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Globalisation’s New World: How Should Business Adapt?

May 31, 2018


The future is not what it used to be. We are living through a period where globalisation, international trade and global supply chains all risk being thrown up in the air. Many put this down to the unpredictability of the current White House incumbent. A president who refuses to play by the generally accepted rules of the game. It will all go back to normal – eventually.

Business leaders who take that view are taking big risks. The backlash we are seeing against globalisation is not a blip. It reflects fundamental political, cultural and economic changes that call into question the balance of benefits and costs that accrue from international trade. It also reflects the changing reality of global geopolitics.

Let’s start with the latter.

The post-war world order was characterized by Western dominance and overseen by the steadying hand of US hegemonic power. Now we have three more or less equally potent trading blocs – the US, China, and the European Union – each with their spheres of influence. Economists have known for decades that, in such a geopolitical structure, competition between blocs becomes much more likely than co-operation. And that is exactly what we are seeing.

In a digitised world, trade has also started to become more clearly enmeshed with questions of national security. Privacy and national security issues affect trade in ways that are much deeper than they have previously – from the manufacturing of routers, to the security of data platforms, to building self-driving cars. For instance, Qi Lu of the Chinese tech company Baidu explains: “The days of building a vehicle in one place and it runs everywhere are over. Because a vehicle that can move by itself by definition it is a weapon.”

Globalisation has driven, and been driven by, the rise of the multinational corporation. Economically, this was seen as a model of economic efficiency. Now many see the multinational model as potentially corrosive. Causing social upheaval as companies rapidly move investment and employment from one country to the next in search of the lowest costs while leaving governments to clear up the resulting disruption through the welfare system. Putting pressure on elected governments by playing them off against each other in investment, employment, taxation and lowering of regulatory standards. And coming to dominate markets through monopoly or oligopoly. There is a limit to how long democracies will tolerate these distortions and the shift in power from elected governments to commercial interests.

And particularly so when dealing with competition from China. Governments in the West are starting to look enviously at Chinese companies that are mere extensions of state power and act decisively in the national interest rather than in the short-term interests of shareholders – wherever and whoever they happen to be.

For instance, the world supply of cobalt, essential for the production of batteries and the electronic goods on which our whole defence and economic infrastructures depend, is increasingly coming under Chinese control. The CEO of Glencore, one of the biggest miners of cobalt, has been quoted as saying that he would happily sell the company to Chinese investors if they offered a price that was right for shareholders. This and many similar situations bring into sharp focus the tensions between security, open trade and cross-border merger activity.

Many are now also questioning the balance of benefits and costs of international trade. ‘World trade produces net benefits for all’ was the 20th century mantra. Now it is clear that such benefits are very unevenly distributed with consequent economic, social and political implications. The free movement of global capital was seen as a vital fuel for growth and development. Now it is also seen as a mechanism for financial destabilization, a system for hiding large amounts of illicit money, and a facilitator of tax arbitrage. Low labour costs were seen as the competitive advantage of developing countries. Now they are seen as the basis of ‘unfair competition.’ Persistent unidirectional trade imbalances were dismissed. Now we understand their corrosive effects on deficit countries.

It is tempting for senior business people to try to preserve the status quo that has, to date, served well. That would be to underestimate just how deep are the tectonic shifts affecting the fundamentals on which the 20th century conception of free trade was built. Just how inadequate they are for a 21st century world.

There may also be a tendency to place these changes in the convenient box of ‘political risk’ – by which most business leaders understand the impact of political decisions on their business. But it is also worthwhile broadening the definition of political risk to include the social, and ultimately political, consequences of how leaders choose to run their businesses. It could easily be argued that the backlash against globalization is, at least in part, driven by the behaviour of businesses, and particularly large, multi-national businesses, in optimizing their business models almost exclusively for shareholder benefits.

Neither are the changes merely political. Consumers are increasingly falling out of love with mass produced goods. In a finite world, economies that see their future as driven by ever-increasing consumption are increasingly called into question. Environmental externalities are becoming harder and harder to ignore.

The most forward-looking companies are already ahead of the curve. “Now we have a strategy of localization and regionalization. We think you should invest in your domestic market as much as you can” says Inge Thulin of 3M. “Chasing the lowest labor costs is yesterday’s model” according to Jeff Immelt.

Businesses should consider the idea that autarkic globalization will, in future, no longer be an oxymoron. Change will happen, is happening. It will progress in fits and starts giving business leaders chance to re-think and re-structure their business models. Neither should such re-structuring be based on knee-jerk reaction to short term events. Rather it needs to be based on a full understanding of the political, cultural and economic shifts that are underway and will, in some manner, continue.

Change always brings opportunity for those who are better prepared than their competitors.

Dr Joe Zammit-Lucia, Radix think tank

Author – Backlash: Saving Globalisation from Itself

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