Globalisation—a term first coined by Theodore Levitt and a buzzword at Davos until recently—has suddenly become rather controversial. Some world leaders seem to regard trade as an ‘economic attack’ by insidious enemies with invaders taking advantage of the ‘invadee’ as evidenced by gaps in balance of payments (difference between exports and imports) and loss of jobs. They wish to ‘Make it all’ and in so doing make their country great again. The logic is not just flawed, it’s outright dangerous.
Like companies, every nation has a competitive advantage—and similarly a competitive disadvantage—in some areas. Writing presciently, almost 27 years ago to the day (March–April 1990 issue), in the Harvard Business Review, Professor Michael Porter laid down four conditions for a nation to achieve competitive advantage: First, on the basis of the nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. Second, the nature of home-market demand for the industry’s product or service. Third, the presence or absence in the nation of supplier industries and other related industries that are internationally competitive. And finally, the conditions in the nation governing how companies are created, organised, and managed, as well as the nature of domestic rivalry.
The underlying message was clear: no country can do (or make) everything, and to succeed, each must focus on what it is best suited to do, i.e., with a clear competitive advantage.
Let’s consider two small, focused and highly prosperous countries—Switzerland and Singapore. (I had the privilege of living and working in both).
Neither has any mineral wealth that can be pumped out of the ground, and they both have some serious geographic constraints. Switzerland is a landlocked, largely mountainous country. Singapore is a tiny island (derogatorily referred to as the ‘little red dot’ by its envious neighbors!) which was once a swamp, now in the middle of the world’s busiest sea-lanes, with an excellent deep water port…but little else! Given the tiny populations, neither has a significant home market to tap.
Both are however blessed with some of the most industrious and creative people on the planet… and more importantly, sound leadership.
Both focused on high precision, not easy to replicate products (like watches by Switzerland, pharma, specialty chemicals, integrated circuits by both) that require a small amount of raw materials but tremendous expertise to convert them into high value end products.
Both created exceptional human capital, brought in outside workers where needed to deliver outstanding world class services in banking, insurance, hospitality, transportation, education and so on – but have no hesitation importing their requirements of potatoes and pork for roesti and char-siew.
Neither, you’ll notice, ever had a ‘Be Swiss. Buy Swiss’ or ‘Make Singapore Great Again’ campaign! Both decided – consciously – there’s no virtue in making (or doing) everything; make (or do) what you can better than others, create a business climate that encourages that… and buy (read: import) everything else that others can make (or do) better and cheaper!
What Prof Porter did not say was as important as what he did. No ‘competitive advantage’ is permanent and keeps changing as technology develops, the economy grows and demographics change. China for instance leveraged cost arbitrage for decades and produced vast quantities of low cost goods for the world using a cheap labour force. Over time that advantage was lost and shifted to other countries with lower costs. Same for India’s BPO centres offering low cost offshore services which are fast moving away.
And every time there’s a ‘shift’ some sections of Society benefit… while others lose out. Been happening for centuries.
With a GDP of over $18 trillion, USA is the world’s largest, most powerful and vibrant economy by far. The single most important contributing factor has been a culture that fosters creativity, innovation and risk taking by a populace continually enriched by immigrants. It’s a magnet for talent like no other; no wonder USA has won over 350 Nobel Prizes – more than all other nations combined. Make no mistake: America is already great; just look at the lines at American embassies of people wanting to emigrate.
USA also has a small but vocal swathe of middle-aged people (between 40 and 60 years of age) who possess outdated skills, have relatively low education and little inclination to retrain, but who became used to a comfortable life that came via the American Dream (“a chicken in every pot; a car in every garage”) which for some has now turned into a nightmare. Most carry a sense of entitlement with an undercurrent of resentment and the easiest scapegoats are foreigners and immigrants—especially illegal, or if that doesn’t work, anyone with a brown skin.
If you pardon the sweeping oversimplification, robots today run manufacturing plants while Asian immigrants write software code for Artificial Intelligence and manage the Cloud, carry out surgeries, teach in Ivy League schools and provide top end services on Wall Street. Latino immigrants—at least the illegal ones—keep the streets clean, flip hamburgers and pick the cherries. America needs them all.
A short walk through a Wal-Mart aisle shows how much the US depends on China and other low income countries to meet consumer demand. (Wal-Mart’s Chinese imports amounted to $49 billion in 2013). However banning imports or imposing punitive tariffs will not create a local industry for readymade garments or toasters… or jobs; it’ll just push up prices. There’ll still be no jobs for the dispossessed and their grocery bills will be much higher.
And what developing countries earn by running call centres, exporting garments, shoes and other labour intensive products is spent on Boeing airplanes, F-16s, iPhones, Microsoft software, Hollywood movies watched while sipping Coke, eating McDonald’s hamburgers, drinking Starbucks coffee, buying on Amazon and taking rides with Uber. The loss of export earnings will push many in developing countries back into poverty - making smuggling, crime and terrorism likely options, that is if illegally entering the US doesn’t work. The ‘wall’ with Mexico doesn’t take into account the over 12,000 miles of unguarded shoreline!
Mexico, incidentally, used to be a major conduit for smuggling drugs into USA until a few years ago. Rising prosperity and sincere, efficient policing has brought this down significantly. A ‘wall’ and punitive import tariffs on legitimate low cost goods will surely reverse the trend. ‘Be American, Buy American’ and keeping the Bad Hombres out is not going to make ‘America Great Again’. More likely it’ll make the world a very unsafe place.
Actually one major and often overlooked hidden benefit of trade resulting from globalization: it prevents wars! You may argue with nations that disagree with you but you don’t go to war with them as it hurts you where it matters most – in the economy and jobs.
Popular slogans may win elections but are no substitute for pragmatic economic policy. Hope the architects of ‘Make in India’ have read and learnt the lessons from The Competitive Advantage of Nations by Prof Michael Porter who, incidentally, will be celebrating his 70th birthday next month.
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