Part One: A Framework For Global Trade Today
By Peter Allgeier
March 28, 2023
There are four major pillars of global trade anchoring today’s international economic landscape that all executives — especially those new to the world of global commerce – should be aware of. These are the pillars that will impact busineses of all sizes, and from all industries and geographies. The four pillars are the changing nature of manufacturing, the services revolution, the digital revolution, and shifts in global supply chains.
The Changing Nature of Manufacturing
The United States has suffered a sharp decline in manufacturing jobs but not manufacturing output over the last 25 years. While U.S. manufacturing employment decreased 30%, manufacturing output has increased 80%. The fall in U.S. manufacturing employment is partially due to competition from China and globalization of production, but primarily (more than 80%) due to productivity-enhancing technological change. What took 12 manufacturing employees to produce in 1997 requires only 5 employees now.
Not only are manufacturing jobs declining, but there are big changes in the skills required. Manufactuers often sit high above the plant floor in stead of on the floor itself, monitoring their computer and software-heavy command center for spikes in temperature, pressure, etc. as manufacturing machines and robots do the heavy labor.
The Services Revolution
Meanwhile, the Services Economy accounts for 70% of world GDP and has become the world’s largest employer with 3.2 billion jobs on offer. As the source of most new jobs, the services sector has created an impact on our work and daily lives as dramatic as the industrial revolution 150 years ago.
While the numbers alone are impressive, this particular revolution is more than just numbers of workers or share of GDP. More significant is that all businesses, whether small or large, and all segments of the economy — including agriculture, manufacturing, and energy — depend on services to succeed, especially if they are to plug into global supply chains. Manufacturers and their employees depend on services — whether from accounting, finance, product design, distribution and logistics, advertising, computer-related services, or telecommunications — to get their manufacturing done. Likewise, ask any farmer about their the reliance on services. Crop insurance, extension services, financing, storage services, distribution and marketing, and equipment maintenance are just some of the services that the agriculture sector must rely on to produce their products.
Small businesses are in particular need of access to efficient, economical services in order to compete in international markets and maximize their efficiency and competitiveness at home. Services provided on an international basis – access to the internet, electronic payments, express delivery, etc. — enable millions of small and sometimes micro enterprises to engage in their own “random exports” of goods and services without any need for a physical presence overseas.
Cross-border services are governed by international agreements that have been negotiated bilaterally, regionally, and multilaterally. There are four key ways in which services can be traded, known in international agreements as the four “modes of supply.” These modes are often subject to negotiation and new rules during trade negotiations. It is important for executives to know which of these modes are critical to their operations and to speak up when there is rulemaking under consideration for these modes that may help or hinder their efforts.
Cross Border Supply: Providing services across a border, such as an architectural drawing or medical diagnosis transmitted via the Internet or by mail.
Consumption Abroad: Having the customer come to the host country to receive the service, e.g., tourism or going abroad for an operation.
Commercial Presence: Establishing an affiliate or branch or partnership in a foreign country, e.g., opening a fast food restaurant or operating a bank branch.
Presence of Natural Persons: Sending an employee temporarily to the customer in a foreign country, e.g., repairing sophisticated machinery or operating an off-shore oil drilling platform.
The Digital Revolution
At the center of the services revolution is the digital revolution, of which the Internet is emblematic. Today, the power of the internet enables services to be delivered digitally across borders globally to a degree unimaginable even 20 years ago.
The ability of companies to move data digitally across the globe for their internal operations and to serve their customers is crucial. Think of insurance firms processing claims, express delivery companies tracking packages across the globe, or an airline company remotely monitoring its engines in flight. The services and digital revolutions enable everything from retailers managing worldwide procurement and inventory, to health professionals seeking second opinions to their diagnoses from specialists across the globe.
In all, the digital economy demands fewer “muscle jobs” and more “brain jobs.” This is where most job growth is occurring. These skill requirements across the economy are outpacing supply, and preparing people for these new skill requirements is a challenge – especially for displaced manufacturing workers who have been trained for “muscle” during their careers.
Global Supply Chains
Global supply chains are the result of integration of services with manufacturing and agriculture production. This evolution has allowed enterprises and countries to specialize in tasks rather than goods.
For example, the typical automobile produced in North America crosses the border between six and twelve times in the course of its production. It isn’t manufactured completely in one room. The automobile’s capacitator may be imported from Asia by a circuit board manufacturer in Michigan, which sends both components to Mexico for assembly in a bonded facility. The components then go back to Texas for further enhacement, then back to Mexico where they are turned into a seat actuator, which eventually goes on to a seat plant in Canada. The seat then is shipped to an auto assembly plant in Texas. And all of this was to produce just one seat in the automobile! An estimated 80% of world trade moves through similar global supply chain workflows, making most products multinational in their manufacture.
Many executive are concerned about what the impact of the COVID experience will be on global supply chains. Given delays that were experienced during COVID both in terms of manufacturing and shipping, there are likely to be significant adjustments in the pattern of globalization in the coming years, which is likely to raise costs. Companies are re-evaluating the balance between resiliency and efficiency in their manufacturing risk management. They also have elevated concerns about any aspect of the supply chain that has exclusive dependence on China and may be considering diversificaction alternatives.
I believe companies will be inclined to develop multiple vertically-integrated operations in different geographic regions to protect themselves from over-reliance on single sources (i.e., regionalization of supply chains) that will create more sustainable supply chains. For North American manufacturing, this is likely to create new opportunities for Mexico in particular to serve as an alternative to China as a supplier.
Companies were already analyzing their resilience in the face of climate change, trade conflicts, and cybersecurity before the COVID pandemic struck. Differences in labor costs figure less in companies’ supply chain strategies given the greater risks they now rate from paralyizing single-source dependency. However, while there undoubtedly will be some relocation of supply chains away from China, companies still want to maintain a solid presence in China because of the size of its market. In respect to Asia, the emerging supply chain model seems to be a “China Plus Strategy,” where a company may look to dual source elements of its supply chain from countries like Vietnam, Thailand, Taiwan, etc.
One key issue is that there is a lot discussion about the role of government in securing post-COVID supply chains. Countries have an increased interest post-COVID in maintaining domestic production of certain critical materials such as medical supplies and key components of electronics and other materials that invoke national security concerns. At the same time, countries mist consider the danger of protectionism and subsidizing inefficient production with any supply chain mandates or rules they may issue.
Stay tuned for part two of this series on global trade: The China Challenge. Interested in having Ambassador Allgeier speak to your organization? Check out his global trade presentation booking overview HERE.