Two sides of the same coin?
Protectionism may be on the rise, but look beyond the barriers and challenges, says Morgen Witzel, University of Exeter Business School.
Reacting to the Brexit vote, the former Chancellor of the Exchequer George Osborne recently said, “Let’s make sure that we go on doing trade with our biggest export market, otherwise withdrawing from the single market would be the biggest single act of protectionism in the history of United Kingdom and no amount of trade deals with New Zealand are going to replace the amount of trade we do with our European neighbours”.* True, our economies are too intertwined to stay aloof for long. Globalization and protectionism come in cyclic patterns—it is within you to leverage the opportunities.
In 2001, the late Professor Alan Rugman predicted that the long groundswell towards greater global integration of world economies would come to an end. His book, The End of Globalization, made the point that the pressures for and against global integration were cyclical. Over the course of history, there have been times when economic entities cooperated with each other and lowered trade barriers, and times when they put up fences.
Professor Rugman was not the only one making this point.
A few years later, Paul Laudicina, then chairman of consultancy firm A.T. Kearney, speculated in his book World Out of Balance that globalization could go one of several ways. The trend towards greater integration, exemplified by the GATT negotiations and establishment of the World Trade Organization, might continue, leading to ever lower tariffs and open borders; but Laudicina thought it equally possible that this trend could reverse. His most likely scenario, however, was a rather muddy mixture of the two, with some countries banding together to create regional free trade zones, while others put up protectionist walls.
Building on Rugman’s work, too, management scholar Karl Moore and historian David Lewis noted how throughout history there have been ‘waves of globalization’; in other words, some periods of time when popular sentiment and government policy favored free trade, and others when protectionism was the rule. The Roman Empire was highly protectionist, encouraging trade within its borders but establishing high tariffs and restrictions on imports. The Chinese Empire had very similar policies. The Mongolian and early Islamic polities, on the other hand, favored free trade.
Here and now in early 2017, there are signs that Rugman and Laudicina were right. President Trump’s decision to abandon the Trans-Pacific Trade Partnership is just one of a number of signs that he may adopt more protectionist policies in an effort to boost internal investment and create jobs in the US. Britain’s forthcoming departure from the European Union may have similar features, as it looks increasingly unlikely that Prime Minister May and her government will make an effort to remain inside the European Economic Area. Mrs May has made a public commitment to free trade, but it remains to be seen how real this is, or will be.
However, there are equal and opposite signs as well. The rise in France of Emmanuel Macron, who may well become the next president of the country later this year, is an interesting example. Macron is committed to open borders and free trade, and has received significant support as a result. The fury of the ASEAN countries over President Trump’s abandonment of the TTP suggests many of them remain committed to free trade as well. Laudicina’s scenario, of a patchwork world with some companies becoming more protectionist while others continue to follow the principles of free trade, is starting to look more and more likely.
As individual business men and women, we have very little control over which policies are adopted by our governments. All we can do is try to read the tea leaves and work out which direction things are going, and then try to adapt our own policies as best we can. So, how can we do so?
In order to come up with some strategies for survival and prosperity, we need first to understand the basic economics of protectionism and free trade.
History shows us that protectionism starts to take hold when ■ domestic industries and jobs are
threatened by the popularity of imports which undercut local goods on price, capital outflows to pay for imports begin to impair the domestic economy, or both happen at once.
Let us take as an example: the most important protectionist movement of all, the English and Scottish mercantilists of the seventeenth century. Writers such as Josiah Child, Thomas Mun, and Andrew Yarranton and politicians including Prime Minister Robert Walpole all argued that Britain’s significant economic weakness was due to the draining effect of imports. Cheap imported goods were seen by customers as more attractive;
they therefore spent their money on these, to the detriment of higher-cost, higher-price domestic producers, and both money and jobs flowed away overseas.
The mercantilists argued that this must end. Consumers should be encouraged by whatever means necessary to buy local: drink English beer rather than French wine or Dutch gin, wear clothes made from local wool rather than imported silk. At the same time, domestic producers should be encouraged to export as much as possible, in order to achieve a positive balance of payments. This theory of economics treated trade very much as a zero-sum game: we win our share of trade by taking away some of yours. It led to immense rivalries, trade wars, and sometimes real wars too. In this context, it is interesting to note that President Trump is calling for both more economic protection and an increase in defence spending. This may not be a coincidence.
That said, protectionism does offer economic benefits, especially to industries that are vulnerable to competition. Even the most ardent of free-traders still embrace forms of protectionism. The European Union maintains the Common Agricultural Policy, a subsidy for farmers that serves to protect them from open competition. France is a particularly strong supporter, and it could be argued that many of France’s most distinctive brands—brie and camembert cheeses, champagne, cognac, Bordeaux wines—only survive because of this protectionist barrier. Whether these brands could compete in an open market without regulatory protection is not at all certain.
In Canada in the 1970s, protectionist measures were introduced in the music industry, to give Canadian musicians and composers some protection from larger, better-funded American record labels who—it was perceived— were swamping radio and other entertainment media with American music. The measures, which lasted for some twenty years, enabled the domestic music industry to grow and develop, to the point where, when protection finally ended, the industry was strong enough to stand on its own two feet. Today, Canadian musicians and music producers are known around the world.
Fundamentally, though, there is a paradox at the heart of protectionism. With rare exceptions —Mao Zedong’s China, Enver Hoxha’s Albania— protectionists are not against all trade; they are merely against imports. They are quite happy to export because this earns hard currency and brings prosperity to domestic companies and workers. We want to keep your imports out, they will say, but we insist on being able to export to you.
And, of course, if every company blocks imports while insisting that other companies have to take their exports, something has to give. One of two things will happen: conflict, or compromise. Eventually, two countries that desire to export to each other will have to sit down around a table, just as some European countries did back in the 1960s, and agree that in exchange for the right to export, they will also take in imports.
For this reason, as Alan Rugman pointed out, protectionism and free trade run in cycles. Trade barriers do not last for the simple reason that
Protectionism and free trade run in cycles. Trade barriers do not last for the simple reason that they cannot last.
they cannot last. Countries survive through trade. Invasion, conquest and forcing trade down people’s throats is one way to do it—it worked for the Romans, at least for a while—but in the end, some form of cooperation will always be necessary, and with cooperation comes free trade.
surviving in a protectionist world
To come back then to the issue of survival strategies for businesses, let us start with an observation. The current drive towards protectionism will not last because, as noted, it cannot last. Economic cycles happen more quickly these days, and even if protectionism does take strong hold in countries such as the US, as a force it will soon burn itself out. Thus, the first rule of strategy making must be, plan ahead, for a day when free trade once again becomes the dominant trend. It will happen.
Until then, how to secure the future? Already, as the events of 2017 unfold, it is becoming clear that location strategy is vitally important. If you are in a business which is strongly dependent on free trade— financial services, automotives—it is essential to locate in place where barriers are limited and there is good access to other markets. Here Laudicina’s theory of islands, regions which band together to promote free trade locally, becomes important. We need to study the geopolitical trends and look at areas where there is still strong commitment to free trade. Will the European Union hold together? Will ASEAN continue its free trade commitment? Will individual countries like Australia emerge as free trade zones, welcoming international investment and cross-border trade rather as the Netherlands did in the seventeenth century?
If so, then management should look closely at these as potential locations for investment. HSBC and other banks have already announced plans to shift jobs out of the UK, probably to either France or Ireland. Car makers have been drawing up similar contingency plans. Indian companies seeking to expand outside of India will need to consider very carefully where they wish to invest. The old traditional investment destinations may no longer be the best. It is likely, too, that those countries and regions still committed to free trade will be offering incentives to invest. Look out for these, and be ready to cherry-pick the opportunities.
Within protectionist regimes, however, there are still short-term business opportunities. Entrepreneurs should identify markets where imported goods are dominant. If the supply of imports is choked off, how will the gap be filled? In India, Lakmé Cosmetics was found in response to a shortage of cosmetics and toiletry products under the highly protectionist post-Independence government. Lakmé prospered because, at least at first, it had strong market demand and very little competition. Be on the lookout for other similar markets that will need new domestic production in order to fill them.
Another fruitful area for entrepreneurs, or companies seeking to diversify, is goods where a ‘Made in…’ label can offer a cachet. Amstrad, the British electronics company, did well in the personal computer market for many years because it was perceived as patriotic ‘to buy British’ rather than choose an American import such as IBM.
The first rule of strategy making must be, plan ahead, for a day when free trade once again becomes the dominant trend. It will happen.
French car manufacturers, Renault, Peugeot, and Citroën enjoyed similar favor in a market where French customers felt it their patriotic duty to buy local; and of course, in both cases, the domestic producer was protected by tariffs on foreign goods.
Tariffs push prices up, and domestic production which had once been uncompetitive for reasons of cost can suddenly now become profitable—which is, of course, exactly what the protectionists intend should happen. In the US, there is a long-cherished project to revive the domestic coal and steel industry. If protectionist tariffs on imported steel are severe enough, it may be that these domestic industries can become competitive once more. However, this is risky because an end to the protectionist cycle can leave these industries badly exposed. Managers need to use the period of protection to strengthen their companies until they are genuinely competitive and can compete in open markets, rather like the example of the Canadian music industry given above.
Finally, it is important not to become too ideologically bound. Protectionism may be on the rise, but we still have businesses to run. We still have employees who look to us to provide them with work; we still have customers who need the goods we make; we still have investors who need to see a return on their investment. No matter how one feels about the rise of protectionism, we still have a job to do. If we look beyond the barriers and challenges, there are still opportunities; perhaps fewer and further between, but they are still there. It is up to us to have the courage to reach out and seize them. ■