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Protectionism Redux: Something Old, Something Blue

Global value chains have been casualties — and life savers — in protectionist times
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NAFTA today, Brexit tomorrow. We seem to live in a time when drawbridges are being raised and trade agreements torn up or rewritten. The rising tide of protectionism threatens to inundate the well-rooted networks of global value chains.

While the United States pushes to renegotiate NAFTA and the United Kingdom makes plans for its break from the European Union, whisperings about protectionism are on-the-rise worldwide. But what does protectionism really mean for trade, especially in an era when commodities are increasingly interconnected thanks to extensive network of global value chains?

For Gary Gereffi, it’s déja vu all over again. “It’s not just a current phenomenon,” says the sociology professor and founding director of the Global Value Chains Center at Duke University. Protectionism “has a bigger history.”

Gereffi, who spoke at Smith School of Business as part of a conference held by the Canadian Chapter of the Academy of International Business, points to three periods in recent economic times that offer telling insights into the relationship between protectionism and global value chains.

The 1980s: Japan Adapts

For Gereffi, understanding the relationship between protectionism and global value chains requires sliding back in time to Japan in the 1980s. At the time, the country was an export powerhouse, revolutionizing production systems and streamlining business practices. “Toyota was replacing Fordism in mass production,” says Gereffi.

Unhappy with how popular the imported automobiles were becoming, the U.S. implemented a series of quotas on how many vehicles Japan could bring into the country as well as new tariffs it was required to pay.

“If the goal was to buffer the U.S. market against international competition, it didn’t work,” says Gereffi. As a result of the quotas, the Japanese simply upped their game and began exporting higher-end vehicles (rather than compact cars) to compensate for their restricted access to the U.S. market. More importantly, they started investing in the U.S. by building their own manufacturing plants, kicking off a wave of foreign investment in the country. Today more than half of the American auto industry is made up of foreign transplant companies.

At the same time, the 1980s saw a debt crisis emerge in the world’s developing countries with many, particularly those in Latin America, unable to repay their foreign debt. The introduction of the Washington Consensus later in the decade enshrined an export-oriented focus for all developing countries, encouraging large-scale exporting in order to build self-sustaining economies. From a global value chains perspective, Gereffi sees this period as an important one. “We can call it protectionism but it affected the way multinationals and supply chains were organized in a very dramatic way.”

2007 to 2009: The Great Sobering

The period now known as the Great Recession brought with it significant declines in exports and imports worldwide. “It was the steepest decline in history,” says Gereffi, “even more than the great depression. So, there was panic again. It was another crisis.”

The international organizations that stepped in to help, such as the World Bank and World Trade Organization (WTO), were worried developing countries would become more protectionist in a bid to shelter themselves from the crisis. After all, as Gereffi explains, the Washington Consensus was established on the basis of advanced industrial countries buying goods from less advanced ones. When demands for goods collapsed, however, so did the economic fortunes of exporting countries. In China, for example, tens of thousands of factories closed within a matter of months.

“In this kind of supply-chain world, protectionism could be really disastrous,” says Gereffi. “If most of a country’s exports rely on imports and you introduce protectionism, then the whole trading system could collapse.”

By 2009, he says, organizations such as the WTO were using the language of global value chains to help sell a story about maintaining openness to international trade, including their Made in the World campaign, which sought to highlight the interconnectedness of the world economy.

“International organizations were realizing that the structure of international trade had changed fundamentally,” says Gereffi, “so that trade in intermediate goods was greater than trade in final goods and capital goods combined. That was totally new.”

It meant that exporters of final goods were dependent on imports from around the world, facilitated by global supply chains established by multinationals, in order to fabricate those final products. By 2013, says Gereffi, every major international organization was using the framework of global value chains in one way or another to make sense of economic trade.

Today: Regions Supplant Countries

While President Trump has referred to NAFTA a “U.S. jobs killer”, the fact remains that North America’s supply chains are deeply interconnected. According to Gereffi, U.S imports from Mexico currently contain more than 40 percent U.S. content, while those from Canada contain 25 percent. Chinese imports, in contrast, are generally only made up of 4 percent U.S. content.

“The problem with protectionist rhetoric is that all imports are seen as bad,” he says, “but from the point of view of the firms who would be affected, there would be far more losers than winners.”

As an example, Gereffi cites the recent discussion around the U.S. imposing a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. While 140,000 Americans work in the steel-making industry today, there are more than 6.5 million working in industries that use steel – much of it imported. “You might be appealing to one set of workers saying ‘we will save your jobs,’ but others will lose.”

Gereffi says it’s important to think of global value chains as being regional rather than country-based systems. China, for example, may export iPhones but they are made with parts from all over Asia and beyond. North American medical devices and European vehicles are made the same way.

“The way the world works is that regions are competing with regions instead of countries against countries. That’s an issue that doesn’t play to a political base, but it’s a problem with protectionism”

“The way the world works is that regions are competing with regions instead of countries against countries,” says Gereffi. “That’s an issue that doesn’t play to a political base, but it’s a problem with protectionism.”

Gereffi believes the current trade tensions between the U.S. and China may have more to do with China’s rapid ascent in the digital economy than about protectionism. “A lot of people have talked about China as a low-wage country in a race to the bottom,” he says, “but China is interested in a race to the top.”

He says many Americans companies find they can pursue innovative development in China in a way they are not able to at home. “We would be missing the boat if we are trying to look at U.S-China relations as just a trade war.”

For Gereffi, the issue of protectionism today, especially in the U.S context, raises more questions than answers. Certainly, he says, the “Anglo-American alliance” in place since the Second World War appears to be fracturing but, looking ahead, what will become of leading economies in a new, multi-polar arrangement? While U.S. hegemony may not be what it once was, how does the world make space for China? And how do these global economic trends reflect breakthrough technologies?

“I think these are issues that global supply chain researchers need to pay attention to.”

Meredith Dault

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When politics and organizations are reduced to economic and financial affairs, something else will inevitably fill the vacuum

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