World's apart – protectionist measures in the wake of a global downturn

The other trend we see is companies beginning to manufacture goods closer to home, pulling out of traditional, low-cost destinations because of a combination of price, risk and reputational considerations. Hayter, the British lawnmower manufacturer, is one such company. Earlier this year it announced plans to bring back production to the UK to safeguard jobs at its Hertfordshire plant ­ a process known as insourcing. There are many more recent examples, including PepsiCo’s decision to work with US bottlers again.

Global risk
And there’s good reason for it. Gap and Levi Strauss made headlines recently for outsourcing the production of jeans to a factory in Lesotho, the poverty-stricken enclave surrounded by South Africa which had apparently polluted drinking water and dumped hazardous waste in unsecured tips popular with scavenging children.

It highlighted the risk of outsourcing production to low-cost countries. The potential scale of the threat, however, was put into stark relief by Panjiva, a database that tracks low-cost country suppliers to assess risk and which soon discovered another 10 customers of the factory. In global business, risk spreads quickly.

As ever, cost is the benchmark. But even here the trappings of globalisation are less attractive than they once were as rising inflation in low-cost countries and currency fluctuations wreak havoc with even the best-laid plans.

Take business process outsourcing (BPO), one of the stories of the past 20 years as an increasing number of companies look to farm out aspects of their back-office operations which are non-core and purely transactional. But the initial reasons for doing so are no longer obvious.

According to Everest Research Institute, India, the most popular offshore destination for such outsourcing, experienced wage inflation of between 8% and 12% in 2008. In 2007, however, it reached between 15% and 20%. China is no different. According to the China Statistical Yearbook 2008, average earnings increased by more than 18% in 2007 over 2006. The 2006 average had, in turn, increased by more than 14% on 2005. Combine such hidden cost increases with even less tangible costs, such as high rates of attrition and the immediate benefits of BPO and offshoring look much less attractive.

If anyone’s still in any doubt about the decline in globalisation, it’s worth returning, as ever, to the numbers: according to the World Trade Organisation, global trade will fall by 9% in 2009, the biggest decline since the Second World War and a frightening indication of the depths of the current crisis.

Investment slump
As mentioned, FDI has plummeted as corporations look closer to home for those rare investment opportunities. Up until July 2009, data provider Dealogic claims that European outbound merger and acquisition activity fell by 82% on the same period the year before.

The same can be said for bank lending. According to the Bank for International Settlements. After adjustments for exchange rate movements, cross-border bank lending fell by $720bn, or 2.3%, in Q1 2009. This followed an even more dramatic fall of $1.9 trillion in Q4 2008. The UK has been particularly hard hit, with overall inwards bank lending falling by 5.7%, or $53.6bn, during Q1. The cumulative decline over the past three quarters is a massive $190bn.

Add to this the comments made by some of the most influential figures in finance today. Speaking at the annual banking conference, Financial Services Authority chairman Lord (Adair) Turner talked about proposals to introduce more stringent country-based legislation to govern the banking industry. “I know that proposal creates concerns that such ring-fencing would drive deglobalisation, reducing the ease with which global capital flows to its most productive uses,” he said.

Similarly, Pascal Lamy, head of the World Trade Organisation, is well aware of the risk of deglobalisation ­ but he believes its roots lie in the bank bailouts of last year. “There is a danger that the finance industry will be on the side of the forces of deglobalisation,” he told the Financial Times.

His reasoning is, in many ways, supported by the figures above ­ that the bailouts had constrained risk taking outside the territories familiar to national banks. “I am convinced the worst is yet to come,” he said. “The real stress test is for the future when the shrinking of economies translates into unemployment and social hardship and that translates into a political reaction that could influence trade policy. The toolbox for protection is a wide one.”

For finance directors, the challenges are clear. For all but the most cash-rich companies, a more hesitant, introspective and risk-averse financing sector will have a substantial impact on future expansion strategies. It’s probably best to shelve those cross-border acquisition plans for a few years yet (the largest such deal in the UK so far this year has been GlaxoSmithKline’s $3.6bn bid for Stiefel Laboratories ­ the two largest deals in 2008, involving brewing giant Anheuser-Busch and Roche, reached $107.5bn).

The phrase deglobalisation ­ perhaps correctly ­ receives a liberal dose of cynicism from the majority of observers. The very idea of something as ingrained in modern business as cross-border trade and investment going into reverse seems so spectacularly unlikely that this isn’t surprising.

But consider the facts. The combination of global recession, increasing environmental concerns ­ and, more to the point, approaching legislation, rising protectionism, heightened risk and more insular corporate management is an extremely heady mix. Finance directors should prepare themselves for a subtle shift in how they help to manage multinational corporations in an era when business leaders, governments and consumers are thinking local.

And, to answer Besley’s question, it appears more than a “temporary blip”.

Protectionism: fact from fiction
A rise of protectionist measures has been one reaction to the economic crisis ­ or, at least that’s what the headlines have often screamed. However, thanks to Global Trade Alert, a new database of protectionist government legislation co-ordinated by the Centre for Economic Policy Research, we can now see exactly what measures are being introduced.

GTA claims that the UK is currently affected by 43 pieces of protectionist legislation. Here’s a sample:
• Russia: The introduction of temporary import tariffs on laundry equipment
• Australia: New South Wales launches a “local jobs first” programme as part of its stimulus package
• Brazil: The introduction of import tariffs on certain steel products
• US: Employ American workers Act, affects hiring companies that are recipients of bailout funds
Of the 43 measures implemented, GTA considers 25 of them to be discriminatory ­ and a third of all measures have been introduced within the last month.