Among the myriad political and policy changes affecting major economies across the globe, the rise of economic nationalism may prove to have the most lasting impact on multinational corporations. The antithesis of a free trade approach, economic nationalism justifies measures to stimulate domestic manufacturing, promote exports, and erect barriers to foreign imports.
This phenomenon is not limited to the United States, although President Trump’s “America First” policy has led to its most visible manifestations, including the U.S. withdrawal from the Trans-Pacific Partnership (TPP) and its European equivalent, the Transatlantic Trade and Investment Partnership (T-TIP), as well as ongoing efforts to renegotiate the North American Free Trade Agreement (NAFTA). Major countries on every continent and across regions have been eschewing multilateral free trade constructs in favor of protectionist measures and regulations often motivated by promoting domestic players.
Increasing trade frictions raise the cost of conducting business across borders, as tariff and non-tariff barriers are erected to foster the protectionist aims of economic nationalism. For a corporate leader focused on expenses and profits, the challenges are significant. How can you best position your company to maintain and grow business in major markets as key free trade touchpoints come under pressure?
There are several possible responses. The first is to provide support and leadership for pro-growth, pro-trade policies and institutions. Leading corporations can and do give voice to these concerns, individually and as part of industry associations, chambers of commerce, and public-private commissions and organizations. Second, companies should give serious thought to making direct investments overseas as a way of taking advantage of measures that reward and promote local presence. This strategy was employed successfully in the 1990s by Japanese automakers facing increased tariffs for their exports to the United States. Several established major manufacturing facilities – supported by generous local incentives – in the U.S.
Compliance is another area where trade frictions increase risks. In times of increasing trade barriers, foreign companies’ exposures to liability under trade regulations often grow as well, as enforcement policies are influenced by broader economic objectives. To meet these risks, companies must expand compliance structures, incurring greater costs. While no company relishes increased compliance spending, these costs must be balanced against the material risk of adverse monetary and reputational consequences that result from significant regulatory violations. We operate in an environment of hyper compliance vigilance; increased focus must be devoted to compliance as a result.
Finally, we are witnessing a rise in regulations covering data protection, data deployment and localization, as economies seek to lay dominion over big data flows – the newest and most prized manifestation of commerce. One question is, will trade regulation in this area reflect a race to the bottom (less regulation of data and data handing) or the top (high levels of regulation and protection)? Europe has placed a major bet that if it can set relatively high data privacy standards, global businesses will have to adhere to those standards to stay relevant. The U.S. for many years has favored a low regulation approach. But with China weighing in with a new data protection law featuring localization requirements, heavy state involvement and significant restrictions, the balance appears to be moving away from the U.S. model. Whether Europe or China will ultimately set the high-water mark that all global businesses will be required to meet is an open question.
The “America First” trade policy of the current U.S. administration has its origins in the decades-long exodus of manufacturing abroad, and a belief that jobs and factories can be brought back if imports are made sufficiently expensive. But the current manufacturing dilemma is not where products are produced, but how. Increasing automation and the exponential growth in the speed with which data is being processed, coupled with the phenomenon of “mass customization,” are transforming manufacturing. Unless the policymakers of the United States and other major developed economies keep pace and learn how to embrace this change, traditional protectionist measures will prove costly and ultimately ineffective in driving production activity within their borders. Meanwhile, newly emerging global champions, led by China, will continue to transform themselves in the image of the new economy.
Free trade is no longer being seen as a positive engine of global growth (which in fairness it actually is) but rather the author of economic and environmental dislocations (which in fairness it also is). The question for today’s global business leaders is how to harness the benefits of free trade while recognizing that success requires movement not at the speed of an ocean vessel or even a cargo plane, but rather at the speed of light? And the question for those of us who are dedicated to helping businesses succeed is, how do we help you anticipate the traps and barriers that must be negotiated at that speed?