Tectonic Economics

Dec. 5, 2010
Two clashing forces are having a major economic impact on manufacturers and the countries in which they operate.

A global economy behaves like a global geological system. Just as the clashing of tectonic plates under the surface of the earth causes earthquakes and tsunamis thousands of miles apart, so can clashing economic tectonic plates cause economic disruptions in different parts of the globe.

Currently economic tectonics is causing disruptions to the global economy, while simultaneously shaping the international economic landscape for the next decade. We see two economic forces at work: (1) increased economic nationalism of countries and (2) increased supra-national behavior of multinational corporations.

We can see the clash of these two forces when China retaliates against an action of the Japanese government by denying rare earth metals to large Japanese corporations. We can see it in the way Germany has positioned itself as banker to the EU, and China as banker to the world, both to protect their large multinational exporters.

What a change it is from the recent past: From the 1970s until the middle of the last decade, there was a worldwide push for international cooperation in many areas, such as trade, intellectual property, energy and the environment. The signing of the North American Free Trade Agreement, the establishment of a single currency in Western Europe, and the entrance of China into the World Trade Organization mark high points in three decades which saw increasing economic integration.

Now the same nations that argued for increased internationalism are having second thoughts. Protectionist clamor from industries and employees suffering from Asian competition has gathered steam in the United States, Great Britain, France and Germany. Anti-foreign worker fervor has also infected the United States, Western Europe and even countries of the East African Community. Meanwhile, China continues to fix its currency at an artificially low level, preferring to keep its price edge in manufactured goods over stabilizing the world economic system.

Perhaps the biggest sign that countries are retreating from multinationalism has been the impossibility of achieving a viable agreement to address global environmental concerns.

At exactly the same time countries are retreating into economic nationalism, corporations with operations in more than one country are losing their national identity. Can we really consider Henkel a German company or Toyota a Japanese company when these and many other multinational corporations (MNCs) have such large operations and workforces in other countries?

MNCs continue to grow in size and global reach, while at the same time becoming less subject to regulation by national governments. Multiple global operations across nations with sometimes vastly different laws and business customs make taxing and controlling the activities of MNCs a stubborn challenge for national governments. A perfect example of the inability to control MNCs can be seen in the legal constraints preventing the U.S. government from taking a greater management role over British Petroleum's handling of the oil spill in the Gulf of Mexico.

The new MNCs are different from the past conglomerates that would own many disparate businesses, enabling them, at least in theory, to ride out bad times because when one part of their operations was down, another would be up. By contrast, the contemporary MNC seeks to dominate one industry or product line globally. Be it Vodafone in telecommunications, Toyota and Tata in automobiles, or Severstal and ArcelorMittal in ferrous metals, large companies are gobbling up smaller ones, resulting in worldwide industries being dominated by a small number of players.

These new MNCs have enormous economic power because they control key resources. With fewer players, global prices become less stable, as anyone who has tracked oil price volatility on a long-term basis understands all too well. Moreover, as MNCs continue to grow, they are beginning to come into direct conflict with countries trying to regulate their activities.

Thus, economic forecasting has fragmented into nationalist thinking at the same time that business planning unifies around the global strategies of a few big players. These two trends work against each other like clashing tectonic plates. The result may appear to be random -- threats of tariff wars, armed skirmishes to control single-resource countries, ethnic minorities which control resources asserting their independence -- but they are not. On one level or another, many of the economic and political eruptions we will see over the next two decades will result from the interaction of these "economic tectonics."

Dennis Unkovic is an international business lawyer with Meyer, Unkovic & Scott, LLP who has published six books and more than 150 articles on international business issues and advised hundreds of U.S. and foreign companies on conducting business activities around the globe.

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