Ricardo’s law of comparative advantage has proven to hold true. Today’s global economy is highly interconnected, and many industries are now structured with global supply chains from components to assembly to customer support. Consumers expect to be able to buy an ever broader range of goods that come from dozens of countries, including Taiwanese PCs, Chilean sea bass, New Zealand apples, German shavers, and Japanese video game consoles. Now that businesses have discovered cost advantages of global sourcing and outsourcing, no political or populist force will allow us to return to inefficient, closed national market environments.
However, as Congressman Tip O’Neill famously said, “All politics is local.” Shifts in employment from inefficient national industries to more effective global supply chains will cause periods of pain, since new jobs are seldom created in the same places that the old jobs are lost. Workers who need retraining may never get back on the same career and benefit track they had under the old, more protected economic system.
Because economic and political policy are determined for and within each country (the Euro zone being a notable counter-example), political tensions get in the way of economic rational behavior. As long as there is no world body that controls master economic policy, national governments will interfere with the money supply and interest rates to support short term fiscal priorities.
FORCES FOR GLOBALIZATION
John Naisbitt cited globalization as a mega trend in 1982. While he was writing for an American business audience, his predictions guided business leaders around the world to look beyond their borders for market growth, new innovations, and more efficient and lower cost sources of supply. Globalization of the world economy – measured as trade (gross imports or exports) as a percentage of world GDP has actually been increasing steadily for decades.
China grew from the #11 economy in 1990 to the #3 economy today, based on the GDP measured in nominal dollars. This year, China will almost certainly surpass Japan to become the second largest national economy.So, if trade is good, and globalization is a benefit for the world as a whole, why does almost every nation erect barriers with their national policies, and what should a profit-motivated business do about this?
FORCES FOR NATIONALISM
Nearly every nation attempts to build its economy by encouraging national champions in select industries. Over a dozen nations support home-based automobile manufacturers with tariffs and other restrictions on foreign competition or, as with GM and Chrysler, direct government investment. National flag airlines continue to receive preferred treatment in almost every country. Even the US, with relatively liberal business regulation policies, maintains restrictions on international ownership for US airlines and sets rules that restrict the success of non-US carriers in serving the domestic market.
The two main justifications for nationalist protectionism are employment preservation and national security. Let’s look at these two issues:
Employment protection in inefficient firms may make sense in the short term, but in the long run, the inefficient producer will always lose out to an efficient global competitor. Without the competitive drive to world class cost and quality, the local producer wastes its resources. The lower profits restrict the investment level in new processes, in further cost reduction programs, and in deeper intimacy with its market. The local producer cannot match the pace of new products that will meet the evolving needs of its customers, and will get further and further behind a true world class competitor.read more details at http://www.unesco.org/most/dsp52.htm.
The only two logical arguments can be made to support trade barriers for employment protection are:
Anti-dumping rules, which prevent foreign competitors from selling below cost in the home country. While these are detrimental to consumers (because they lead to higher prices), they do help to eliminate one competitive tactic, the use of predatory pricing to thwart natural market forces.
Short term protection to support a major restructuring investment for an industry. One of the best recent examples of this was the 3 year tariff imposed on Japanese large displacement motorcycles from 1983 – 1986, while Harley Davidson Motor Company restructured as a newly independent company to launch the “Evolution” generation product families.
National security issues are sometimes used to justify controlled exports of a wide class of products, not just armaments and aircraft. Until just a few years ago, Motorola could not sell its most capable analog modems (with data transport rates of 19,200 bits per second) outside the US. The most capable server processors and systems based on those processors cannot be sold in certain markets. However, nearly every US manufacturer of high-tech products has foreign competitors who are not subject to these business limitations. China could buy modem technology from Ericsson, Siemens, Alcatel, and a number of less-known Asian competitors.
HOW TO MOVE FORWARD
Here are 3 steps to navigating the challenges presented by nationalism:
Join your industry trade association. This might include the National Association of Manufacturers, Consumer Electronics Association, or any of dozens of market-specific groups. Many of these organizations maintain a Washington office to lobby our Federal government to encourage international trade and prevent barriers. Membership is inexpensive, but the real value comes from participating actively when key issues arise. You should designate one or more people to monitor federal activity that relates to your specific market, and be prepared to respond quickly to new issues.read this post here for more details.
Look beyond the national border and the usual supply chain to identify innovative sourcing opportunities for components and technologies that may revolutionize your market. The best way to deal with structural change is to drive it, and no country holds an exclusive on creative ideas. Reject the NIH syndrome, and conduct periodic (quarterly or annual) scans of activity in every world region about the offerings that come to market in both your own market space and the market space of your chief suppliers. By maintaining intelligence about trends in your supply chain, you will be able to stay abreast of opportunities that will impact your own industry in one or two generations.
Even if you have no sales outside your home market today, stay on top of trends in emerging economies that relate to your market. There may be competitors who take a very different approach to the market than your usual competitors. A power supply manufacturer with major operations in Europe and the US was investing heavily in automation equipment to streamline costs. A competitor in India, however, used low cost skilled labor to produce small quantities of specialty products at a much lower effective cost, and could guarantee more rapid delivery of the order anywhere in the world at the same time. By understanding the tradeoffs, the power supply manufacturer refocused its volume sales efforts to avoid head-to-head competition.
The days when business people could simply focus on their traditional domestic competitors ended several decades ago, even though many executives still only focus on those traditional competitors when assessing strategic options for growth. As emerging economies continue to drive the global economic growth engine, it is much more important for executives to understand the market and competitive environments in emerging markets – especially China, India, and Brazil, the leaders of the BRIC collection of markets. (Russia and Mexico are often mentioned in this list as well.)
You need to monitor market and competitive signals from these emerging economies in order to be prepared for potential new market entry of the foreign competitors, or to take advantage of the local opportunity for growth enabled through very different business growth policies. Seize the day!