Businesses Must Take the Backlash Against Globalism Seriously

Is globalised trade in reverse? Is protectionism on the rise with the potential of a spreading trade war? These are questions at the top of many business leaders’ minds. The answer to both these questions is yes, and business models are going to have to change as a result. Dr Joe Zammit-Lucia, co-author of ‘Backlash: […]

Is globalised trade in reverse? Is protectionism on the rise with the potential of a spreading trade war? These are questions at the top of many business leaders’ minds. The answer to both these questions is yes, and business models are going to have to change as a result. Dr Joe Zammit-Lucia, co-author of ‘Backlash: Saving Globalisation from Itself’, explains for Finance Monthly.

WTO figures already show a significant slowdown in the growth of international trade as a percentage of GDP. We are still only at the early stages, but a trade war and a stalling of globalized trade is almost inevitable.

This first part of the 21st century has seen many shifts from the post-war global world order that we had all become used to and on which the trans-national business model has been built. These changes are significant, encompassing political, cultural and economic shifts that have upended old assumptions.

To cite but a few examples, global governance structures (WTO, IMF, World Bank, etc) were previously seen as fair arbiters of the global order. Now their governance structures are seen by developing countries as dominated by the West and by the developed world as no longer serving their interests.

‘World trade produces net benefits for all’ was the 20th century mantra. Now it is clear that such benefits are very unevenly distributed with consequent economic, social and political implications. The free movement of global capital was seen as a vital fuel for growth and development. Now it is seen as potentially destabilizing, a system for hiding large amounts of illicit money, and a facilitator of tax arbitrage.

Low labour costs were seen as the competitive advantage of developing countries. Now they are seen as the basis of ‘unfair competition.’ Persistent trade imbalances were dismissed. Now we understand their corrosive effects on deficit countries.

In an information driven world, privacy and national security issues affect trade – from the manufacturing of routers to the security of data platforms, to building self-driving cars. For instance, Qi Lu of the Chinese tech company Baidu explains: “The days of building a vehicle in one place and it runs everywhere are over. Because a vehicle that can move by itself by definition it is a weapon.

But maybe most important is the major geopolitical shift. The post-war world order was characterized by Western dominance and overseen by the hegemonic power of the US. Now we have three more or less equally potent trading blocs – the US, China and its sphere of influence, and the European Union. Economists have known for decades that in such a structure, competition between blocs was much more likely than co-operation.

Trans-national business has played a role in these changes. A meaningful proportion of the US trade deficit comes not from ‘Chinese goods’ but from American goods that are being manufactured in China (the computer I am writing this on, for example). Businesses have long engaged in arbitrage between countries in investment, jobs and taxes, nurturing, over time, what has turned out to be a political time-bomb.

Neither can business leaders be blamed for such behaviour. They were doing their job: optimizing their business models. But times have changed. The rules of world trade need overhaul. And business models will have to change with them.

Some business leaders are already taking action. “The days of outsourcing are declining. Chasing the lowest labor costs is yesterday’s model” says Jeff Immelt of GE. “Now we have a strategy of localization and regionalization” states Inge Thulin of 3M.

It is also worth bearing in mind that the trade agreements that we have all become used to were developed in a world of trading largely in goods. They are poorly suited to trade in services, digital commerce and large financial flows.

It is tempting to dismiss talk of trade wars as a Trump phenomenon. Much bombast, little meaningful action, and something that will soon pass. That would be to misunderstand the slow but sure tectonic shifts – political, cultural and economic – that are happening.

How individual businesses react, or, preferably, pre-empt these shifts will determine their future performance. And they will determine whether the political consequences of their actions will, over time, smooth things out or make them worse.

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