Are U.S. traders creating hurdles in the world marketplace?
THE COUNTRY'S TOP 150 CEOs, collectively known as the Business Council, were in Washington recently to hear President Clinton extol the virtues of the global marketplace. Profits and revenue growth generally are high these days and, for many of the nation's biggest companies, foreign operations now contribute nearly half of both.
Yet it was the question of what may come next that distracted the president and his corporate audience. The fragility of the stock markets; the uncertainty of economic growth patterns; the prospect of an inflation-and-interest-rate revival-all cast gray uncertainty over the record export surge of 1996 and the narrowing trade deficit.
For one thing, many of the executives in attendance were crediting the globalization trend with helping to smooth out the up-and-down cycle of domestic business activities, which has interrupted economic expansions in fairly regular waves ever since business statistics first were recorded. As a result, they argued, the threat of a sudden surge of inflation, with its choking tandem rise in credit costs, was less likely this time than it has been in past cycles.
"As far as the business cycle is concerned, I am convinced that if you go back to 1960 and look at the peakto-trough cycles, it has become more benign with every decade," says Jack Welch, CEO of Fairfield, Conn.-based General Electric Co. "As information technology, supply-chain management, and inventory management have improved on a global basis, the ability to respond to these cycles have become much faster and much better. The peak-to-trough cycle changes of 3% to 4% of the '70s have become 1% to 2% in the '90s."
That is not something new, "it's a 40-year phenomenon," Welch says.
"Economic planning is no longer the province of a few priests," he says. "Information technology reaches across company divisions, across companies, and across national boundaries. Information is quickly available, so inventory excesses aren't there anymore. Other excesses are moderated, too, and I think we can easily handle more growth on the industrial side. I won't argue that there are constraints in the financial markets, but we in manufacturing can handle more growth without causing an inflation rise. Right now, we don't see much pressure on prices, let alone inflation, anywhere-not in Europe or Asia."
Alan Bossidy, CEO of Morris Township, N.J.-based Allied Signal Corp. and president of the Business Council, was more cautious, but also agreed that world markets have proven to be a strong anti-inflationary force.
"I am not a proponent [of the idea] that the business cycle is over. But I do feel we don't get enough commentary on the impact of world markets," Bossidy says.
World markets "have made a significant contribution to the lack of price pressures," he says. "As a consequence, you don't see the inventory excesses of time past, the prices of times past, the things that lead up to a recession. So I am sure we will be visited some day by a business downturn, but the distance of the cycles up and down has changed, and that is due to the fact that we are in a world marketplace. Information systems have come to the point where they can have real impact on inventory control and other management tools.
"Everyone wants jobs-in Detroit, or in India, wherever. That puts the competition on keeping prices down and it puts a premium on productivity gains. Remember that recessions are borne of excess inventories, excess inflation, excess prices, and excess wage demands. I think the world economy stymies that and that we, especially the United States, are the beneficiaries," Bossidy says.
But not every global manager is thrilled by the prospect.
Dearborn, Mich.-based Ford Motor Co. ranks as the second largest (revenue) company in the United States. CEO Alex Trotman has been lauded for more than doubling Ford's first-quarter profits to $1.47 billion, attributable to slashing $800 million in costs and to a surge in foreign automotive earnings to $168 million, from $94 million in the same quarter of 1996.
Trotman says he is concerned that, instead of smoothing out the U.S. national business cycle, big firms may merely have made themselves even more vulnerable to world business currents that are beyond anyone's control.
He describes himself as "somewhat uneasy." Motor vehicle industry sales in both North America and Europe are flat. Cost savings are key to the productivity gains that drive the profits. No longer can one count on either a rise in sales or in market share, as in years past.
"Sure, we are being pushed overseas, into Asia especially," Trotman says. "The best I can say about this is, so far, so good. There are a couple of things that bother me, though. It is true we have a quicker flow of information, but that also has the effect of speeding up the business environment. You get more information more quickly, but you have less time to really consider decisions. The enormous flows of capital around the world also serve to magnify the consequences of mistakes; you can lose a lot of money in a hurry," he explained.
"But I also worry about what I see as a regionalization of the world," he says. "I am not convinced that we are truly globalizing the world marketplace. Some regions are prospering and growing, others are lagging, and some haven't caught on at all. I worry about the capacity of our institutions - the World Trade Organization, for one - to stand up to a serious world economic crisis, which could happen very quickly in one part of the world and spread, gathering momentum, to other parts of the world. We've seen examples of that in various currency and banking scares over the last 10 years: Mexico, Singapore, Japan," Trotman adds.
"The most dangerous risk in such a crisis would be the throwing up of protectionist barriers as a response, just as we did after World War I. The nations that have not benefited as much from globalization would be the most vulnerable to protectionism," he says. "You see signs of that in parts of the Indian and Asian regions. You could see how Mercosur in Latin America might turn into a barrier. But you also have to allow for the wealthier countries establishing their own protected territories, too, in a real world crisis. I could see NAFTA becoming one. I wouldn't be surprised if the European Union and North America were to set up preference arrangements against the rest of the world. These are real prospects, because I don't think the existing international facilities are in place to weather through a real crisis," he says.
Making the sparks fly: Just what kind of trade mechanism is the United States piecing together?
It is uneasiness about the global trade market that is the new element in the dialogue swirling around trade's impact on America's future. No longer do free-trade advocates and critics debate about what impact globalization will or might have on U.S. business health. This time, both sides to the debate have begun to argue about the early returns coming in from both the corporate and foreign-policy fronts.
Globalization no longer is about U.S. corporations trading the higher costs of doing business in the United States for the higher returns on capital investment of making and selling in foreign locations. Increasingly, American corporate chiefs find themselves running harder abroad just to stay in place in the profits race. The globalization pace sends billions of dollars in capital spinning around the planet at ever higher velocities.
There is another trend developing, as well. Getting away from the U.S. scene for fresher, more open markets, is no longer quite the liberating experience it was 15 years ago. American public and political concerns about human rights, environmental impact, and the domestic consequences of doing business abroad are following close behind the executive decision to commit money and managerial expertise overseas.
Whether one approaches the globalization debate from the left or the right, most analysts agree the test is whether there is a crisis looming of such dimensions as to duplicate for the current financial and manufacturing trend what the great collapse of 1929 did to the much smaller industrial bloc of nations of that time. And whether one talks to seasoned businessmen like Trotman or Welch, academic economists or political commentators, a systemic collapse of financial markets will put insupportable pressure on the politicians of rich and poor nations alike to save the jobs of their worker-voters.
For author William Greider, the crisis already is upon us.
In his book One World, Ready or Not: The Manic Logic of Global Capitalism (Simon & Schuster, 1997), Greider notes that by 1992 the financial assets of the mature economies of the Organization for Economic Cooperation and Development totaled $35 trillion, or double the actual output of those countries. Consulting giant McKinsey & Co. estimates that by 2000, that total will reach $53 trillion, or triple the economic output of those economies. Far too much of that growth, Greider argues, is in the form of debt.
"Something has to give," Greider told World Trade. Any nation is in trouble if it borrows to pay for its loans faster than it creates new productive base. When many wealthy nations are doing this at once, the system is in trouble." He cites the rolling series of bubbles and collapse that have run from Japan to Mexico to Eastern Europe and back again through Wall Street in the last five years as proof that the tectonic plates of the global economy are signaling a dangerous shift out from underneath us.
Not everyone agrees that the situation is inevitably hopeless. Dani Rodrik, an economist and political scientist at Harvard's Kennedy School of Government, argues that globalization is neither irresistible nor necessarily destructive. As evidence, he points to the bitter row that France, Germany, and Britain are having about forming a true economic union that will take over many of the functions of national sovereignty.
"What aggravates this situation is the tendency of policymakers to base their arguments on the need to increase productivity and competitiveness," Rodrik says. "So you have the European Community wrangle, and you have the extension of NAFTA, which will bring up issues inside the United States that go way beyond the individual Latin American countries. In East Asia you see the South Korean government surreptitiously changing labor laws in pre-dawn legislative meetings while the opposition is not in the building; they claim the need is for Korea to be more competitive with Japan, or Taiwan, or whomever.
"There are two complementary strategies that governments - ours included-can pursue to avoid the kind of catastrophe that some are predicting. One is an internal strategy, where governments stop neglecting the role of the social safety net. The pruning of the welfare state is not desirable from the standpoint of social stability, nor does it make a country more economically competitive. All this does is set up the kind of political backlash that turns into a protectionist surge whenever a crisis emerges.
"The other challenge, the external one, is to develop a set of multilateral rules, in and around the World Trade Organization, that encourages greater chances to expand but within a convergence of domestic institutions and international standards that affect trade between all kinds of nations. That would have to include some escape mechanisms for countries caught too far off balance in certain situations. A crisis is not inevitable."
Copyright World Trade Magazine Inc. Aug 1997
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