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EACC Insights: Global Shock

by Maurice Marchand-Tonel, Honorary Chairman, EACC Paris

“Protection will lead to great prosperity and strength” (Donald Trump)

“No nation was ever ruined by trade” (Benjamin Franklin)

In the current debate on President Trump’s view of his “America First” mantra, “international trade” and “globalization” seem to be treated as one and the same thing. True, the two are obviously interconnected: the Tea Party and the ensuing War of Independence were indeed all about free trade within a global system (the tea and sugar triangular trade: Europe, Asia, Americas) with the colonists standing for freedom and England for captive markets. But, as we will see, globalization is now a much broader and hard-hitting concept.

Let’s start with a few remarks about trade.

Trade : Containing the Dragon                                                                  

With Japan quietly fading away and India still getting its act together, the world economy today is dominated by three blocs: the US, Europe, and China. They represent around 70% of world GDP and about the same percentage of world trade. US and EU exports are essentially brain-based value-added products while China’s have long been mostly labor-cost-based.

Recently, though, in its effort to regain its former status of three centuries ago as the first economy in the world , China has been moving aggressively toward brain-based products , leaving the labor-intensive products to the Bengladeshes of this world and the unimaginative commodities and energy products to the likes of Russia. One example among many is the solar panel industry, definitely not a labor-intensive business, where China is clearly the world leader.

The problem with China’s upgrading is glaring government interference with free markets. The authoritarian one-party strongman  government controls the economy and feeds its corporations with all manner of regulatory booby traps and discrimination to bilk technology from more advanced Western firms. This is clearly not acceptable. China will perhaps attain its preeminence objective over time, but it must pay the real price for it, fair and square, like Western firms competing between themselves.

(It is worth noting the Chinese government has been particularly smart in the world trade chess game and in ingratiating itself to the 30% of the world economy outside the Big Three , largely non-democratic countries like itself. The best example is Africa , where China is now in pole position to take advantage of the expected 1.5 billion population increase in the next few decades).

On international trade, we clearly have a bipolar world :

On one hand , the “regular guys” (mostly the US and Europe, but also Canada , Japan and several others) , democracies where business is driven by shareholders and management, not government. Labor costs are roughly identical , the law is the same for all competitors , the playing field is level and the best guy wins. The end consumer (who is also a voter) is free to buy the Harley Davidson or the BMW that has conquered his heart and his wallet

On the other hand, we have China

If we believe in democracy and fair competition , the first group must hang together and be united to gently (or not) force China to correct the errors of its ways . If we don’t follow that route, we may end up with our three blocs living separate lives with little trade between them but enough economies of scale within each of them to have reasonable cost levels. It’s à la rigueur a viable option but definitely not an exciting one for future generations.

Now, international trade implies that a product has a nationality, and this simple posit is getting trickier and trickier. A high percentage of world trade is intra-group: one of the top French exporters is IBM France shipping to…other IBM companies, casting doubt on final “nationality”. An Airbus plane is assembled or preassembled in 16 plants in at least four countries from parts originating in over 20 countries and value-added analysis tends to show that the product is primarily … American. The top exporter of cars “made in USA” is BMW, from their huge plant in North Carolina . Are those cars American or German ? Are Detroit , Michigan, and Windsor, Ontario, “foreign” cities to each other ? Are Caterpillar machines assembled in Grenoble , France, for European markets American , European or French products ? Low shipping costs and instant communication also contribute to the blurring of borders. Truth is, we are shifting to global products, made by global companies for global markets.

Globalization :

“The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn , unlearn and relearn” (Alvin Toffler)

Tradable manufactured products are where globalization started, with spunky companies taking their experience curve advantage to other countries. That was exceptional when Air Liquide set up shop in Japan in 1907 or when Dutch shipbuilders exported to czarist Russia, it is now routine behavior expected of all leaders. The good old times are no more when US firms would routinely define their total market as the US plus 10% for Canada and a smattering for Latin America.

A testimony to the new name of the game is that even businesses that are inherently local are now run by global companies. Cement is a case in point: it does not make economic sense for this low-price commodity to travel more than 60 miles from the plant to the user’s site. Yet this industry has progressively become dominated  by just a few global competitors: Lafarge Holcim, Heidelberger Zement, Titan, Cemex, all growing by acquisitions then sharing know-how and best-practices world-wide among markets that remain fiercely local. Another example is insurer AXA of France turning around its moribund Equitable acquisition in the US thanks to expertise developed in Europe and making it a local part of a global network.

These “global-local” instances unveil a much more profound development: globalization is no longer just about relative cost of production. The stars of the fast-sprouting global village feed off a blend of technology, finance, branding, (to name just the more obvious factors), blended at warp speed to hit competition hard and fast. Amazon is a case in point: no business is more local than retailing, yet Amazon is becoming a global retailer, with each local piece engineered around the intellectual clout of the company, fast. In the similarly hyperlocal real estate business, the world-wide  success of The Trump Group Organization’s brand is of the same vein. What took Coca Cola decades to achieve can now be attained in just a few years.

Globalization is growing at exponential speed, as brilliantly predicted by Alvin Toffler in his 1970 book “Future Shock”. The connected economy we see developing is based on brains and talent, not plants scaling up on mature technologies. In the US, the yearly quota on H1-B visas is probably a much more important variable for economic success than the level of duties slapped on imported steel. Competition between countries today is increasingly a competition between universities rather than a competition between workers.

Gone are the days when a young consultant could wow a CEO by taking the then self-contained US auto industry, draw an experience curve, place GM, Ford, Chrysler, and American Motors on it then gravely explain why the market share pattern was so stable year after year. Today’s world is much more complex and fickle and CEO’s are under pressure to make tough calls without necessarily having much time to explain to outsiders. Financial analysts have adapted, politicians are still a work in process, yet it is imperative for business and governments to play from the same  book.

Key decisions today, corporate and government, can only be based on educated judgment. Judgment must be based on good information and sentiment derived from dialogue with other respected decision-makers. This is precisely what the EACC is all about. Based on a common history , the same values and the same challenges, Europe and the US are in this together.

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