“The golden age of globalisation, in 1990-2010, was something to behold,” wrote The Economist in a January, 2019 article. “Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalised.” The very nature of the global firm was transformed during these two decades, with The Globally Integrated Enterprise destined to become the corporate model of the future, said IBM CEO Sam Palmisano in a 2006 Foreign Affairs article.
But, then global trade started slow down. “After the go-go 1990s and 2000s the pace of economic integration stalled in the 2010s, as firms grappled with the aftershocks of a financial crisis, a populist revolt against open borders and President Donald Trump’s trade war,” wrote The Economist in its June 18, 2022 lead article. “The flow of goods and capital stagnated. Many bosses postponed big decisions on investing abroad: just-in-time gave way to wait-and-see. No one knew if globalisation faced a blip or extinction.”
“Now the waiting is over, as the pandemic and war in Ukraine have triggered a once-in-a-generation reimagining of global capitalism in boardrooms and governments,” added the article. “Everywhere you look, supply chains are being transformed, from the $9trn in inventories, stockpiled as insurance against shortages and inflation, to the fight for workers as global firms shift from China into Vietnam. This new kind of globalisation is about security, not efficiency: it prioritises doing business with people you can rely on, in countries your government is friendly with.”
Most everyone agrees that global supply chains will be restructured over the next decade, accelerating the changes that were already in motion. “Decision-makers are increasingly concerned that supply chains should be robust, not just efficient,” said the briefing article in the same Economist issue. “As a result they are choosing to depend less on jurisdictions where they are exposed to risk. And countries are experimenting with industrial policies aimed at self-reliance or international pre-eminence in at least some ‘strategic’ technologies and businesses.” Let me discuss each of these potential changes.
Balancing efficiency with resilience
The explosive growth of global supply chains in the 1990s was driven by an obsession with economic efficiency. The elimination of waste, - whether of time, materials, or capital, - was viewed as fundamental to competitive advantage, turning management into a science taught in every business school. Thomas Friedman’s The World is Flat became an international best-seller in 2005 by nicely explaining what globalization in a hyperconnected world was all about, including the key forces that contributed to the flattening of the world, - from the explosive growth of the Internet and business management software to the rise of outsourcing, offshoring and just-in-time supply chains.
“Why would we not want managers to strive for an ever-more-efficient use of resources?,” asked Roger Martin, - former dean of the Rotman School of Management at the University of Toronto, - in a 2019 article. Of course we do. But, an excessive focus on efficiency can produce startlingly negative effects. To counterbalance such potential negative effects, companies should pay just as much attention to a less appreciated source of competitive advantage: resilience.
“Resilience is the ability to recover from difficulties - to spring back into shape after a shock. Think of the difference between being adapted to an existing environment (which is what efficiency delivers) and being adaptable to changes in the environment. Resilient systems are typically characterized by the very features - diversity and redundancy, or slack - that efficiency seeks to destroy.” Planning in highly uncertain times, like the ones we’ve been going through, need to focus on a company’s ability to quickly react to fast changing circumstances, as has been the case with supply chains disruptions over the past few years.
Cybersecurity and international trade
The pandemic has now made the case for accelerating the rate and pace of a company’s digital transformation. Enterprises will likely embrace and scale the changes they were forced to make to help them cope with the crisis. At the same time, cybersecurity threats have been growing. Large-scale fraud, data breaches, and identity thefts have become far more common. As we moved from a world of physical interactions and paper documents, to a world primarily governed by digital data and transactions, our existing cybersecurity methods have been far from adequate.
More recently, international cyberthreats have escalated, with a growing number of high profile attacks by criminal groups and adversarial governments. Cybersecurity is now invoked by governments as a major aspect of national security, as they focus on protecting their critical infrastructures and the overall wellbeing of their nations.
Beyond terrorism and national security, cyber threats have the potential to wreak havoc with international trade and the global economy. In a recent paper, Framework for Understanding Cybersecurity Impacts on International Trade, MIT professors Stuart Madnick and Simon Johnson and research scientist Keman Huang wrote that cybersecurity concerns have become a key issue for international trade policy.
“Governments around the word have begun to develop strategies to protect themselves against cyber threats,” said the authors. “More than 50 countries have published a cybersecurity strategy to define the security of a nation’s online environment. … One typical example, that has been informally suggested, is that potentially dangerous products coming from questionable countries should be excluded from import. But this raises many policy issues, such as (1) what is a questionable country considering the globalized supply chains for almost every product, (2) what products are of most concern, and (3) assuming such restrictions quickly become worldwide policies with retaliations, what might be the impact on international trade and the economy?”
History shows that breakdowns in international trade can lead to very serious economic crises. In the aftermath of the 1929 stock market crash, the US imposed the Smooth-Hawley Tariff Act, which raised tariffs on over 20,000 imported goods to reduce pressure on the growing trade deficit. In response, over 25 US trading partners increased their own tariffs. Global trade plummeted by 67%, significantly worsening the effects of the Great Depression.
National and regional supply chains
Over the past decade, global trade has stagnated, with the share of American firms’ revenues and profits from abroad mostly flat. “One reason was automation, which reduced the labour intensity of manufacturing and therefore the competitive advantage of lower-wage countries that had become offshoring hubs in the 1990s and 2000s,” said The Economist. “Another was that wages in those countries rose. In 2000 China’s average annual income per person expressed in dollars, a reasonable proxy for the wage costs facing a multinational firm, was 3% of America’s. … By 2019 that had risen to 16%.”
The pandemic and the war in Ukraine are accelerating ongoing supply chain transformations, such as bringing production closer to home. A number of far-flung supply chains will likely be replaced by national and regional ones, especially for critical supplies like those in the medical and pharmaceutical sectors, and for complex production where assemblies have to cross borders repeatedly, as is often the case with automative manufacturing.
Over time, it’s quite possible that companies in developed economies will attempt to set up new clusters of national and regional production, relying on technology and automation instead of labor cost arbitrage. Zara, the Spanish apparel retailer, is an example of a company that has set up a diverse regional supplier base, not only to help avoid the pain of disruptions but to also help them react faster to changing tastes in fashion. Zara’s different apparel lines reach their shops independently, rather than being part of a highly integrated supply chain.
“Redesigning supply chains takes time, and noticing an effect takes even longer. … But the shift is under way,” said The Economist in conclusion. “Increased economic integration did not bring about the greater global harmony that some had hoped it would. It is difficult to imagine that fragmentation will do much better, and it is all too easy to imagine it making things worse. That could be one of the reasons why, for a long time, changes to the fundamental shape of globalisation were much talked about but not much pursued. Now that they are actually happening, they are contributing significantly to the new anxiety.”
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