Two sides of the same coin?

The Smart Manager - - Contents - MOR­GEN WITZEL IIS A MAN­AGE­MENT HIS­TO­RIAN, AUTHOR OF 21 BOOKS, AND A FEL­LOW OF THE CEN­TRE FOR LEAD­ER­SHIP STUD­IES AT THE UNIVER­SITY OF EX­ETER BUSI­NESS SCHOOL.

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?

why pro­tec­tion­ism?

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. ■

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