Sunday, 29 November 2015 03:45

International Business Faces a Challenging Global Marketplace

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International Business Faces a Challenging Global Marketplace

Murray Weidenbaum

Murray Weidenbaum holds the Mallinckrodt Distinguished University Professorship at Washington University in St. Louis, where he also serves as the honorary chairman of the Weidenbaum Center on the Economy, Government, and Public Policy.

To break the suspense right away, I offer my forecast of the global economy. By all the standard measures, worldwide growth is picking up once again. The overall world economy is rising at over 4 percent this year. That is in "real terms," after boiling out the effects of inflation. That's an improvement, although far from setting any new record. Nevertheless, that favorable trend should continue at about that rate into 2011.

The business outlook likewise is upbeat and a combination of threats and opportunities, both in the short run and especially in the longer run. That requires a bit of explanation, so here goes.

At the outset, it is useful to remind ourselves of where we stand. Almost every way you measure it, the American business system is the largest and most successful in the world. Far more often than not, we are the trendsetters. In industry after industry, U.S.-headquartered companies lead their competitors on a worldwide basis. This is so whether you examine high-tech aerospace design and production where my old company Boeing has been in the lead for decades, or low-tech soap and detergents and encounter that household giant Procter and Gamble.

On a more micro level, individual brands like Coca-Cola and Microsoft generate instantaneous worldwide recognition. In fact, Cadillac has become an adjective, denoting a top-of-the-line product. FedEx is often used as an active verb to indicate delivering an item as rapidly as you can.

Nevertheless, all this good news does not mean that U.S.-based companies -- or any other firms competing in the global marketplace -- can rest on their laurels. Some historical perspective helps on that score.

Back in the middle of the 19th century, European companies, especially those located in England and France, dominated international commerce. And then a rapidly expanding newcomer in North America elbowed its way into the club of leading world economic powers. In absolute terms, the economies on both sides of the Atlantic Ocean continue to expand substantially. But Europe never regained its dominant share of the world market.

In the second half of the 20th century, Japan played a role similar to that of the United States a century earlier. It became an important member of that club of economically advanced nations. Japanese companies such as Sony and Toyota became strong global competitors. Major Western industries continued growing, often rapidly, but frequently losing some market share. Today, we are in the midst of yet another such significant shift in the array of economic and market power. China has rapidly become a major force in the international marketplace. By some measures, it is already number two, second only to the United States. However we measure it, our lead is rapidly shrinking. The fact that this country initiated the most dangerous global credit crisis since the Great Depression of the 1930s does not exactly enhance American leadership in either economic or financial matters. We cannot take much consolation from the sad current experiences of the Euro bloc countries.

Forecasts are inherently fragile. That is a kind word from this veteran prognosticator. So I'll state my point carefully: there is a reasonable likelihood that, in the next several decades, China will surpass the United States as the largest economy in the world. That shift surely is not inevitable.

Historians remind us that in the middle of the previous millennium -- around 1500 -- China was the most culturally advanced and economically powerful nation on the globe. That is, until one misguided emperor decided to reduce foreign influences by cutting off trade with the rest of the world. China is still trying to recover from this fundamental blow to the economic prospects of the Middle Kingdom. In the future, self-inflicted wounds of similar magnitude may come from a very different source in that huge and not entirely unified nation of 1.3 billion people.

In any event, on a per capita basis, the United States, by a very substantial margin, will still be the wealthiest large country on the globe. Our domestic marketplace will remain the most attractive. American companies will continue to be worldwide leaders of many key industries. But that is precisely why it is so important to divide our examination of the changing global marketplace into the short-term and the long-term situation. The differences will be substantial and occasionally startling.

In the short run, many countries, certainly including our own, are still struggling to recover from the sharpest economic and financial decline in over 70 years. The recovery is now significant but not especially rapid. Despite all the talk from Washington about focusing on employment, job creation in the United States continues to be discouraged by a seemingly endless array of federal initiatives that -- intentionally or otherwise -- make it more expensive to hire new employees in the United States or even to maintain the size of existing workforces. The costly and frustrating red tape generated by the detailed rules accompanying the stimulus and health reform legislation have been amply discussed by business executives and in the trade press.

However, that is not the end of the line. The latest administration proposal to increase the bureaucratization of the workplace has not received the attention it deserves. Apparently the U.S. Department of Labor, without any new legislative authority, is developing detailed regulations to require every business to prepare a new and detailed set of reports showing specifically how they will comply with a host of employment-related laws and rules. These new requirements in the works range in coverage from wage and hour laws to equal employment guidelines to job safety regulations to distinguishing between contract workers and those that are directly on the company payroll. All this will be reviewed by a new breed of Labor Department compliance officials.

From a more macro viewpoint, American companies are likely to find it challenging to raise new funds in domestic capital markets that will be dominated by increasing levels of governmental deficit financing. The rising interest rates likely to be required to accommodate the unprecedented amounts of Treasury borrowing will inevitably make it more difficult for private firms to borrow at reasonable rates.

On the bright side -- this will be much shorter -- we can anticipate that, sooner or later, American companies will learn how to overcome this new array of obstacles facing them and to resume a path of growth and penetration of overseas markets. However, there is no guarantee that the outcome will be as successful as it has been in the past.

I say that because, in the longer run, internationally oriented businesses will be facing key changes in the composition of global markets. Perhaps the most fundamental will be the rising tendency of East Asian companies to buy as well as sell in East Asia itself. This is not an unusual or unexpected development. Just examine the experience of the older parts of the modern industrial world. Since the creation of the European Common Market, rising shares of the "foreign trade" of the member nations have been staying in the European Union area. Of course, the elimination of trade barriers within the EU helped move this process along. However, the tendency of countries to focus their foreign trade with their neighbors is of very long standing.

Closer to home, major shares of the exports and imports of the United States, Canada, and Mexico are staying in North America. The creation of the North American Free Trade Area surely helped encourage that development. Nevertheless, that close economic relationship reflected the importance of obvious geographic factors that have always been present.

We are now seeing a similar regionalization of trade in Asia and without a formal intergovernmental structure. It is not surprising that the economic importance of geographic closeness continues to be strong, despite the reduction of transportation and communication costs resulting from technological advance. The strength of cultural and political ties surely exert powerful influences on patterns of commerce.

Nevertheless, a special and vital factor is underscoring the significance of the continuing regionalization of international trade: by a substantial margin, East Asia, and especially China, is the major growth area of the globe. On any comparative basis, the cost structure of the area is very competitive. Thus, American companies are likely to be facing a rough time in the years ahead in maintaining their current large shares of worldwide markets.

In this regard, fundamental changes in our public policy -- both positive and negative -- can be vital in strengthening (or weakening) the American position in international commerce. In the short run, we are in the midst of a rapidly growing tendency for the federal government to directly influence business decision making. How far this trend will go is anybody's guess. However, American history tells us that the policy pendulum does not always move in one direction. Rather, it swings back and forth and often at unexpected times.

In that connection, it is important to remind the American public of the vital importance of enhancing American competitiveness in foreign markets. Our nation needs to focus on fundamental factors that transcend the political cycle as well as the business cycle. One of those key factors is the continued expansion of science and technology and especially of the professional workforce that produces the major advances and breakthroughs. Since the early 1980s, an important but undramatic crossover has occurred in the United States. From the end of World War II until the end of the 1970s, federal government agencies, especially the Department of Defense, provided the majority of the funds to perform research and development. Since then, however, private industry has become the major funder of R&D, as well as the major sector performing R&D.

The differences are profound. In the earlier period, the federal government, especially the military establishment, set the key priorities for the nation's R&D efforts. In more recent years, the great majority of the R&D conducted in this country has responded to the needs and views of private enterprise. It is not surprising that recent decades have witnessed unexpectedly large increases in the productivity of the American economy. The accelerated flow of new and improved products and production processes are the expected results of large and continued investments in R&D. Substantial shares of American exports have been in high-tech products such as aerospace, electronics, and scientific instruments. A beneficial side effect is that the design and production of high-tech products generates a large portion of the demand for highly skilled and highly paid professional employees. That has been a major factor in rising living standards in the nation.

In that regard, it is sad to see the relatively small numbers of American-born college students now majoring in the subjects vital to research and development, notably science, math, and engineering. By no means is this a plea to reduce the number of foreign students enrolled in American universities. As a teacher, I can attest to the fact that a diversified student body makes for a more stimulating classroom experience. My point is that it would be desirable if greater numbers of our native sons and daughters studied those "difficult" subject areas.

On the other hand, my concern also reflects the shortcomings of our traditional immigration policies. At the present time, it is easier for a low-skilled but relatively distant relative of a legal resident of the United States to stay here than for a highly educated prospective immigrant, even with a degree from an American university, to do so.

Over the longer run, it also would be helpful if the American public, and especially governmental decision makers, would take more enlightened positions on the vital role of private enterprise, especially companies involved heavily in international trade and investment. Specifically, officials in both the legislative and executive branches need to be better informed about the positive contributions of multinational business to the domestic American economy.

Here are just a few points that participants in the public policy arena should consider before launching yet another assault on the alleged shortcomings of business: American factories owned by multinationals (MNCs) tend to be larger and more efficient than their domestically oriented competition. American factories owned by MNCs are less likely to close than purely local firms. U.S.-based multinationals create more U.S. jobs than in their overseas operations. They export from the United States far more than they import.

Multinational companies around the globe score better than purely domestic firms in various measures of business performance. U.S. firms, in particular, are rated as better managed than those in other countries, including companies in China and India. However, the gap is not overwhelming.

Contrary to widely held opinion, multinationals operating in poor developing countries usually pay more than local employers and their workplace conditions tend to be better. I can underscore the last point from my own experience as an outside inspector of factories in China producing for American companies.

On reflection, the single most important point that comes out of any comprehensive analysis of the outlook for American companies heavily engaged in international business is the growing competition from Asia and especially China. For example, a decade ago, the United States was the world's leading exporter and China was in ninth place. Last year, we were still #1, but China had jumped over several major European countries to rank #3. Even more significantly, China's exports grew at a compound annual growth rate of 20 percent over the decade, compared to a modest 4.3 percent for the United States.

Surely, Americans love competition. We certainly pay homage to that powerful force. In that regard, the rise of China is a positive development. The shift in that nation's practical focus from economically backward communist-style production patterns to modern capitalistic techniques has been a positive development. So was the opening of that vast nation to international investment and trade and thus to Western culture and ideas. Those changes also provide a striking reminder to the United States that the specific effects of greater competition can also be painful. We cannot coast along, depending on past achievements. In retrospect, the rise of East Asia's economic power led to a renewal of European competitiveness as well as our own. China should have that overall positive effect on the West in the years ahead. The ultimate beneficiaries will be consumers enjoying higher standards of living.

Let me leave you with a final thought. The most fundamental result of the expansion of international trade and investment -- or to use the common shorthand, globalization -- is not economic at all. By enabling more people to use modern technology to move and communicate across national boundaries, globalization empowers individuals and does so more fully. Globalization makes possible a far greater exchange of the most powerful of all our resources -- people with new ideas. *

"If we can prevent the government from wasting the labors of the people, under the pretense of taking care of them, they must become happy." --Thomas Jefferson

Read 1622 times Last modified on Sunday, 29 November 2015 09:45
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