Disruptive Changes in Global Trade?

May 4, 2010

“Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition,  with war”     Cordell Hull, US Secretary of State, 1944

In July of 1944, almost a year before the formal end of hostilities in World War II, the Allied Nations gathered together at Bretton Woods, New Hampshire to design the post war world. On the minds of participants were the key lessons of the Great Depression and World War II: the need to dismantle tariffs and economic protectionism, limit the extremes of economic competition and to build a stable rule-based global trading regime.  Unfortunately, there is growing evidence that the post war order is beginning to unravel, resurgent protectionism is undermining international cooperation and with it the reliability of global markets.

History seems to be repeating itself. In 1860, Britain was the pre-eminent global power, the United States of its day. Britain’s energy consumption was five times that of the United States and Germany, six times that of France and 155 times that of Russia. Britain used its political and economic strength to establish an international economic system founded on the principals of laissez faire, or free trade. This system grew strongly, encouraging globalization (on a limited basis) and increasing accessibility to markets. 

Unfortunately laissez faire began to unravel with the rapid rise in mid  19th century of newly industrializing nations, the most significant of which were the USA and (and a few decades later) Germany. These new industrial powers greatly increased economic competition among the Great Powers. The erosion of cooperation increased protectionism (in the form of imperial preference) and a set off a late century period of aggressive imperial conquest, particularly in resource rich Africa (the so called ‘Scramble for Africa’). 

 The Darkening Strategic Outlook

Today, the rise of the ‘BRIC’ (Brazil, Russia, India and China) is putting enormous pressure on the global system. The severe trade and fiscal imbalances that exist in the international system and the realization of potential commodity supply limitations, coupled with recessionary pressures are having a similar effect. They are undermining faith in the reliability of markets, unleashing forces of neo-protectionism and triggering a modern day ‘scramble for resources’. 

What will replace the free trade regime if it were to decline? At best we will see gradual erosion of free trade principals and international cooperation; more likely a severe economic downturn would trigger  a  protectionist backlash unleashing a sudden disruptive change in the global trade regime. When this happens expect disruption and much greater political involvement in the global economy, including (eventually) closed markets and  ‘managed trade’ packs negotiated between major trading blocks.

 Return to a more self-sufficient, vertically integrated companies

All the major trends of the past 40 years including de-regulation, globalization, reliable global markets, efficient logistics etc. made a compelling economic argument for corporate dis-integration. The situation going forward, however, is much different from the recent past. Major industries are more and more vulnerable to trade and supply disruptions and/or massive swings in the price of basic commodities. Major industries can be expected to reverse course and bias supply chain integration strategies through acquisitions (real supply chain integration) and/or deeper supply chain partnerships (virtual supply chain integration) as a hedge against global uncertainty.

 Things to Think About

  1. Where does your company and its assets fit in the global network. Do your homework so that you’re prepared before major changes take place. For instance to ensure access to key global markets you should be lining-up strategically positioned acquisition targets or compatible supply change partnerships in advance.
  2. You should also be asking yourself, what risks your organization would face if access to your global supply base became compromised and what we can do to build more resiliencies into your business model.

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