Editor’s note: Michael Mayer is Professor of Strategic Management at the School of Management, the University of Bath, UK. The article reflects the author's opinion, and not necessarily the views of CGTN.
The President of the European Commission Jean-Claude Juncker met US President Donald Trump last Wednesday. The meeting led to an agreement aimed at averting a potential trade conflict between the two sides.
Although this is a positive signal for international trade, the longer term outcomes remain uncertain. That there was a need for such a meeting in the first place is an indication that old certainties about the stability of the international trading system are gone. This has important implications not only for trade in final goods, the sort of goods we might buy in a shop but also for so-called intermediate goods. Intermediate goods are those that form inputs into the creation of other products.
Consider the iPhone, for example. It is manufactured in China, but components are sourced – and traded – globally, from countries including the United States, South Korea, and Germany.
Such integrated manufacturing systems are central to the global economy and underpin many of its benefits as different firms and locations specialize on what they do most effectively and efficiently.
An Apple store in Macao, China, July 18, 2018. / VCG Photo
The ability to develop and sustain such integrated networks, however, depends on two factors. The costs of trade, including those created by trade barriers such as tariffs must be relatively small. They must also be relatively predictable. With both factors being called into question, we must ask, "How can firms respond?"
First, firms must recognize that although globalization is often seen as essential for success, research I have done with my colleagues Julia Hautz and Christian Stadler has shown that the benefits for financial performance can be elusive and require a long-term commitment.
With new uncertainties on the horizon, firms must therefore be even more focused on understanding both the extent to which their capabilities can be leveraged internationally and the extent to which they are able and willing to absorb the increased risks.
Second, while in more stable times firms could prioritize efficiency and effectiveness, the new realities require a greater focus on flexibility.
A number of actions can be taken. Rather than consolidating manufacturing in the interest of economies of scale, firms can retain or establish multiple manufacturing sites, such as musical instruments firm Fender, which manufactures in the United States, Mexico, and Japan.
Firms should also consider expanding their supply and manufacturing base internationally, increasing their ability to respond to shifting trade restrictions.
A growing trade conflict between the US and Mexico, for example, might require Fender to revisit the extent to which hardware components, which are currently manufactured in the US, might need to be either produced in Mexico as well or sourced from elsewhere.
If conflicts gather pace, firms may need to consider the adoption of "multi-domestic" strategies. Such strategies involve the creation of relatively complete supply chains on a regional or national basis.
This would be a return to an old model followed, for example, by General Motors in the 1970s and 1980s, in it’s German and British subsidiaries Opel and Vauxhall (now owned by Peugeot).
November 18, 2010: GM cars outside the New York Stock Exchange in New York. / VCG Photo
Ultimately, pulling back from international involvement and collaboration remains unsatisfactory for both firms and wider societal welfare. Firms must therefore recognize and respond to some of the underlying factors driving skepticism about the benefits of international trade.
While internationally-integrated manufacturing systems create real economic benefit, these benefits must be both understood more widely and shared. The challenge is thus one of both communication and engagement.
For this to be successful the voice of firms must be both authentic and legitimate. The most challenging aspect here is that this may require firms – and their owners – to at times forgo short-term profit in the interest of long-term legitimacy. For example, it may involve a more substantial and longer-term commitment to support workers when manufacturing is shifted elsewhere as well as investments in support of local communities.
While it is notoriously difficult for managers to justify a prioritization of wider societal concerns, the current dangers to the stability of the international trading system may, paradoxically, offer an opportunity.
It is becoming clearer that a wider sharing of the benefits of international trade is a very real investment in the future stability of international exchange and, therefore, the longer-term success of firms – regardless of the outcomes of high-level political talks.
