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Author, Professor John Manners-Bell, Ti’s CEO discusses the threat to global supply chains from increased protectionism.
This briefing will deal with:
For decades the trend towards globalization seemed unstoppable. The benefits, so the argument went, were obvious: lower costs for Western consumers; jobs and higher standards of living for workers in developing countries.
However, in the last two years the global business community has been shocked to discover that not everybody agrees with this hypothesis. Largely ignored, there had been a growing unease in many parts of the developed world – especially the United States – over the perceived detrimental effect which globalization has had on the job prospects of many workers. The out-sourcing of a large proportion of manufacturing to low cost labour markets, predominantly in Asia, has led to a surge of discontent which has manifested itself in the rise of ‘populist’ parties and politicians, by far the most important and influential being Donald Trump. Blaming out-sourcing for the loss of jobs is only partly true as automation is also a major factor. However, Trump’s rhetoric touched a chord with a large number of US voters who had seen traditional manufacturing decline throughout the 1990s and 2000s and whose standards of living had declined throughout this period.
It would be wrong to suggest that Trump has created this growing protectionist sentiment. The US, according to the Centre for Economic Policy Research, implemented over 1000 discriminatory trade measures between November 2008 and September 2016, about twice as many as India and Russia, in second and third position in the rankings of G20 nations. Many of these measures involve the development of ‘industrial policies’ (a term also used by the incoming May administration in the UK) which justify the subsidy of local companies, ‘local’ standards which discriminate against foreign competition and, of course, tariffs and duties.
In fact, few of the latest headline-catching trade disputes were initiated by Trump:
Although these three cases (and other such as Canadian lumber and European and Chinese steel) involve trade dispute mechanisms which have been in place for many years, there is a perception worldwide that, backed by a President sceptical of free trade, protectionist powers hold sway in Washington.
The results of a survey of US shippers undertaken by international freight forwarder BDP suggest the hardening of attitudes amongst policy makers is supported by many in US industry. The freight company asked a range of US shippers for their opinions on current free trade agreements involving the US. An overwhelming majority of respondents (83%) believed that the US needed to be aggressive in their approach to new FTAs. This hawkish view was backed up by their opinions of NAFTA. A similarly large majority (90%) believed that the agreement was ‘old’ and in need of up-dating. Only 6% thought it should be left alone. Respondents were more split over the benefits of Free Trade Agreements. 46% believed that they kept US manufacturing costs down, although over a third thought that this wasn’t the case. Two thirds of those surveyed also thought that the Government should do a better job of enforcement outside of the US.
If these opinions come from executives actively involved in global supply chains, it is easy to see why the wider population views globalization with such mistrust.
To understand how this situation has arisen, it is first necessary to put the issue in context with a little economic history.
A SHORT HISTORY OF ECONOMIC LIBERALISM…
The fortunes of economic liberalism have ebbed and flowed over the past two centuries. Free trade held sway up until the economic depression of the 1930s leading to great advances in industrial, technological and, indeed, political, development. However, when governments around the world adopted ill-judged protectionist and interventionist policies in an attempt to counter the depression of the 1930s, the primacy of economic liberalism came to an end. Instead the next 50 years saw countries introduce varying levels of controls on trade, capital and migration. At the same time the Soviet Union, China and the countries within their sphere of influence, offered a completely different system to the free markets of the West.
It was only in the 1980s that the pendulum once more swung back in favour of those who promoted the concept of more integrated international markets. Although the organisations forged at the Bretton Woods summit had been effective in ensuring some elements of transnational cooperation and reform, it took many decades before politicians and central bankers (led by the UK and US) realised that structural reform was necessary to avoid economic collapse.
China’s change of economic philosophy and the implosion of the Soviet Union added to this momentum. Throughout the 1990s, global trade grew strongly, creating economic value in many parts of the world and providing consumers in the West with cheap products. The loss of traditional heavy industries in the West and even some higher value manufacturing was seen as part of an essential re-balancing of economic structure.
Now, however, this last premise is being challenged. It has always been the case that globalization has created ‘winners and losers’. The ‘losers’ in the West have been those formerly employed in the industries which have adopted the ‘unbundling and out-sourcing’ approach to production – such as in the high tech or fashion sectors, for example. Alternatively, they may have been employed in a steel mill or chemical plant which has become uneconomic due to cheaper supplies produced elsewhere. Or indeed, their company could have been acquired by a foreign investor and shut down, as production is centralized on a regional basis elsewhere.
Although this may have been happening for the past 30 years, the discontent that it has created has largely ignored by the political elite (of whatever political persuasion). However, the political and economic environment has now changed. Some of the key reasons for this include:
These factors exacerbated mistrust in the systems created by politicians who themselves have been regarded as increasingly self-serving and remote from the voters. This discontent manifested itself in the vote for Brexit in 2016 in the UK and in the election of President Trump in the US later in the year.
TRUMP, TRADE AND SUPPLY CHAINS
It is very difficult at such an early stage of Trump’s presidency whether or not many of his populist policies will be implemented. It has yet to be seen whether Trump will actively develop protectionist policies rather than withdrawing support for free markets. However, his approach to the following trade issues will be critical.
One of President Trump’s first acts when coming to power was to sign an executive order to withdraw from negotiations with 11 Asian countries effectively ending the development of the Trans-Pacific Partnership (TPP). The accord had been likened by some as an attempt to create a single market in the same mould as the EU and had been widely supported by US businesses. Although the TPP does not include China (in fact the initiative was seen as a way of challenging China’s power in the region) it does include countries making up 40% of the world’s economy. Trump says he would rather make bilateral trade agreements with the countries involved.
President Trump swept to power on a largely anti-globalization ticket promising to repatriate out-sourced jobs back to the USA. In one tweet he stated ‘China is stealing our jobs’ although he saw Asia as a whole a threat to US domestic employment. Since meeting the Chinese President, Xi Jinping, his rhetoric seems to have changed, not least due to role China must play if the North Korean crisis is to be solved.
The role Mexico has played as a low cost near-souring market for US manufacturing has long been of concern to Trump. However, any efforts to roll back the free market created by NAFTA will have significant consequences to the region. More than a quarter of Mexico’s economy is accounted for by exports to the US and, in order to facilitate this trade, companies have invested billions in upgrading port, road and rail infrastructure.
The automotive sector could be particularly hard hit although, at this stage, it is hard to estimate what Donald Trump’s Twitter statements will mean for the industry and cross-border trade. However, already the impact of his comments about the importation of vehicles from Mexico appear to have alarming implications for supply chain management.
If vehicle manufacturers were to feel under pressure to start changing their supply chain policies, global trade and logistics markets would come under substantial pressure. To take the Mexican example, much of production in Mexico relies on major components- including items such as engines and gear-boxes- made in the US. The reverse is also true, with Mexican plants acting as sources for parts for US production. Unravelling this supply chain structure would be possible but expensive and would have a major impact on rail and road freight across the US.
The effects on the South Korean, Japanese and German economies would also be immense even if the US levied only modest increases in import taxes. The logistics sectors of all three economies are heavily dependent on automotive related demand. Most of the big manufacturers have diverse production facilities in Mexico and are planning to expand them.
Although Trump was quick to pull the plug on the TPP, the same was not the case with TTIP. There is definitely an appetite for some sort of deal with Europe. However, negotiations stalled even before Trump became president, not least to opposition to the deal from many in Europe. There seems no indication that material talks will start again soon.
THE CHALLENGE TO BUSINESS
One of the problems for economic liberalism and globalization is that proponents have always faced a difficult battle against nationalism and interventionism. In 2015, when large elements of the UK’s steel industry in South Wales were faced with closure due, in part, to the low price of steel on the international market, unions and opposition politicians immediately called for the protection and support of the manufacturing plants. Few politicians would be brave enough to argue the doctrine of comparative advantage or about ‘leaving it to the market’ (although, of course, in this example the situation is made more complex by Chinese state support of its steel mills). Rather, politicians prefer to talk about ‘industrial strategy’ which suggests that they are better than the market in predicting successful outcomes and this will almost inevitably involve some element of protectionism.
Likewise in the US, the argument for free trade with Asian markets was lost to Trump’s persuasive, populist rhetoric about ‘bring back American jobs’ despite the enormous value which global supply chains have brought to the country.
Industry has also been poor at demonstrating the benefits of globalization even to the markets in which production has been relocated to. Instead many companies have been criticized over the pay and conditions of their out-sourced labour force.
Under attack at home and abroad, it would seem that global supply chains are not as resilient as many people would like to hope. There is nothing inevitable in the development of economic liberalism or global supply chains. Business cannot rely on politicians to support their development and consequently must make the case themselves, demonstrating the benefits to a largely unconvinced electorate. Without such efforts, there is a major possibility that countries adopt isolationist policies which lead to the fragmentation of global supply chains – the ultimate risk. Politicians on the other hand must do a better job at increasing skill levels within the work force which will ultimately lead to the creation of high value jobs as well as improving productivity. However they may well find that it is easier to implement protectionist policies rather the longer term solution of increasing their country’s competitiveness through education and training.