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PROTECTIONISM IN A NEW COAT

By Professor Stéphane Garelli - February 2013

It is a classic: during each recession – and this is my 5th – protectionism resurfaces. After 4 years of economic turmoil, unemployment is critical in the US (7.7%) and Europe (11.7%). Obviously governments want to protect national companies and jobs, especially if they want to be re-elected… If protectionism is back, it is also far more subtle than in the past. Gone are the days when governments would apply tariff barriers (unacceptable for the World Trade Organization) or would impose crude measures such as targeting one "congested" small entry point for goods entering their country (as the French did for Japanese video players in the 90s).Today protectionist measures thrive on pollution standards, health requirements, safety standards, etc. In addition, "buy national" campaigns or "forced cooperation" with local companies complete a wider array of measures available to scared administrations. The coat changes but the beast remains the same.

It might be more adequate to speak about "economic nationalism." Many emerging economies have set as an objective the globalization of their national champion companies. To that end, they can rely on a large reserve of cash. China now has some $3,300bn of foreign currency reserves and Russia $530bn. Considerable money is channelled to home companies through sovereign wealth funds: ADIA from Abu Dhabi manages $624bn, SAFE from China controls $567bn and the National Welfare Fund from Russia has $149bn. "State backed enterprises" are a new form of protectionism: it means funding national companies with government money to help them succeed abroad. In China, 21 out of the 22 largest companies have close financial ties with the state. Meanwhile, the domestic market where these companies operate becomes increasingly difficult to penetrate.

The explosion of global brands from emerging markets and their impact on world competitiveness has forced "advanced economies" to react. Re-industrialisation has become the key word. Rightly so: in the past 20 years, the share of industry as percentage of GDP has dropped from 16% to 11.2% in the US and from 17.7% to 11.4% in the UK. The share of world manufacturing of most industrialized nations has dropped by 20%, with the exception of Germany. Re–shoring, that is bringing back home some manufacturing capacity, is increasingly fashionable. General Electric brings back some household appliances production from China to Louisville, Kentucky. Apple and Hewlett Packard also plan to invest in manufacturing in the US.

The tension between "economic nationalism" in emerging economies and "re-industrialisation" in advanced economies will define world competitiveness in the coming years. Protectionism will be a tempting solution to these pressures. Certain governments will even use the threat of nationalisation to achieve their objectives, like the French minister Arnaud Montebourg's action against Mittal (but it would have cost more than $1bn in compensation to France, so the government chilled out…). In the end, most governments will be very careful: protectionism is a double edge sword that can be returned against its user, even with a new coat…

Stéphane Garelli is the director of IMD's World Competitiveness Center and teaches on IMD's Orchestrating Winning Performance program.



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