William Laraque, Managing Director at US-International Trade Services
31.07.2015 01:00 am
The McKinsey Global Trade Institute 2014 Report provides the salient facts regarding the growth in global trade.
Working in the field of financing imports and exports for many year has provided me an education in global business strategy.
The intervention of central banks has become the default mechanism for economic adjustment in the European, U.S. and Japanese economies. This default is caused by a lack of political leadership or leadership which defers increasingly to central banks and bankers for the execution of fiscal policy. The result is dangerous and threatens to destabilize the equilibrium of the global financial system itself. The recent QE or quantitative easing by the ECB (European Central Bank) is a case in point. This easing has resulted in a weakening of the Euro vis a vis the U.S. dollar. This move increases the relative value of the dollar which in turn makes dollar-denominated goods more expensive and less attractive in global markets. Need I remind the reader that the competitive devaluation of currencies was a major contributing factor to the Great Depression?
Fortunately, there is a strategic alternative to this dismal way of affairs for multinational companies large and small. I learned this alternative by witnessing the death of many exporters during my long career in international business. Many exporters died as a result of foreign exchange fluctuation similar to what is occurring now. When your goods suddenly become unwelcome in the foreign markets ion which you and your employees depend, you and your export company die.
The injection of billions of Euros into the European economy is a de facto competitive devaluation. The principal fault in such a policy is not only the risk it creates for a cycle of competitive devaluations. It is not an effective strategy for creating the jobs so desperately needed by European youth.
The solution is two-way, bilateral or multilateral trade. By importing as well as exporting, an enterprise benefits as the cost of imported goods becomes more attractive just as the price of your export goods is high and unattractive.
According to the MGI report, the management intuition that served us in the past will become irrelevant. Long held assumptions will give way and powerful business models will become upended. Emerging market growth, disruptive technologies and an aging population have created such volatility that the usual management assumptions and decisions are irrelevant and obsolete.
In 2009, emerging markets for the first time contributed more to global growth than developed ones. By 2025, 45% of the companies on the Fortune 500 list will be from emerging markets. 2 billion consumers in emerging markets will have sufficient discretionary income to create a new breed of corporations whose global reach will be supported by success in their home markets. Nearly one half of growth from 2010-2025 will come from 440 cities in emerging markets. Two-thirds of the world population has access to cell phones and one-third of this population has access to the Internet.
As information flows continue to grow and new waves of technology emerge, the old mind set that technology is solely a means of cutting costs and boosting productivity will be replaced.
A new intuition is arising that businesses can start and gain scale with stunning speed while using little capital, that values are shifting between sectors, that entrepreneurs and start ups have an advantage over large, established businesses, that the life-cycle of businesses is becoming shorter and that decision-making has never been so rapid fire.
Here are a few relevant data provided in the MGI report:
• The global flow of goods, services and finance in 2012, was equal to 36% of global GDP.
• Global flows could triple by 2025. Up to $450 billion is added to global GDP growth each year by these flows and the benefits to the most connected countries compared to the least connected countries is 40% more.
• Between 2005 and 2012, there was an 18 fold increase in cross-border Internet traffic.
• The total cross-border flow of goods and services and finance from emerging economies grew from 14% in 1990 to 38% in 2012.
• By 2025, the value of the flow of goods, services and finance will reach $85 trillion, three times the value in 2012.
• Growth in knowledge-intensive goods trade is growing 1.3 times as fast as trade in labor-intensive goods.
• 90% of commercial sellers on e-Bay export to other countries. In the U.S., less than 25% of traditional small businesses export.
Trade finance is estimated at $10 trillion per year globally. Of the 8.1 million short term trade finance transactions in 2011, fewer than 1800 defaulted.
The MGI provides an idea of the dimension and direction of the flows of global trade. What is remarkable is the degree to which the income, wealth and opportunity in this trade is concentrated in very few companies. The ICC has deemed trade finance to be a very secure business, "a business built on real transactions by companies that make real goods that are moved from one place to another, so real people can consume them in the real world." It is a business in which financing is highly supportive of concentration. The degree to which the system of international trade finance fuels oligopoly is impressive:
• 100% of the large jet market is controlled by Boeing and Airbus
• 90% of PV operating systems are sold by Microsoft
• 55% of the PV market consisted of 5 firms
• 3 firms make up most of the mobile handset market
• 69% of agricultural equipment is sold by 3 firms
• 69% of global pharmaceuticals are controlled by 10 firms
• 95% of microprocessors are sold by 4 firms
• 50% of all cars sold globally are sold by Toyota/Daihatsu, GM, Ford and Daimler-Chrysler
• 3 firms comprise 60% of the tires sold: Michelin, Bridgestone, Goodyear
• 66% of glass is sold by Saint-Gobain and Owens-Illinois
This concentration of sales and markets also represents a concentration of wealth and opportunity. Concentration impacts employment and related income and opportunity depending on the market forces that act on the large firms within the oligopolies. It is now rumored that IBM will lay off as much as 9,000 of its workforce of 431,000 because of the migration of its services to the cloud. The oil exploration and exploitation services area is seeing large layoffs due to the precipitous drop in the price of oil. Shell plans to lay off thousands...of people.
In Part II we discuss how new players and new technologies are impacting international trade. This transformation is occurring in Germany, Spain and in the U.S.