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

Cast your mind back two years to 9 August 2007 as the world woke to news that French banking giant BNP Paribas had frozen three of its investment funds and the roof finally fell in on the subprime mortgage house of cards.

There followed two years of introspective corporate management as western companies made sure they got the basics right ­ cost reduction, cash management and risk mitigation have been the watchwords for any finance director looking to keep their head above water ever since.

Since that summer, the world has changed. Rising protectionism, the collapse of global trade, a significant reduction in foreign direct investment (FDI), a slump in cross-border lending and rising inflation in hitherto low-cost locations are now the order of the day. It all points to one daunting realisation: that globalisation, the most significant trend in recent business history, has stalled. It may even be in retreat.

Tim Besley, a professor at the London School of Economics and, until September, a member of the Bank of England’s Monetary Policy Committee, is one expert who believes globalisation is in reverse. “We’re going through a period of quite striking deglobalisation in both goods and capital markets. It’s impossible to know whether this is a temporary blip or the beginning of a more protracted reversal,” he says.

A Lex column article in the Financial Times earlier this year didn’t pull any punches: “Deglobalisation: ugly word, scary concept and now painful reality,” it began. While the article went on to argue that much of the recent fall in global trade can be linked to the financial crisis, rather than ingrained behavioural change, more recent events certainly challenge that hypothesis.

In June, the Organisation for Economic Co-Operation and Development published estimates of FDI into OECD countries during the first quarter of 2009. It didn’t make pleasant reading. Of the 17 members which had reported ­ including the UK, US, Germany, France and Japan ­ FDI inflows declined by 50% and outflows by 40% from Q4 2008. If the rate of decline persists, total FDI inflows for all 30 OECD members in 2009 will fall by more than half to around $500bn, while outflows will drop by 40% to about $1 trillion.

Worrying trend
So, what’s going on? Is it possible to see a long-term trend amid the fallout from the financial crisis? Or is it much ado about nothing?

The latest European Union annual report on US barriers to trade and investment suggests there could be the beginnings of a trend. And on this occasion it has nothing to do with the financial crisis, but is a consequence of the US government’s ongoing fight against terrorism. As part of that battle, the US launched the Container Security Initiative (CSI) to counter potential security threats in the containerisation industry, a move which has created headaches for companies exporting to the US since its inception in 2002.

“According to EU industry, CSI screening and related additional US customs routines are causing significant additional costs and delays to shipments of EU machinery and electrical equipment to the US,” the European Union argues. “This burden is so severe that a number of small European engineering companies have decided not to export to the US any longer.” The thin end of the wedge or a drop in the ocean?

One thing that is for certain is that anti-terrorist legislation is not the only leftfield influencer of the global business and economic agenda. Sustainability is another.

A good example is South Korean auto manufacturer, CT&T United, which makes the eZone electric car ­ one of the new generation of two-seater city cars. While focusing on global markets is clearly central to its strategy, it plans to use local manufacturing centres to build the car, rather than global factories reliant on long supply chains.

The strategy, which CT&T has labelled the Regional Assembly and Sales System, will allow the company to satisfy the needs of local customers more easily as well as reduce the environmental impact of the manufacturing and supply chain process ­ not to mention reduce cost. “Owners of our cars can feel good about supporting a product that has a very low environmental impact and is being made close to home,” says its chief operating officer Joseph White.

Its chairman and company founder goes one further, saying that “regionalisation” could be as big a revolution to the auto industry as the Toyota ‘just-in-time’ manufacturing system was in the 1970s.

Neither is CT&T alone. Dutch electrical and consumer goods giant Philips is another company which has felt a change in the air, with its chief executive, Gerard Kleisterlee, saying that a future where energy is more expensive and less available will lead to far more regional supply chains.

Similarly, The Scotts Miracle-Gro Company is focusing on regionalisation as a key focus of future growth and competitiveness. “We may do it a little bit differently to other companies, but we feel we can gain more market share by understanding the local consumer needs [better] and are reviewing our organisation to go more regional from a sales and marketing perspective,” says global procurement director, Erik Dam.