global economy finds itself could quickly come to an end amid rising trade disputes between China and the United States. While the trade war appears to be circumscribed to these two countries for now, further antitrade measures against economies with large trade surpluses against the U.S., particularly the European Union, remain a possibility. Should these fears materialize, the ongoing stellar global trade cycle could sharply slow, hitting economic growth worldwide. Moreover, central banks are adopting a more hawkish tone in response to reduced economic slack which is beginning to push up inflation. Less accommodative monetary policies by key central banks could tighten financial markets and add downward pressure to global economic growth.
FocusEconomics panelists expect the global economy to grow 3.4% in 2018, which is unchanged from last month’s estimate and would represent the strongest rate in seven years. In 2019, the global economy is seen decelerating slightly, to 3.2% growth.
Although the 2018 GDP growth projection was unchanged from last month’s report, the economies of the Euro area and the United States both saw upgrades to their growth estimates. Growth prospects for Canada, Japan and the United Kingdom were left unchanged.
Among developing nations, China’s resilient economic growth, a strong global trade cycle and improving dynamics in India are shoring up economic activity in the Asia (ex-Japan) region. Eastern Europe, meanwhile, is benefiting from the ongoing economic recovery in Russia, solid growth among some key regional economies such as Romania and Turkey, and robust dynamics in the European Union. While the economic outlook in Latin America appeared to be more stable in recent months, political uncertainty in some countries continues to dent the region’s growth projections. Despite mounting geopolitical risks and economic imbalances, the outlook in the Middle East and North Africa, and in Sub-Saharan Africa, are gradually improving on the back of a higher commodity price environment.
UNITED STATES | Belligerent trade rhetoric clouds solid economic backdrop
The economy likely lost some steam in the first quarter of the year, partially reflecting residual seasonality but mostly the result of a moderation in consumer spending following robust growth in the previous quarter. Nonetheless, the underlying economic picture remains encouraging, with solid employment gains and accelerating wage growth buttressing private outlays and sentiment. Similarly, data for February showed healthy business sentiment and factory output underpinning an economy at full throttle. Trade measures enacted by President Trump’s administration could, however, counterbalance growth-inducing fiscal impulses. In recent weeks, the executive forged ahead with tariffs on steel and aluminum imports, which caused National Economic Council director and free-trade advocate Gary Cohn to resign. Trade tensions with China also flared up after the administration proposed tariffs on up to USD 60 billion worth of Chinese imports by invoking Section 301, which followed an investigation into intellectual property theft by China.
Protectionist policies bode poorly for the U.S. outlook, risking a global trade war and obscuring an otherwise very healthy economic panorama. A double dose of fiscal stimulus—tax cuts and higher government spending caps—should keep the economy running at a solid pace this year, while a tight labor market is expected to encourage higher fixed investment and household spending growth. FocusEconomics panelists see GDP expanding 2.7% in 2018, up 0.1 percentage points from last month’s estimate. In 2019, growth is seen moderating to 2.3%.
EURO AREA | Trade disputes with the U.S. take center stage
Detailed data confirmed that the Eurozone economy continued to grow robustly in the fourth quarter of 2017, capping off the best year of growth in over a decade. The solid reading was driven by a rebound in fixed investment, supported by optimistic business sentiment, and buoyant export growth despite a strong euro. Recent data for Q1 has been strong, albeit pointing to a moderation from prior levels. Economic sentiment edged down in February, while the composite PMI fell in March. However, the unemployment rate remained at a multi-year low in January. Meanwhile, the relationship with the United States, a major trading partner, has come into focus in recent weeks, after U.S. President Trump announced tariffs on steel and aluminum. On 23 March, the U.S. government announced that exports from the EU would be temporarily exempted until 1 May, and discussions on the topic are ongoing. A breakout of a tit-for-tat tariff battle could dent confidence and economic activity on both sides of the Atlantic.
A buoyant domestic economy should fuel another year of solid growth in 2018, as last year’s growth drivers are largely in place. Tight labor markets, high sentiment and accommodative monetary policy should support activity, while a strong euro could dent export growth. FocusEconomics analysts upgraded their forecasts for a sixth consecutive month this month and now see the Eurozone economy growing a robust 2.4% this year, up 0.1 percentage points from last month’s forecast. In 2019, GDP is forecast to grow 1.9%.
JAPAN | Economy remains in good health at the outset of the year
Economic growth momentum from 2017 appears to have partially carried over into Q1 of this year. In January, seasonally-adjusted unemployment fell to an over two-decade low, boding well for private consumption. Moreover, survey data suggested that, in March, the manufacturing sector expanded for the nineteenth consecutive month. Looking back, the economy performed better in Q4 than previously estimated, according to government data, largely due to an upward revision in private non-residential investment growth. Meanwhile, on 8 March, the government signed up to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which will provide a lucrative opportunity for exporters upon coming into force. On the political front, pressure has increased on Prime Minister Shinzo Abe since 12 March, when news of corruption related to him and his wife resurfaced. This could dent his chances of being reelected as leader of the Liberal Democratic Party in September.
This year, the Bank of Japan’s ultra-loose monetary policy, a tight labor market and resilient global growth will the economy. The main downside risks stem from an abrupt slowdown in China, a key trading partner for Japan, and heightened geopolitical tensions that could strengthen the yen. FocusEconomics panelists see the economy growing 1.3% in 2018, which is unchanged from last month’s forecast, and 1.0% in 2019.
UNITED KINGDOM | EU and UK reach an agreement on Brexit transition period
The economy looks in decent shape so far this year. In February, the services PMI rose to a four-month high thanks to faster new orders growth, while the manufacturing PMI was well in positive territory. Employment surged in November–January, while the unemployment rate ticked down, and nominal wage growth is finally picking up after a prolonged period of depressed readings. Coupled with easing price pressures, this should lessen the strain on consumers. Chancellor Philip Hammond unveiled the Spring Statement on 13 March. Taking advantage of better-than-expected borrowing forecasts, it hinted at a slightly looser fiscal stance to raise spending on cash-strapped public services. A few weeks later, the government and unions reached a pay agreement for 1.3 million healthcare service staff, which will see above-inflation wage rises over the next three years. Around the same time, a draft agreement was reached between the UK and the EU on a 21-month transition period after Brexit, paving the way for trade talks.
This year the economy will likely lose momentum as private consumption growth slows and fixed investment is depressed by Brexit uncertainty. However, loose monetary policy and robust export growth thanks to the weaker pound should cushion the slowdown. Our panelists estimate GDP growth of 1.5% in 2018, unchanged from last month’s forecast, and 1.4% in 2019.
INFLATION | Global inflation inches down in February on seasonal factors in East Asia
Global inflation inched up from January’s six-month low of 2.5% to 2.6% in February, according to an estimate by FocusEconomics that excludes Venezuela due to the lack of economic data and hyperinflation in the country. The print mostly reflected higher price pressures in East Asia due to seasonal factors related to the Lunar New Year holidays, which propelled demand for a wide range of products and pushed up prices. In this regard, inflation in China hit its highest rate in over four years. Reduced economic slack also pushed up inflation in Japan and the United States. Conversely, lower prices for food and more stable exchange rates continued to add downward pressure on prices in some countries such as Brazil, India and Russia.
Strong economic growth and gradually resurfacing inflationary pressures prompted the U.S. Federal Reserve to hike the federal funds rate by 25 basis points to between 1.50% and 1.75% at its 20–21 March monetary policy meeting. Moreover, Fed chairman Jerome Powell sounded more hawkish than his predecessor, signaling that the ongoing monetary tightening pace could accelerate. In Europe, despite leaving the current monetary policy scheme unchanged, European Central Bank President Mario Draghi stated that the current strong growth momentum in the single currency bloc led the Bank to drop its easing bias in March, signaling that the Bank could revise its policy guidance in the coming months. In Japan, meanwhile, the Central Bank once again ruled out any early exit from monetary stimulus even in fiscal year 2019, which is when the Bank forecasts that inflation will hit its target.
The FocusEconomics panel projects global inflation of 2.8% for 2018, which is unchanged from last month’s estimate. Next year, the panel sees inflation broadly stable at 2.7%. If the hyperinflation episode in Venezuela is factored in, global inflation will reach 141% in 2018 and 6.0% in 2019.
Millennials are losing out on income these years.
Millennials are missing out on income compared to previous generations, according to a report from the Resolution Foundation. In a study of eight high-income countries, people born between 1980 and 2000 have an average household income of 4% less than Generation X did at the same age. The discrepancy is even more extreme in Spain and the UK, which have experienced generational “boom and bust” periods; UK millennials have seen “a deterioration in most measures of living standards,” following a long post-war boom, said Bloomberg.
According to recent surveys, institutions recognize the need to enhance their risk management capability. 100% of firms surveyed recognize the need to improve the functionality of their existing risk management IT systems, 43% (especially banks) believe they must improve their business processes, and 29% recognize that their risk management capability can be significantly enhanced by adopting new risk management frameworks such as Basel III and Solvency II.
Banks are well capitalized, but deregulation and increased exposure to global market forces will drive risk management upgrades, such as CVA. Asset management companies require integrated, multiasset portfolio and risk management technologies in response to greater investor sophistication and a broad range of financial products. Securities firms face challenges of managing more complex, interconnected risks. In the report, Risk Management in China: Trends and Challenges for Banks and Securities Firms, the author will provide his viewpoints in the risk management challenges, trends, and methods in China.
In order to compete effectively on the global stage—and against both foreign and domestic competitors at home—financial institutions will need to develop world-class risk management capabilities. Firm-wide customer and counterparty views across investments and financial management and risk data repositories are critical for financial institutions.
changes of seasonally adjusted urban fixed-asset investment index and annual
growth rate (year-to-date) in %.
Source: National Bureau of Statistics of China (NBS).
Finance and Insurance Led Growth in the Second Quarter
Gross output by industry
JP Morgan Chase:
Code of Ethics and Revisions Since the 2008 Financial CrisisDate: September 10th, 2015 by Kara in Case Studies
By: Daniel Strong
JPMorgan has an extensiveCode of Ethics, which appears to be well polished, written and executed. There are adequate policies designed to encourage compliance and whilst changes have only occurred to the Code of Conduct, they have been very positive in nature. Despite this, there appears to be no change in the frequency of ethical issues facing the company which suggests different types of intervention are needed.
There are three parts to this article. The first outlines relevant background information of JPMorgan, including its ongoing ethical and legal violations. The second section examines the current code of ethics adopted by the company, consisting of a Code of Conduct, a Code of Ethics and more restrictive codes for certain subsidiaries. While the codes have a distinct concern about the company’s reputation and legal compliance, they cover a wide variety of topics including human rights, the giving of gifts and intellectual property. This section also compares the current code of ethics to previous versions, noting one major change in the Code of Conduct in 2013. The third and final section explores how the code is implemented in practice and how compliance is encouraged including membership of certain organisations, the availability of reporting services and auditing measures.
Section I – Background Information
Headed by Chief Executive Officer (CEO) Jamie Dimon, American based JPMorgan Chase & Co., was founded in 1799 by its predecessor company the Manhattan Company. It was the first billion dollar corporation in 1901 and has steadily grown over time, merging with and acquiring other companies including the Chase Manhattan Corporation, which is now included in the corporation’s name. The company is primarily concerned with finance related activities, including commercial banking, market services and investment banking (JPMorgan Chase & Co 2015a; JPMorgan Chase & Co 2015b)
The bank is one the largest companies in the world, ranked as the fourth largest public company by Forbes (Forbes 2014), and ranked thirteenth and fifty seventh in the Fortune 500 and Fortune Global 500 respectively. It owns around 2.4 trillion dollars’ worth of assets, making it comparable with some of the biggest banks in the world (Fortune 2014a; Fortune 2014b; Fortune 2015).
Figure 1: Forbes 2014
JP Morgan’s net income and revenue were 21.8 billion and 97.9 billion U.S dollars respectively in 2014 (JPMorgan Chase & Co 2014a). To put this in perspective, the New Zealand government received and spent 89.4 billion and 92.2 billion New Zealand Dollars respectively in the same year (Treasury 2014). In US dollars this comes to about 67 and 69 billion U.S. dollars.
Possessing the kind of cash flows comparable to a modern state like New Zealand highlights the size of the corporation itself and the global economic influence JP Morgan is capable of wielding. Considering this, it is highly relevant how the company acts from an ethical standpoint.
Recent Ethical Issues
JPMorgan Chase & Co has been repeatedly involved in illegal and unethical behaviour since the global financial crisis of 2008 with no signs of remission. Some of these instances (but by no means all) are listed below.
- February 2015: Two JPMorgan Chase & Co employees are charged for assisting an ‘aggravated breach of trust’ in selling risky products to the German city of Pforzheim and allegedly misleading the city council over the matter (Matussek 2014).
- January 2015: JPMorgan Chase & Co along with Wells Fargo is charged by the Consumer Financial Protection Bureau and the Maryland Attorney General with running an ‘illegal marketing-services-kickback scheme’. Customers of the bank are being manipulated into using one particular company by at least six employees who were rewarded with cash and other assets for doing so. The penalties for this could cost the company $600,000 U.S. dollars (Consumer Financial Protection Bureau 2015).
- November 2014: The Company, along with the Royal Bank of Scotland, HSBC Bank, Citibank and UBS are collectively fined £2.6 billion pounds for rigging foreign exchange markets described as part of a ‘free for all culture’ (Treanor 2014).
- July 2014: JPMorgan Chase & Co is fined $650,000 dollars for ‘repeatedly submitting inaccurate Large Trade Reports’ by the Commodity Futures Trading Commission (Commodity Futures Trading Commission 2014).
- October 2013: The Company is ordered to pay a $100 million dollar penalty by the Commodity Futures Trading Commission for ‘manipulative conduct’ in dumping large amounts of credit default swaps (Commodity Futures Trading Commission 2013).
- September 2013: The Securities and Exchange Commission fines JPMorgan Chase & Co $920 million for ‘misstating financial results’ and failing to implement controls to prevent their ‘traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses’ (U.S. Securities and Exchange Commission 2013)
- August 2013: JPMorgan Chase & Co is ordered to pay $23 million dollars for the misuse of customer funds in buying Lehman Brothers notes in ‘reducing its own exposure’ despite having knowledge of company’s problems which preceded its bankruptcy (Stempel 2013). This after being fined an additional $20 million dollars earlier in April 2012 by the Commodity Futures Trading Commission for the same case (Commodity Futures Trading Commission 2012a).
- September 2012: JPMorgan Chase & Co is fined $600,000 dollars for exceeding speculative position limits trading on the InterContinental Exchange U.S (Commodity Futures Trading Commission 2012c).
- March 2012: JPMorgan Chase & Co is fined $140,000 dollars for a non-competitive and ‘fictitious’ ‘prearranged trade’ where a customer was allowed to trade on both sides of a transaction (Commodity Futures Trading Commission 2012b).
- July 2011: The Company is fined a total of $228 million for ‘rigging at least 93 municipal bond reinvestment transactions in 31 states’. This was achieved by illegally arranging to gain information on competitor’s positions (U.S. Securities and Exchange Commission 2011).
- November 2009: The Securities and Exchange Commission penalises the Company a combined total of $722 million dollars for conducting an ‘unlawful payment scheme’ where Jefferson County (Alabama) officials were paid in order to ‘win business and earn fees’ with the cost of the illegal payments passed onto the county in higher interest rates (U.S. Securities and Exchange Commission 2009).
- September 2009: The Company is fined $300,000 dollars for drawing upon customer funds breaching the separation of customer and firm funds, as well as failing to report this breach in a ‘timely’ manner (Commodity Futures Trading Commission 2009).
Section II – The Written Code
What can be considered JPMorgan Chase & Co.’s code of ethics contains both an employee Code of Conduct and an accompanying Code of Ethics. There are also further Codes of Ethics prescribed to particular subsidiaries.
Code of Conduct
The Code of Conduct as of writing, is reasonably lengthy (49 pages) and covers the variety of topics with a noticeable degree of detail. The code is broken into five sections entitled ‘Our Heritage’, ‘A Shared Responsibility to Our Customers and the Marketplace’, ‘A Shared Responsibility to Our Company and Shareholders’, ‘A Shared Responsibility to Each Other’ and ‘A Shared Responsibility to Our Neighbourhoods and Communities’ (JPMorgan Chase & Co 2014).
The first section ‘Our Heritage’ is a general introduction to the code, telling employees to ‘conduct business ethically and in compliance with the law everywhere we operate’ including co-operation with authorities, with the law to be upheld according to its ‘letter’ as well as its ‘spirit and intent’ (with employees expected to know all laws and regulations affecting them). The reach of the code itself is firmly established as a ‘term and condition of employment’ of all employees of the company, although there is a slightly ambiguous exception to any ‘separate legal entity’ which must first be approved as subject to the code. Employees are not only required to follow the code, but also report any others suspected of breaking it (JPMorgan Chase & Co 2014b: 2-9).
This section also sets out rules surrounding the use and dissemination of information. All information, both personal and company-related in nature is to be considered confidential and disclosed on a ‘need-to-know basis’. This includes disclosing information to family and friends, other parts of the company (with some exceptions) and information on previous employers (which should not be revealed to the company) (JPMorgan Chase & Co 2014b: 5-7).
The second section, ‘A Shared Responsibility to Our Customers and the Marketplace’ primarily deals with legal compliance. Relating to insider trading, It contains strict guidelines on the control of Material Non-Public Information (MNPI), with employees banned from trading in any accounts when they possess related MNPI and barred from passing this information along to anybody in any form unless with explicit approval. Furthermore, it restricts employees’ private trading activities from being ‘short term or speculative’, risky or outside an employee’s ‘financial means’ (JPMorgan Chase & Co 2014b: 11-13). Employees are also restricted from investing in clients or suppliers of the company, and must disclose companies they do hold securities in, if asked to conduct any business with them (JPMorgan Chase & Co 2014b: 14).
This focus on adherence to the law continues with employees required to comply with anti-tying laws, avoid and report any money-laundering activity, and to comply with economic sanctions placed by the United States and its allies as well as anti-boycott laws. With a company ‘commitment’ to antitrust laws employees cannot fix prices, conduct bid rigging or group boycotts, separate customers or territories or limit services to particular areas (JPMorgan Chase & Co 2014b: 15-16).
The offer or acceptance of bribes is also forbidden ‘if it is intended or appears intended to obtain some improper business advantage’ including bribes that are considered common in some countries to ‘expedite performance’. Third parties also are not to be asked to conduct any governmental or business dealings on behalf of the company (JPMorgan Chase & Co 2014b: 17).
The third section, ‘A Shared Responsibility to Our Company and Shareholders’ adds further limits on employee actions. It outlines the company’s policies on intellectual copyright, such that any business-related ideas ‘created in or outside work belongs to the company’ and employees must assist the company in enforcing this ownership (JPMorgan Chase & Co 2014b: 21).
Employees also are expected to handle information responsibly, with a particular focus on ‘accurate record keeping’, involving personal expenses etc. Employees must provide ‘complete, accurate, timely and understandable’ information to authorities and not ‘misrepresent or omit material facts’ (JPMorgan Chase & Co 2014b: 21-22).
The giving and receiving of gifts is given a lot of attention, with strict guidelines likely related to anti-bribery concerns. Gifts cannot be solicited in appreciation for good service or thanks or ‘as a tool to influence or reward’. Gifts must have some sort of ‘customary justification’ such as a weddings, or stationary with company advertising on it. If goods are perishable they must not be extravagant and must be shared with colleagues. Goods over the value of 100 U.S. dollars are not to be accepted. Some types of gifts are also explicitly prohibited such as straight cash or gift cards (JPMorgan Chase & Co 2014b: 26-28).
There are also some expected policies against romantic relationships, working with relatives, engaging in business transactions with families and friends as well as using company resources to access inappropriate material, gamble, install risky software etc. (JPMorgan Chase & Co 2014b: 20).
Previous limitations on personal finance are extended with the expectation employees conduct this activity with ‘responsibility’ and ‘integrity’. This includes acting as a guarantor for clients, customers or co-workers, avoiding any preferential treatment, acting as a personal fiduciary for anyone not family or a close friend, involvement with competitors, and the use of disreputable sources of loans (JPMorgan Chase & Co 2014b: 22-24). Employee lives are also addressed with restrictions on anything that could be regarded as a conflict of interest, representing the company unless ‘explicitly authorized’, putting not for profit activities ahead of their job, ensuring social media usage does not reflect on the company as well as a ‘pre-clearance’ requirement for public testimony, talking about their jobs, and speaking engagements (JPMorgan Chase & Co 2014b: 24; 28-30). This is on top of the requirement in the second section of the code that employees cannot encourage anyone to leave the company (JPMorgan Chase & Co 2014b: 15).
The fourth section, ‘A Shared Responsibility to Each Other’ continues the theme of restrictions on employee’s behaviour. Unsurprisingly it outlines zero tolerance for discrimination, the use of drugs or alcohol at work, bullying, violence and sexual harassment (JPMorgan Chase & Co 2014b: 33-35).
The final section ‘A Shared Responsibility to Our Neighbourhoods and Communities’, rather predictably governs employee behaviour in the community. A clear line is drawn regarding the company’s political involvement, with employees allowed to be politically involved but completely separate these activities from the company. Activities such as meetings with government officials need to be pre-approved (JPMorgan Chase & Co 2014b: 37-38). Although charitable work is not to interfere with their jobs, employees are encouraged to be involved in helping the community and being a ‘global citizen’, with the company expressing support for ‘environmental stewardship’ and human rights (JPMorgan Chase & Co 2014b: 38-40).
Focus of the Code of Conduct
The code itself seems to be based on two primary concerns: compliance with the law and the upholding of the company’s reputation. The first is demonstrated for instance, by the mention of antitrust laws, accurate record keeping and so forth. The second is underlined in a slightly more implicit manner, but still visible (particularly in the restrictions of employee’s behaviour). The clearest example of this is in the introductory letter from the company CEO Jamie Dimon. He mentions how employees should act with integrity not only because it is the moral thing to do but also because ‘it is essential to protecting our firm’s reputation’ reminding readers that ‘once a company’s reputation is harmed, the effects are enduring’ and that even ‘a perceived ethical transgression can permanently damage any company’ (JPMorgan 2014b: II)
Whilst the latter of these two concerns has little to do with ethics, it is an understandable position from a business perspective, although it does seem to be excessively stressed throughout the code. One does wonders whether this concern (and its strict requirements on employee behaviour) is driven by a negative public perception of financial institutions (and its knock-on effects on investors) in the wake of the global financial crisis and recent public relations disasters mentioned previously.
The first concern, adherence to the law, is a relevant ethical imperative, but it seems unwise to consider the law the ultimate judge of what is moral. In that case, what does the code have to say about ethics beyond the company’s legal requirements?
We can immediately discount ethical requirements of the code such as discrimination or bribery because although they are certainly morally justified, they are also required by law and do not give an unfiltered insight into the ethical commitment of JPMorgan.
However, some specific rules and interests could be considered ethical. Bans on some forms of bullying and activity at work that may not fall within the law, the promotion of human rights and environmental concerns (however vague) and political independence can be thought as ethical outside the confines of the law.
There are also some less specific but still relevant requirements of the code. Employees are told to act with ‘personal integrity’, to the ‘highest standards of ethical conduct’, to never manipulate people, to listen to feedback, to ‘treat others with dignity and respect’ and to act in a ‘fair, ethical and non-discriminatory manner’ (JPMorgan and Chase 2014b: 14; 35; 41). Whilst these could be considered vague, they are still important ethical ideas to promote.
Code of Ethics
The Code of Ethics is short and its requirements ‘supplement, but do not replace, the firm’s Code of Conduct’. Like the Code of Conduct, it is a ‘term and condition’ of employment. Although most of its contents is contained within the Code of Conduct itself, it instructs finance related employees to act in an ethical manner (specifically regarding conflicts of interest) and with full compliance to the law. It specifically targets compliance with regulators such as the Securities and Exchange Commission in filing ‘full, fair, accurate, timely and understandable disclosure in reports and documents.’ Employees are not to ‘coerce, manipulate’ or ‘mislead’ authorities. They also are told to ‘promptly report’ any violation of the code (JPMorgan Chase & Co 2015c).
Similar to the Code of Conduct, the Code of Ethics can be summed up well by its introductory objective in that its purpose is to (JPMorgan Chase & Co 2015c):
“Promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the firm’s financial books and records and the preparation of its financial statements”
In other words, the Code of Ethics is primarily concerned with compliance with the law. As with the Code of Conduct this could have ethical and/or self-interested motivations. Considering all the content is already contained within the Code of Conduct, the Code of Ethics as a separate entity seems unnecessary unless its existence is to emphasis compliance with the law as a chief concern (which seems self-interested in motivation).
Further restrictions are placed on senior level employees of particular subsidiaries involved in financial markets. It is important to note that these specific codes are required by law, rather than being a company initiative. Some of the rules present in the Code of Conduct and the Code of Ethics are in these specific codes, but there are some additional ones. These employees are required to disclose all securities to the Compliance department as well as all transactions in which they are involved. Senior staff are subject to a minimum holding period of these securities and have a ‘special responsibility’ to ensure the confidentiality of customer’s information. Finally, they are required to keep accurate records including lists of code violations, present and previous codes and people with access to MNPI (U.S. Securities and Exchange Commission 2007; U.S. Securities and Exchange Commission n.d.).
Revisions to the Code Since the Global Financial Crisis
There appears to be few revisions to the codes described. The publication of a Code of Ethics is first mentioned in a Form 10-K submission to the Securities and Exchange Commission on 31st December 2003 (U.S. Securities and Exchange Commission 2003: 1). This is confirmed by its first findable presence on an Internet Archive snapshot (of the Company’s website) on the 24th April 2005 (Internet Archive 2015a). Other than a formatting change in 2010 (Internet Archive 2015b), the wording is completely identical.
There also are no apparent or accessible amendments to the specific subsidiary codes of ethics since the Global Financial Crisis.
There are however, four previous Code of Conducts dated May 2009, May 2010, April 2011 and June 2013. Although not stated, there seems to be a policy of annual revision. The content of all versions is similar but there are four important changes to note between 2009 and 2014 versions (JPMorgan Chase & Co 2009).
Firstly, the newest version is more polished, more articulate and better laid out. The refinements are noticeable by the addition of specific examples, decision trees and the added ability to report anonymously to an independent organisation through several methods (JPMorgan Chase & Co 2014b).
Secondly, there is more emphasis on general ethical values in the 2014 version. Treating customers correctly for example, is not explicitly mentioned in the oldest version. Furthermore, there is no mention of either environmental stewardship or an employees obligations to be a global citizen.
Thirdly, although the content is the same, the newest version is much more specific. In the oldest version there is no mention on the use of drugs and alcohol in the workplace, no mention of social media restrictions, no mention of common bribes made to expedite performance, no mention of the inclusion of EU and American sanctions, and clearer guidelines on harassment, which now include specific terms like ‘bullying’ and ‘sexual harassment’ (JPMorgan Chase & Co 2014b: 15-17; 33-34).
Finally, the general tone of the oldest Code of Conduct stresses less (although it is still present) on legal compliance and the protection of the company’s reputation. This may be due to the continued problems with issues of unethical behaviour associated with the company.
The changes between the five versions are as follows.
Code of Conduct Changes 2009 to 2010
Very minor revisions to the code, mostly formatting but does include the provision on social media usage (JP Morgan Chase & Co. 2010: 7).
Code of Conduct Changes 2010 to 2011
This could be best described as an amendment to the 2010 version, with the text being almost identical save for a few additional details. For example, there is now a sharp differentiation between U.S. Government officials, Non-U.S. Government officials, and employees in terms of bribery policy. Employees are also now restricted from investing in ‘private offered unregistered funds organized by the firm’. A summary and conclusion is added as well as an independent reporting service offered through email, telephone and fax (JP Morgan Chase & Co. 2010; JP Morgan Chase & Co. 2011: 4-27)
Code of Conduct Changes 2011 to 2013
The changes constitute most the revisions present between 2009 and 2014. The formatting of the document is changed and the options for employees to report code violations now includes a website alternative. Decision trees and specific examples are also added (JPMorgan Chase & Co. 2013a).
Code of Conduct Changes 2013 to 2014.
The differences between 2013 and 2014 can be compared to the changes between 2010 and 2011, being superficial in nature by reformatting, rephrasing and streamlining the document. Some information is added, such as the differentiation between non-public information and MNPI (JPMorgan Chase & Co. 2014b: 11), and some are taken away, such as a diagram relating to information barriers (JPMorgan Chase & Co. 2014b: 13). The company’s statement on environmental issues is rephrased to perhaps appear slightly less committed, now stating a belief that ‘balancing environmental with financial priorities is fundamental’ (JPMorgan Chase & Co. 2014b: 39).
Section III – The Code in Practice
The rules described in a code of ethics mean nothing without some of form of implementation and encouragement to comply. As such it is prudent to ask what JPMorgan has done to achieve compliance. To start with, there are several methods outlined in the Code of Conduct itself, including its well laid out structure and explicit rules (which leave little room for unethical behaviour or misinterpretation).
The presence of a functioning and independent hotline (with explicit protection for whistle-blowers) able to accessed through fax, telephone, email and the internet (JPMorgan Chase & Co. 2014: 42) is an excellent method to encourage all-important whistle-blowers (Callaghan et al. 2012: 19).
JPMorgan Chase & Co. also encourages compliance through the availability of code specialists to every single employee (who are trained to give clarification on ethical matters), as well as mandatory annual affirmations of understanding, training sessions and severe punishments for breaches (including termination) (JPMorgan Chase & Co. 2014: 2-3). These training sessions and affirmations, if regarded as a ‘priming mechanism’ are useful in the context of promoting compliance (Davidson and Stevens 2013:71). The code also has been translated into several languages and ‘is available on the intranet’ to all employees (JPMorgan Chase & Co. 2014: 8).
JPMorgan Chase & Co. also implements the principles of its Code of Conduct, particularly environmental ones externally, being involved in the following organisations and agreements:
- Equator Principles: promotes minimum principles of ethical behaviour including the reporting of high greenhouse gas emitting projects and the implementation of labour standards (Equator Principles 2013; JPMorgan Chase & Co. 2014c).
- Adoption of UN Declaration of Human Rights: (JPMorgan Chase & Co. 2014c)
- Carbon Principles: agreement to address carbon risks and try to meet energy needs in ‘an environmentally responsible and cost-effective manner’ (Credit Suisse 2015; JPMorgan 2014c)
- Green Bond Principles: Investment in environmentally forward thinking project (JPMorgan 2014c; International Capital Market Association 2015)
- Extractive Industries Transparency Initiative: Full disclosure of payments made by oil, gas and mining companies to governments in order to prevent corruption and conflict (Extractive Industries Transparency Initiative 2015; JPMorgan 2014c)
- United Nations Principles for Responsible Investment: ‘Awareness of environmental, social and corporate governmental (ESG) issues’ (JPMorgan Chase & Co. 2014c; Principles for Responsible Investment 2015).
- Ceres Company Network: Promotion of environmental and social responsibility (Ceres 2015; JPMorgan 2014c).
- The Wolfsburg Principles: Advancement of robust financial frameworks and activities such as money laundering and corruption (JPMorgan Chase & Co. 2014c; Wolfsburg Principles 2015).
The regularly published Environmental and Social Policy Framework also includes specific bans on activities related to child labour, forced labour, resource exploitation on world heritage sites, illegal logging and companies that have no policies against uncontrolled or illegal use of fire in forestry (JPMorgan 2014c: 5-6). Enhanced review processes are also required for certain activities such as hydraulic fracturing (fracking), oil and gas projects, and any business related to palm oil (JPMorgan 2014c: 7-8). Periodic internal audits of policies are conducted to ensure compliance as well as annual environmental sustainability and corporate responsibility reports (JPMorgan & Chase 2014c: 20)
Additionally, the 2013 ‘How We Do Business’ report makes the following claims:
- 16,000 employees added to ‘support our regulatory, compliance and control efforts’ as well as a million hours of training related to these activities (JPMorgan & Chase 2013b: 27).
- Additional 2 billion dollar budget increase for regulatory and control issues as well as 1.7 billion spent on technology related to these activities (JPMorgan & Chase 2013b: 27).
- The Establishment of a firm wide Risk Committee, a firm wide Fidiciary Risk Committee and a firm wide Control Committee in 2012 and 2013 (JPMorgan & Chase 2013b: 28).
Independent audits of the company are also conducted by PricewaterhouseCoopers (JPMorgan Chase & Co. 2015d).
Breaches of the Code of Conduct can result in both reduction of compensation and retroactive retrieval of salaries and bonuses (including equities) even if employees have left the firm, known as claw black provisions (J.P. Morgan 2014d: 25;44-45) . A prime example of this being applied is action taken against employees involved in the market manipulation for which the company was fined in October 2013 (Heineman 2012).
Success or Failure?
Despite these efforts there are undoubtedly ongoing issues within the company, even though the unethical behaviour the company (or its employees) is involved in is clearly forbidden by the code of ethics described. Despite the apparently genuine drive to enforce the code, these efforts don’t appear to have made any difference in reducing these problems. This perhaps reveals cultural tendencies within the institution that are proving difficult to change and that a code of ethics is inadequate in creating an ethical culture. Determining what other methods can be taken outside of a code of ethics should be regarded as an important extension and an opportunity for research.
Not all blame can be placed on JPMorgan however, with its independent auditor fined £1.4 million pounds for failing to conduct its audits properly which would have prevented some the misconduct described (White 2012).
Unchanged code, improved implementation, same culture?
Overall the JP Morgan’s Code of Ethics contains a distinguishing focus on legal compliance and protecting the company’s reputation which complicates an ethical evaluation of the codes.
The revisions to the code itself were either non-existent or minor apart from the significant amendment to the Code of Conduct in 2013, which added much more detail and improved formatting. The implementation of the Code shows JPMorgan Chase & Co. is making noticeable efforts to advance implementation and encourage compliance including an important and easily accessible independent whistle-blowing tool.
Yet, when these efforts are compared to the ongoing ethical problems listed in the first section, it appears the improvements are not sufficient to prevent unethical and damaging behaviour within the institution itself. This suggests more and potentially different types of initiatives are required.
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A New Global Financial Architecture-（Asian Infrastructure Investment Bank，AIIB)
Economists will correctly argue that investments in capital must be undertaken when investments are susceptible to increasing rather than negative returns. That is, when the rates of return are positive, especially in capital-scarce countries. Yet, if the calculus of rates of return is misleading and social costs are beyond the mandate of financial architects, who will pay for the social costs that are facilitated by new financial architects? Will the World Bank be confronted with a new asymmetry of increasing responsibility and scarce resources when the beneficiaries of leverage are poorer countries?
Alternatively, will investors be smart enough to eliminate white elephant projects and social costs by engaging in critical countervailing acts that balance infrastructural development against the inevitable social costs of development. Organizations that lack supranational authority or a multiplicity of mandates face significant limitations and pose some social risks.