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      - page 42 / 47





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direct airline flights between China and Taiwan.89 China’s trade and investment relations with Southeast Asian nations has had a similar effect in reducing political tensions and in seeking peaceful solutions to thorny issues such as territorial claims. U.S.-China economic interaction likewise seems to have contributed to calmer political and security relations.

For some risks, such as political upheavals, insurance is available to U.S. businesses.90 Still, political unrest in countries can severely disrupt supply chain operations. Recent political turmoil and street demonstrations in Thailand, for example, have caused multinational companies to exercise more caution in investing there.

As the global financial crisis has demonstrated, multinational firms, particularly in the financial sector may generate risks that domestic regulators either do not recognize or do not address. AIG, the insurance company rescued by the United States in 2008 was brought down primarily by its financial-products unit that marketed credit default swaps. This unit was headquartered in London, not in the United States, and government regulation of such products essentially did not exist.91 The need for the U.S. government rescue of AIG proved to be a key factor in the spread of what eventually became a global financial crisis and recession.

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In the current financial crisis, countries around the world are either contemplating or implementing various stimulus packages to help their economies recover from the global slowdown. One way that supply chains enter the debate is in estimating the impact of fiscal policies—particularly government spending or subsidies—on the domestic economy. If, for example, government policy is to inject funds into the economy, where should they be injected in order to maximize the economic (not political) impact of the policy?

Each dollar injected into an economy has what economists call a multiplier effect. This is a rule of thumb that estimates what the final impact of that dollar would be on the total economy after it goes through various rounds of spending. Estimates of the fiscal multiplier vary, but they usually range from about 2 to 4. At the 4-level, each dollar injected into the economy ends up being spent and respent an average of 4 times. The reason the multiplier is not larger is that at each round of spending there is “leakage” from the system. If for example, $1 is given in the form of a tax rebate, the recipient may spend three-fourths of that amount (75¢ in the first round of spending) and may save or is taxed one-fourth of the amount (25¢), by the time all rounds of spending are

89 CRS Report RL34683, Taiwan-U.S. Relations: Recent Developments and Their Policy Implications, by Kerry Dumbaugh.

90 CRS Report 98-567, The Overseas Private Investment Corporation: Background and Legislative Issues, by Danielle Langton.

91 Robert O'Harrow, Jr. and Brady Dennis , "The Beautiful Machine; Greed on Wall Street and blindness in Washington certainly helped cause the financial system's crash. But a deeper explanation begins 20 years ago with a bold experiment to master the variable that has defeated so many visionaries: Risk. explanation begins 20 years ago with a bold experiment to master the variable that has defeated so many visionaries: Risk.," Washington Post, December 29, 2008; Brady Dennis and Robert O'Harrow, Jr. ,"A Crack in The System; 1998, AIG Financial Products had made hundreds of millions of dollars and had captured Wall Street's attention with its precise, finely balanced system for managing risk. Then it subtly turned in a dangerous direction ," The Washington Post , December 30, 2008.

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