As we enter into the 21st century, a new era is approaching at warp speed that is affecting virtually every aspect of our lives. As a result, many economic assumptions no longer seem to apply — yet new realities still need to be defined. These ambiguities are causing us to question our business tactics and reassess our strategies.

Ushered in with this new era are dynamic trends toward globalization, the proliferation of trade agreements and the resulting emergence of competing trade blocs that are taking us by storm. They affect every nation, every level of industry, and virtually every business. Keeping up with these changes is extremely difficult. And basing decisions on old assumptions undoubtedly will lead to undesirable outcomes.

The Trend Toward Globalization

Every country in the world is touched by the globalization trend. In order to survive in the 21st century, companies in every industry are taking steps to expand internationally through trade and investment. And those companies that do not recognize this trend will likely become a fatality of globalization.

For many years, the United States’ enormous internal market has more than satisfied the needs of U.S. industry. But today, this is no longer the case. The world is quickly becoming economically integrated, forcing unprecedented changes at every level of industry. As a result, U.S. companies, small and large, are facing record levels of foreign competition. Consequently, for companies to survive and remain competitive in this environment, it takes more than a quality product at an attractive price. Today, it requires international expansion.

A primary economic goal of the United States is to maintain a high and rising standard of living. To achieve this, the United States, which accounts for only 4 percent of the world’s population, must sell and to the other 96 percent. Many U.S. firms have come to understand this and are developing strategies designed to support worldwide exportation and investment. In fact, in just the last decade, the number of companies exporting — especially small and medium-size companies — has increased significantly. According to President Clinton, “Exports now account for almost one-third of real U.S. economic growth and are expected to grow faster than overall economic activity for the remainder of this decade.”

U.S. Trade and Investment Is Rising

From 1988 through 1997, U.S. exports of goods and services increased from $430.2 billion to $932.3 billion, an increase of 117 percent. In 1997, the Office of Economic Affairs, Executive Office of the President, reported that U.S. exports of goods and services supported 12 million American jobs. Predictions indicate that by the year 2000, exports will support 16 million jobs. In fact, the number of export-related jobs has grown six times faster than total U.S. employment. What’s more, according to the Office of the Chief Economist, Office of International Macroeconomic Analysis, Department of Commerce, workers in jobs supported directly by exports are paid 20% higher than the average national wage. Workers in jobs supported directly in high-technology industries are paid 34% more. And workers in jobs supported both directly and indirectly by exports are paid 13% more.

The non-traditional export of services also will become a major generator of economic growth in the future for many U.S. sectors. Typically, services now account for 60 to 70 percent of gross domestic product (GDP) for industrial members of the Organization for Economic Co-operation and Development (OECD). And because services are not yet internationally traded on a large scale, the benefit to their trade balances is not yet evident. Currently, international trade in services is growing at a faster rate than trade in goods, almost 13 percent faster from 1985 through 1996. As this trend continues, service exports will have a greater and greater positive impact on a company’s and country’s trade balance.

There is no doubt that companies that export generally fare better than companies that do not. According to a report published by the Institute for International Economics and The Manufacturing Institute, research organizations based in Washington, D.C., manufacturing companies involved in exporting:

  • Are larger than non-exporting companies—on average four times larger in employment and six times larger in sales;
  • Adopt new technologies more frequently than non-exporting companies;
  • Have an advantage in avoiding plant shutdowns compared to non-exporting companies of the same industry, size, and capital intensity;
  • Had an average annual failure rate of only 3 percent, as compared to 9 percent for non-exporters, during an 11-year period; and
  • Avoided employment shrinkage to a greater extent than other similar manufacturing companies during an 11-year period.

Globalization is Affecting Business in Every Country

Many companies in foreign countries already have been affected by globalization. For example, approximately 30 percent of Canadian gross national product (GNP) is dependent on exports. Hence, in order for Canada to maintain its high standard of living, Canadian companies must operate on economies of scale that necessitate larger markets than are provided by its domestic population base of only 27 million. As a result, Canadian exports are of extreme importance to Canadian companies and to the overall well-being of the Canadian economy. Very simply, many Canadian companies must export or go out of business.

Companies in many other areas of the world, especially Belgium and Hong Kong, also have small domestic markets and need to export to maintain their high standards of living. In many cases, what is exported are actually imports to which value has been added by some means.

For the first time, in 1996, world merchandise exports exceeded $5 trillion. According to the World Trade Organization (WTO), the United States was the leader, with 11.8 percent of world merchandise export share. However, on a per capita basis, the United States ranked low as compared to other developed countries. Germany was second with 9.9 percent; followed by Japan with 7.9 percent; France with 5.5 percent; the United Kingdom with 4.9 percent; Italy with 4.8 percent; Canada with 3.8 percent; and the Netherlands with 3.8 percent. Interestingly, in ninth place was Hong Kong with 3.4 percent of world export market share; in 11th place was China with 2.9 percent, a country with a massive population compared to Hong Kong.

The Proliferation of Trade Agreements and the Emergence of Trade Blocs

With the proliferation of trade agreements, which are resulting in the emergence of competing trade blocs, businesses are striving to gain secure access to foreign markets, and in turn, are achieving a higher degree of economic security and competitiveness.

In The Spotlight

Since 1992, major agreements, such the North American Free Trade Agreement, as well as 200 other lesser-known trade agreements, have been negotiated with the United States. They are responsible for substantially reducing foreign trade barriers, allowing U.S. companies to export more of their products. Numerous other trade agreements — that have acted as building blocks in the establishment of trade blocs — have been negotiated that do not include the United States. These include the Central American Common Market, the Asia-Pacific Economic Cooperation Forum, the Arab League, the Andean Pact, the Economic Community of West Africa, the Association of Southeast Asian Nations, and the East Asia Economic Caucus, to name a few.

Most trade agreements owe their success, at least in part, to prior reductions in trade barriers between the parties to the agreement. For example, integration and cooperation in the iron, steel, coal, and nuclear energy sectors set a precedent for Western Europe to tear down barriers in other sectors. The U.S.-Canada Free Trade Agreement was preceded in 1965 by the Automotive Products Trade Act, which allowed duty-free trade between the United States and Canada in almost all motor vehicles and parts. The progeny of these agreements — more internationally competitive industries — have made business and government leaders in participating countries aware of the benefits derived by the elimination of trade barriers.

But trade agreements have affected more than just trade barriers; they have had a major impact on trade and investment worldwide. In fact, they are responsible for shaping business relationships among companies across the globe.

Today, the three largest trade blocs include the European Union, chiefly involving West European countries and spreading eastward; the North American Free Trade Agreement, among Canada, the United States and Mexico and spreading south; and an informal bloc in East Asia, currently dominated by Japan, but soon to be dominated by China. Based on past trade patterns and policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence.

The European Union

The European Union (EU) now encompasses 15 countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Many other countries are waiting for full membership. Turkey applied in 1987; Cyprus and Malta applied in 1990; Switzerland applied in 1992; and Hungary and Poland applied in 1994. Six countries applied in 1995: Romania, Slovakia, Latvia, Estonia, Lithuania, and Bulgaria. And, the Czech Republic applied for membership in 1996. As the EU expands, it will continue to gain greater economic and political strength, in addition to an enhanced level of global competitiveness. Thus, should all Eastern European countries eventually become members of the EU, its numbers of consumers would swell to 850 million to 900 million.

In 1997, U.S. exports to Western Europe exceeded $155 billion, up by more than 32 percent from 1990, and far exceeded exports to Eastern Europe, which barely reached $7.7 billion. U.S. direct investment throughout Europe has outpaced exports, and reached almost $365 billion in 1995, an increase of 54.6 percent since 1991. In fact, according to an Arthur Andersen report on international investment, Europe was the world’s largest recipient of foreign investment in 1995.

East Asia

In recent years, trade among East Asian nations has increased at a much faster pace than trade outside the region. Through the development of several trade agreements — such as the Association of Southeast Asian Nations (ASEAN), comprised of Malaysia, the Philippines, Singapore, Thailand, Brunei, and Indonesia — the region is becoming more trade-cohesive. However, economic integration is primarily influenced by Japanese investment in the region, creating an informal trade bloc. Even considering the Asian financial crisis that began in 1997, which will no doubt have a massive impact on regional developments and world growth, many predict that Asia will still become the world’s dominant region in the next decade.

Prior to the Asian financial crisis, many Asian economies were growing at the fastest rates in the world. However, as the region emerges from the crisis, its purchasing power will again increase at favorable rates and provide a plethora of export and investment opportunities. According to a report published by the Asian Development Bank, “A modest recovery is expected in the affected economies in 1999, but recovery to pre-GDP growth rates and per capita income levels will take a number of years.” The report predicted that the Asian Development Bank’s 35 developing member countries would see average GDP growth decline to 4 percent, as compared to 6.1 percent in 1997. Yet, growth is expected to recover to approximately 5.1 percent in 1999.

Many U.S. companies that have watched Asian economic developments closely over the last decade do not appear to be dissuaded. Thus, many are positioning themselves to take advantage of new opportunities, while establishing new strategies to mitigate risks caused by the economic crisis.

The Americas

The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994, creating a trade area of 360 million consumers and ensuring secure markets for U.S., Canadian and Mexican products. One of the primary goals of NAFTA is to encourage expansion of business partnerships to promote greater efficiency, and to counter fierce competition from the Far East and Europe. So far, NAFTA appears to be working.

Since the Agreement’s implementation, there has been a proliferation of joint ventures and strategic alliances between U.S. and Mexican companies. Already strong ties with Canada also have prospered. The benefits derived from this teamwork will continue to make the United States, Canada and Mexico more globally competitive at a time when regional trade alliances are becoming increasingly important in the world economy.

For the first time in 1997, Mexico followed Canada as the United States’ second largest export destination, pushing Japan into third place. And the coming Free Trade Agreement of the Americas (FTAA) — in which all the benefits given to Mexico and Canada under NAFTA will be extended to the rest of Central and South America — will further increase cooperation among nations in the Western Hemisphere. Such an agreement will make the Americas one of the largest trading areas in the world, with a population of 750 million consumers, and combined gross domestic product of more than $9 trillion.

Production Sharing In the Americas

Production sharing occurs when various aspects of an article's manufacture are performed in more than one country. U.S. companies regard this as an important tool allowing them to improve the relative price competitiveness of their products, help them keep higher wage jobs in the United States, and provide an important market for U.S. exports of components.

The growth in U.S. production sharing imports (primarily under HS 9802.00.80) in 1994 resulted mainly from larger shipments of motor vehicles and parts, televisions, and other electronic products from Mexico; apparel from the Caribbean Basin and Mexico; and semiconductors from Southeast Asia. Today, a production sharing shift is underway — with more foreign assembly moving to Latin America and away from East Asia.

U.S. textile manufacturers are one group that illustrates the benefits from closer economic integration with Latin America and cooperation in production sharing. As such, the United States is one of the world’s largest and most efficient producers of textile mill products. However, over the years, textile manufacturers’ output has dropped, primarily due to a reduction in apparel production in the United States — the single largest market for the textile industry. East Asian producers of apparel have become major suppliers to the United States. Unfortunately for U.S. textile producers, the East Asians source their textiles in East Asia, not in the United States.

In an attempt to sustain remaining domestic market share, U.S. apparel producers have expanded their production-sharing operations in Mexico and the Caribbean — benefiting from the lower wages and tariff preferences. This activity also benefits the U.S. textile industry. Under a free trade agreement of the Americas, more U.S.-controlled apparel production will move to Latin America from East Asia. U.S. textile mills will likely supply Latin apparel producers, where as Asian producers will continue to source their textiles in Asia. Importantly, a free trade agreement of the Americas will secure Latin American market share for U.S. firms vis-a-vis European and Asian firms.

Within each of the world’s trade blocs, small and large, free trade will continue to become more entrenched. Future trade between blocs is not so clear. Many fear that individual blocs will become inwardly focused and protectionist. Even if protectionism does not emerge outright, trade diversion could have a similar effect. Trade diversion occurs when members of a trade group buy more goods from each other due to the elimination of internal trade barriers, and displace non-member goods. For manufacturers and distributors, foreign market share may be at risk.

Should the EU or the Asian emerging bloc turn inward and establish protectionist measures, U.S. firms could be at a disadvantage. Or through trade diversion, it’s possible that EU and Asian bloc members will purchase more goods from their own blocs at the expense of non-member firms. However, provided the EU or Asia does not look inward and establish protectionist measures, a more economically viable Europe and Asia could result in more U.S. imports. Further integration among EU members, for example, creating one set of standards and regulations, could make the export and investment process less complex for outsiders.

Action Is Required By Government Agencies Interested in Attracting Investment

Many U.S. manufacturers, small and large, have taken steps to expand internationally. However, many have not — and need to or face stiffer competition for shrinking market share. In an effort to remain competitive, many U.S. firms will need to engage in production sharing. And many state and local governments that have not developed a strategy to accommodate these changes quickly will need to do so.

With the understanding that developing countries will continue to compete for low-technology, labor-intensive jobs, the Canadian government has shrewdly positioned Canadian industry to compete well into the next century. It has identified and shifted resources to industries where it has a competitive edge and created investment policies to suit the needs of its target market: manufacturers of high-technology goods.

Many U.S. state and local governments should heed Canada's policy direction, which has been responsible for attracting the type of investment that will help make Canada and its workers competitive for years to come. If not, highly sought after foreign investment that is vital to creating high-paying U.S. jobs will float to more attractive locations.

This article appeared in U.S. Sites and Development, 1998

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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