Brexit, Trump and who knows what more is to come?
Boston, June 24, 2016
The 2016 U.S. elections seems to be shaping up to be a referendum on whether the U.S. feels like a rich country or a poor one. The Brexit vote may well be Britain confessing to feeling more poor than rich!
How did we get here? The vast and growing inequities among the rich and poor are obvious to all. Despite unemployment numbers appearing to be normal, millions feel unemployed and underemployed. Also the employment statistics do not seem to reflect the true plight and deep insecurities of many.
People are angry. They want the system to change in fundamental ways. They are nostalgic of the past and yearn for the good old days when things appeared easier and simpler.
And who are the primary culprits responsible for ruining their old pristine lives? Immigration and Free Trade, along with the elites who offer abstract theories on why they should make their lives better.
It is ironic however that in those “good old pristine days”, free trade was a popular mantra for the Western world. Institutions such as the World Bank legitimized it as a trusted approach to alleviate poverty and inject capital. Developing countries were
cajoled and at times even threatened when they complained about the risks to their own domestic industries and labor force. How the tables have turned!! The shoe seems to be on the other foot.
Developed countries are now behaving like the developing countries of yesteryears. The rich are beginning to feel poor.
How should we understand this shift? Because so much of trade and trade policy is driven from the vantage point of corporations who actually conduct trade, a good place to begin is to ask, how do corporations view trade as part of their global strategy?
Corporations see their businesses as global when they identify systematic advantages from their presence in multiple countries.
Take for instance, the commercial aircraft industry. It requires millions of dollars in investments and years of development to take a concept of an aircraft on to design, production and sales. Such massive scale necessitates that the returns to recover and indeed profit from the investments come from worldwide markets rather than any one single country. The source of global advantage here lies in economies of scale.
Commercial aircraft manufactures need sales all around the world to be competitive. Put differently, in such scale intensive industries corporations limiting themselves to just domestic markets can face huge cost disadvantages. If a corporation in Taiwan for example wanted to build commercial aircraft, yet decided to sell only within Taiwan, it would be easily overwhelmed by global players like Boeing or Airbus who are able to distribute their huge fixed costs over a much larger volume of sales across all countries around the world.
This explains why Japanese trade policy in the 70s targeted scale intensive industries such as autos, consumer electronics and semiconductor industries, and made products for the world rather than just for Japan.
In the “good old” days most corporations that could leverage strong economies of scale in technology, branding, manufacturing and distribution were in the developed world. And at that time, companies such as Ford and GM focused their R&D, manufacturing and assembly at home but leveraged scale by selling cars worldwide. The freer the trade, the more cars they sold around the world and the more the auto companies reinforced their intrinsic scale advantages. And, as these corporations became richer, so did their U.S. workers who made all those cars in Detroit.
Hence, fifty years back a worker operating a milling machine in GM likely owned a home with a two car garage. But a worker with similar skills operating a milling machine in India lived in a shack and bicycled to the factory. Not surprisingly auto workers in Detroit loved free trade back then. What was good for GM was also good for them.
But scale is not the only approach to gain advantages from global presence. Soon corporations realized, leveraging factor cost differences across countries could also provide asymmetric competitive advantage. That is, if Nike manufactured its shoes in
Indonesia, its competitors could face systemic cost disadvantages by not following suit.
What logically followed was a cascade of corporations making a beeline to “offshore” and later even “outsource” different aspects of their value chain such as manufacturing, assembly and even R&D to countries with lower factor costs. In doing so corporations
continued to reap the benefits of free trade and globalization. But the workers in their home country who saw their jobs disappearing did not.
Predictably, they began to see free trade very differently. The old adage “what is good for GM is good for the country” no longer made sense to them.
As factories started closing down, the pain and frustration started becoming more palpable. A generation back, workers in the developed world inordinately benefitted from free trade as the benefits of free trade and globalization also benefitted them. Today free trade allows corporations to painlessly substitute a milling machine worker in Detroit with one in Chennai. They see little difference in their skills, but a big difference in their relative costs. It obviously hurts the worker in Detroit; GM still wins.
Is it possible for the West to go back to the good old pristine days? Can we put the genie of this new avatar of free trade and globalization back in the bottle?
Despite wishful thinking on the part of many, it is going to be very difficult. Time will tell what Brexit’s true pros and cons are. It is going to be a controversial social experiment that may over time tell us a lot about our theories (or ideologies) on trade and integration.
Clearly there are costs to being part of a broader European Union. A country can understandably perceive some loss of its sovereignty. And there also are some benefits such as frictionless trade, larger markets, bigger labor pool etc. It follows logically that
countries within the union experiencing the costs of being inside the union would also prefer to share the benefits only with those within the union. Why would a country agree to bear the costs, but magnanimously share the benefits with a country leaving the union?
Many ramifications will follow. The British may soon begin feeling the pinch when products become more expensive, labor pools start shrinking, small companies begin facing tariffs for their exports, and large corporations begin relocating to countries where they perceive more freedom to enact their global strategy.
Would it have been better to stay in the Union and find ways to compensate those (in retraining efforts etc.) who fell on the wrong side of free trade? Time will tell.
The Brexit polls indicate that it was the older white people that overwhelmingly voted to leave the union. Clearly they feel the insecurities with the changing winds of globalization the most, and have no reason to trust the large corporations or the theories of the elites and pundits. They intuitively sense that the new sources of advantage corporations are choosing to leverage from globalization are not in their interest. NAFTA is now hated by many. TPP is politically toxic.
It is thus not surprising that Hillary Clinton lost to Bernie Sanders in the Michigan primaries. In fact, the rust belts of Ohio and Pennsylvania will be tough fights for Hillary to win in the general elections even though many see her current adversary as boorish, narcissistic, and xenophobic.
The rich are beginning to feel poor and will do anything to get the good old days back. To make America great again! For Britain to have its “independence”. More turmoil is in the horizon. November will tell us if the U.S. is rich or poor.
Dr. Mohan Subramaniam is an Associate Professor of Strategy at the Carroll School of Management in Boston College. He has a doctorate in Management Policy from Boston University and an MBA from the Indian Institute of Management (IIM), Bangalore.
Professor Subramaniam specializes in the areas of ecosystem strategy, global strategy, and the strategic management of knowledge and innovation. His research appears in several leading management journals including the Academy of Management Journal, Strategic Management Journal, Journal of Management Studies, Journal of International Business Studies, the Journal of Management, and the Harvard Business Review.
His research has also received several grants including those from Novell Corporation, the National Science Foundation and the Carnegie Bosch Institute, and awards from the Academy of Management, the Strategic Management Society, McKinsey & Company and the Decision Sciences Institute.
He teaches courses in strategy, global strategy and innovation management at Boston College. Professor Subramaniam has consulted with and taught senior executives at leading global companies including General Motors, Hamilton Sunstrand, Nextel, New Balance, Voestalpine, Tata Consulting Services and executive development programs at the University of Connecticut and Boston College.
Professor Subramaniam is a member of the Academy of Management, Strategic Management Society and the Academy of International Business. He serves on the editorial board of the Journal of Management.