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26 Jul 2024
10 Min Read
Dr Yong Jing Yi (Academic Contributor), Taylor's Team (Editor)
In today's rapidly evolving global landscape, international businesses are navigating a minefield of economic nationalism and geopolitical risks. The resurgence of protectionist policies, escalating trade wars, and rising tariffs are reshaping the way companies operate across borders. These challenges, while daunting, also present unique opportunities for those who can adeptly manage the uncertainties.
Economic nationalism, the policy of prioritising domestic industries and resources over foreign competition, has a long and complex history. It originated in the mercantilist practices of the 16th and 17th centuries, where European nations sought to accumulate wealth through strict regulation of trade and colonial expansion. These early policies aimed to maximise exports and minimise imports to build national wealth and power.
During the 19th century, economic nationalism was further entrenched through the industrialisation process. Countries like Imperial Germany and the United States adopted protectionist measures, such as high tariffs and subsidies, to nurture their burgeoning industries and protect them from more established foreign competitors. This era saw the rise of the ‘infant industry’ argument, which justified protectionist policies as necessary for developing domestic industries that could eventually compete globally.
The Great Depression of the 1930s marked another significant period for economic nationalism. In response to widespread economic hardship, many countries raised tariffs and implemented protectionist measures in an attempt to protect domestic jobs and industries. The Smoot-Hawley Tariff Act of 1930 in the United States is a notable example, which led to a severe contraction in global trade and exacerbated the economic downturn.
In the post-World War II era, the establishment of international institutions like the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT) aimed to promote free trade and economic cooperation. However, economic nationalism persisted in various forms, particularly in developing countries that sought to protect and promote their nascent industries through import substitution policies.
Today, economic nationalism has resurfaced in response to the challenges of globalisation, economic inequality, and political unrest. Countries across the globe are increasingly adopting protectionist policies, reflecting a broader trend of prioritising national interests over international cooperation.
Several factors have contributed to the resurgence of economic nationalism in recent years. One significant driver is the backlash against globalisation. As globalisation has accelerated, many people feel left behind, leading to a backlash against international trade and investment. This sentiment has fuelled nationalist movements and protectionist policies. Economic inequality is another critical factor. Rising inequality within and between countries has led to increased calls for policies that protect domestic industries and jobs from foreign competition.
Political populism has also played a crucial role. Populist leaders have capitalised on economic discontent, promoting nationalist agendas that emphasise self-sufficiency and economic sovereignty. The rise of extreme political movements, including both the far right and the far left, has also influenced this trend. For example, recent elections in the European Union have shown a significant shift towards extreme political ideologies, which often advocate for protectionist and nationalist policies.
Security concerns have also driven governments to adopt more protectionist policies. National security concerns, including the protection of critical industries and technologies, have become increasingly prominent, leading to stricter measures to safeguard national interests. Together, these factors have created a complex landscape where economic nationalism is gaining traction and reshaping global trade dynamics.
Under the Trump administration, the United States adopted a series of protectionist measures aimed at revitalising domestic industries and reducing trade deficits. Key actions included imposing tariffs on steel and aluminium imports from various countries, which were justified on national security grounds. The administration also renegotiated trade agreements, most notably the North American Free Trade Agreement (NAFTA), which was replaced by the United States-Mexico-Canada Agreement (USMCA). The USMCA included provisions to increase North American content in auto manufacturing and improve labour standards, reflecting a shift towards prioritising American economic interests.
China's ‘Made in China 2025’ initiative is a strategic plan to transform the country into a global leader in high-tech industries such as robotics, aerospace, and electric vehicles. The initiative aims to reduce reliance on foreign technology and promote domestic innovation by providing substantial government support to key sectors. This policy includes measures such as subsidies, low-interest loans, and preferential procurement policies for Chinese companies. By fostering homegrown technological advancements, China seeks to enhance its economic sovereignty and competitiveness on the global stage.
India's ‘Atmanirbhar Bharat’ (Self-Reliant India) campaign, launched by Prime Minister Narendra Modi, focuses on boosting local manufacturing and reducing dependency on foreign goods. The campaign encompasses a wide range of policies aimed at promoting domestic industries, including financial incentives for local manufacturers, increased tariffs on imports, and efforts to attract foreign investment in key sectors. The initiative also seeks to strengthen India's infrastructure and support small and medium-sized enterprises (SMEs), positioning the country as a self-sufficient economic powerhouse.
Within the European Union (EU), several member states are advocating for greater protection of strategic industries and tighter controls on foreign investments. This trend is driven by concerns over economic security and the desire to protect critical infrastructure and technologies from foreign acquisition, particularly by state-owned enterprises from non-EU countries. For example, the EU has introduced a new framework for screening foreign direct investments to ensure they do not pose a threat to security or public order. Additionally, there is a growing emphasis on supporting European champions in industries such as digital technology, renewable energy, and pharmaceuticals to enhance the EU's strategic autonomy and economic resilience.
The trade war between the United States (US) and China began in 2018, marking a significant escalation in economic tensions between the two largest economies in the world. The conflict was initiated by the Trump administration's decision to impose tariffs on $34 billion worth of Chinese goods, citing unfair trade practises, intellectual property theft, and the substantial trade deficit with China.
This initial move was followed by several rounds of tariff increases, ultimately affecting hundreds of billions of dollars' worth of goods on both sides. The Biden administration has continued many of these policies, maintaining tariffs and introducing additional restrictions, particularly on technology exports, reflecting a sustained tough stance on China. This trade war signifies a broader trend towards deglobalisation and the fragmentation of the unipolar world order, heralding the start of a multipolar era where economic power and influence are more widely distributed across multiple global players.
The timeline of the trade war includes several key events:
The trade tensions between the European Union (EU) and China have been escalating in recent years, driven by a range of economic and political factors. The EU has increasingly voiced concerns over trade imbalances, market access, and China's state-driven economic model, which includes significant government subsidies and support for domestic industries. The growing influence of Chinese companies in strategic sectors within Europe has also raised alarms, leading to calls for tighter regulations and protective measures.
The trade tensions between major economic powers, particularly the US-China trade war and the EU-China trade tensions, have had significant implications and impacts on global business and the international economic landscape.
The tariffs and technology restrictions imposed during the trade conflicts have significantly disrupted global supply chains. Companies have been forced to reconsider their sourcing and manufacturing strategies due to increased costs and regulatory challenges. Many businesses have sought to diversify their supply chains to mitigate the risks associated with heavy reliance on China. For example, companies in the technology sector have moved some of their production facilities to other countries in Southeast Asia to avoid tariffs and ensure smoother operations.
Certain industries have been more heavily affected than others by the trade tensions. The technology sector, for example, has faced significant challenges due to tariffs on electronic components and the blacklisting of Chinese tech companies like Huawei. This has disrupted supply chains and increased production costs. The agricultural sector in the US has also been hit hard, with Chinese retaliatory tariffs reducing the demand for American agricultural exports, leading to significant revenue losses for farmers.
The growing concerns over technology and cybersecurity have led to a decoupling of technological ecosystems between the US, EU, and China. The restrictions on technology exports and the scrutiny of foreign investments in high-tech sectors have created a fragmented global tech landscape. Businesses must navigate differing regulatory environments and standards, impacting sectors such as telecommunications, electronics, and artificial intelligence.
Economic nationalism presents several challenges for global businesses, including heightened trade barriers, tariffs, and protectionist policies that can limit market access and increase operational costs. However, it also offers opportunities for businesses to localise production, develop strategic local partnerships, and innovate to meet the unique demands and preferences of domestic markets. This dynamic requires businesses to be adaptable and strategic in their operations.
Dr Yong Jing Yi
Taylor's Business School
Navigating economic nationalism and geopolitical risks requires robust strategies to enhance resilience and adaptability. Diversifying supply chains is crucial to reduce dependency on single markets and mitigate trade disruptions. Companies should consider sourcing materials and components from multiple regions, establishing local manufacturing facilities, and forming strategic partnerships with local firms. This approach not only minimises the impact of tariffs and trade barriers but also enhances operational flexibility and access to new markets.
Investing in technology and innovation can also provide a competitive edge and improve supply chain visibility. Companies should focus on digital transformation initiatives that enable rapid response to market changes and enhance operational efficiency. Engaging with policymakers and industry associations to advocate for fair trade policies, conducting regular risk assessments, and maintaining organisational agility are essential for proactive risk management. By implementing these strategies, businesses can better navigate the complexities of economic nationalism and geopolitical risks, ensuring resilience and sustained growth in an increasingly volatile global landscape.
In an era marked by economic nationalism and geopolitical risks, international business plays a crucial role in forging ties and fostering global unity. Despite the shift towards a multipolar world, businesses can act as bridges between nations, promoting cooperation and understanding. As former UN Secretary-General Kofi Annan once said, ‘We may have different religions, different languages, different coloured skin, but we all belong to one human race.' Businesses, in the end, have the power to transcend borders and drive positive change, proving that unity and cooperation are the keys to navigating uncertain times.
Ready to navigate the complexities of global business and foster international cooperation? Discover how our International Business and Marketing programme equips you with the skills to strategise, become a bridge between nations, and drive positive change in the global economy. Book an appointment with our educational counsellors today to find out how you can make a significant impact on the world stage.
