Pankaj Ghemawat on Global Strategy in the Age of Brexit and Trump

Jul 12, 2017

How should companies strategize in the age of "Brump" (shorthand for Brexit and Trump)? Should they think locally rather than globally? Are trade wars inevitable, and if so, how will they affect countries large and small? Don't miss this analysis from economist Pankaj Ghemawat.

JOANNE MYERS: Welcome to all of you who are listening to this podcast, which is coming to you from the Carnegie Council in New York City. I'm Joanne Myers, director of Public Affairs Programs here at the Council.

Our guest today is Pankaj Ghemawat, who is global professor of management and strategy and director of the Center for the Globalization of Education and Management at New York University's Stern School of Business. He is also professor of global strategy at IESE Business School in Spain.

He is the author of seven books, including Redefining Global Strategy, which was named Best Business Book of the Year in 2008 by strategy+business (s+b) magazine, and World 3.0, which received a Thinkers50 award for the best business book published in 2010-11. Professor Ghemawat previously served on the faculty of Harvard Business School, where he was appointed the youngest full professor in the school's history. He is known for his work in the study of globalization.

Our discussion today is based on the cover story of the July-August issue of Harvard Business Review (HBR) entitled "Globalization in the Age of Trump: Why Businesses Must Not Retreat from the Global Economy."

Thank you for joining us.

PANKAJ GHEMAWAT: Delighted to be with you.

JOANNE MYERS: In the opening paragraph of your article you write that, "Business leaders are scrambling to adjust to a world few imagined possible just a year ago." Could you just spend a few minutes talking about what you see as the biggest changes that have occurred, especially in the past year, that will affect globalization going forward?

PANKAJ GHEMAWAT: I would summarize the biggest challenges over the last year in one word: "Brump," which I use as shorthand for talking about Brexit and the election of President Trump, both of which are changes that in many people's minds have raised questions about the future course of globalization. Those are the two big moves that make me think a bit differently in July 2017 than I did back in June 2016, when I was in London two weeks before the Brexit vote and none of this seemed very plausible.

JOANNE MYERS: How do you see companies adjusting to this world of Trump? Have they gone more locally rather than thinking globally, or is there something else taking place?

PANKAJ GHEMAWAT: There's certainly a lot of discussion of localization. This is something that happens pretty much during the course of every hype cycle around globalization. Originally the hype reigns supreme, and eventually when disappointment sets in, there is a discussion of "should we localize how responsive we are to customers," "should we localize by dialing down our global presence," "should we localize by moving to a country-centered organization," etc.

My basic point in my article—and in a book that I have coming out early next year—is that just as complete global standardization was never the answer, localization as a response to what is going on also seems a very limited answer that misses out on a lot of what we've learned about global management over the last hundred years.

JOANNE MYERS: Can you give us an example of where businesses that were more global in their thinking have now sort of cycled down and looked at their local possibilities?

PANKAJ GHEMAWAT: I'll give you two very different contrasts from, say, 10 years ago versus now.

Ten years ago, Sam Palmisano, who at that point was still the chairman and CEO of IBM, wrote an article titled "The Globally Integrated Enterprise," which asserted that companies operate more and more without regard to national borders. In contrast, almost exactly 10 years later, we had Jeff Immelt, chairman and CEO of General Electric, come to Stern, where I teach, and in the commencement speech to the MBAs last year he essentially asserted that given the protectionism that was setting in, that the right strategy was almost the exact opposite of what Sam Palmisano had been talking about: it was a strategy of localization.

JOANNE MYERS: In your article you posit that much of the world may not be as globalized or as connected as we have been led to believe. This follows what you just said. Could you give more examples of what you mean by this? What are some of the common misperceptions about what is and isn't changing about globalization?

PANKAJ GHEMAWAT: Two kinds of examples; one at the level of the globalization of markets and the other at the level of the globalization of companies. A lot of the anti-globalization sentiment we've seen in the United Kingdom, in the United States, and for that matter elsewhere, is basically based on fears about immigration, etc.

It turns out that when you look at the United States and when you look at the major European countries, their citizens tend to overestimate the percentage of first-generation immigrants in the total population by a factor of somewhere between two and four. When they're told about their miscalculation, the percentage of people who are willing to agree with the statement that "there are too many immigrants" drops very sharply. That's an example of overstatement about globalization at the aggregate level, at the market level, really causing some problems that some debunking of globalization could help.

I think at the company level the whole point is that managers are still inclined to agree with propositions that overstate exactly how globalized the companies are. For instance, less than 10 percent of the Fortune Global 500 derive 20 percent of their revenue from each of Europe, Asia, and North America, an old test of globalization that Kenichi Ohmae of McKinsey & Company proposed about 25 years ago. But if you look at the percentage of people who believe that truly global companies do operate in all major markets, that's still several times as high, and in fact more than 80 percent of my respondents to a recent survey think that global companies should in fact operate in all major markets.

So there is a stunning disconnect between how global we actually are, whether at the market aggregate level or at the company level, versus how global it has become fashionable to say we are. That has some bad implications as well for the future of globalization.

JOANNE MYERS: In actuality, how much globalization, then, depends on the United States?

PANKAJ GHEMAWAT: The United States certainly has an outsized share still of world gross domestic product (GDP), of world influence, etc., but that said, the world is significantly less U.S.-centric than it was in the immediate aftermath of World War II, when 40-plus percent of the world GDP was accounted for by the United States while Europe and Japan were still reconstructing. So the United States certainly does have a big influence. History suggests that we should watch the United States with particular interest given that it kicked off the only global trade war we've known, back in 1930 with the Smoot-Hawley Tariff increase.

But that said, I think what we're seeing in the run-up to the G20 is a reminder that the United States is no longer the hegemonic power that it once was, and if it turns its back on globalization, the Chinese are more than ready to try to take on the mantle. What seems to have been happening in the run-up to this G20 is Angela Merkel really emerging more as the leader of the West in regard to attitudes about what needs to be done because—this was pointed out by many people—Trump is fundamentally out of step with much, if not all, of the rest of the G20, at least in regard to what allegedly or ostensibly needs to happen.

JOANNE MYERS: No, you're absolutely right, because it is reported that China's president is already in Berlin, where he has found an ally on free trade and climate change with Angela Merkel, and the Japanese and the European Union appear ready to announce the outlines of a broad trade pact tomorrow.

Given the surging protection sentiments expressed by this administration, do you see the possibility of a trade war, and what would that look like?

PANKAJ GHEMAWAT: A trade war has clearly been a major concern, particularly ever since President Trump got elected. The week he was elected there was a sevenfold spike in searches on Google for "trade war," just giving you a sense of how worried people are about this. It certainly could kick off a trade war. It's hard to say what this administration could not possibly do.

Therefore what I spent my time on—and what I talk about a bit in the recent HBR article as well as in the forthcoming book—is that it's really hard to predict what Trump is going to do, partly because as Henry Kissinger once said, "It's hard to predict what the Russians are going to do; even the Russians don't know what they're going to do." There does seem to be a flavor of that around this administration.

What I tell companies is, "Okay, what you really need to do, rather than trying to predict, is explore a scenario in which there is a trade war and make sure that you're as best prepared for it as you can be." The two big conclusions that emerge—at least to my review of and analysis of the trade war in the 1930s, when world trade dropped by two-thirds over a three-year period—are the following: First of all, nobody is predicting, so far anyway, as steep a decline in world trade as we experienced in the 1930s.

For instance, Moody's Analytics has some estimates suggesting that even if Trump imposed a 20-percent tariff on Mexico and a 45-percent tariff on China, and they retaliated, the net impact on U.S. exports would be that they would drop by about 4 percent. So at the end of the day there would still be exports to be sold, markets to be determined, prices to be set, etc. While a drop-off in trade of that magnitude would certainly be unfortunate, there's a big distinction between pressing the pause button or the rewind button on the tape recorder versus pressing the off button.

Second, thinking about the breadth rather than the depth of globalization, it does turn out that even in the 1930s, while trade dropped off by a lot in terms of its intensity, the identity of countries' key trading partners remained more or less constant, which is a reminder that the breadth of trade usually doesn't move around quite as much as the depth of trade.

What this means from a U.S. perspective is that, yes, we can beat up on Canada and Mexico, but the point is they account for 70 percent of the GDP outside the United States in the only part of the world where the United States exports more to than China. To what extent do we really want to beat up our natural trading partners just because we can? There is a similar question obviously around Brexit and Britain and its natural trading partners in the European Union.

My general sense is that if there is a trade war, first of all, the depth of globalization or trade is not going to zero; and second, its breadth is not going to change very much, which is at least of some help in trying to decide what to prioritize, to try and make sure that bilateral trade agreements are signed to avoid a snap back to World Trade Organization (WTO) rules, etc.

JOANNE MYERS: But if we did enter a trade war, some countries are suggesting that they are ready to play hard. What effect will this have on the United States? Very little, it seems that you indicate.

PANKAJ GHEMAWAT: Four percent is nontrivial. We never quite know where things stop. The point that I tend to stress is that all countries would suffer from a trade war.

But that said—and again this is an experience that is borne out by the 1930s—small countries in some sense are more at risk; so the same percentage drop-off in trade—which was roughly speaking what we observed in the 1930s—translated into a larger share of GDP per smaller countries, because trade tends to be a larger portion of GDP for smaller countries.

So there is a sense in which the United States, which is frankly not very internationalized in terms of trade intensity, is a little bit less at risk than, say, a small, highly globalized country like Singapore, which tops our biannual Global Connectedness Index that we issued in November 2016. Singapore's exports are several times its reported GDP because it acts as a trans-shipment hub. Obviously, given how closely they have allied their future to globalization, they have to be a lot more concerned about what might happen with a trade war than the United States is.

JOANNE MYERS: In the time we have left, I'm just wondering—there are so many myths about globalization that you have punctured in your career—if there is one myth that you wish people would just forget about and walk away from, and if so, what is that?

PANKAJ GHEMAWAT: The biggest myth I wish I could change?


PANKAJ GHEMAWAT: I think the biggest myth that I come to conclude is this notion that while we express a huge amount of interest and empathy for people unlike oneself, when one looks at things like expressed preferences over who should get jobs or how much aid to the poor that there should be, they are actually extremely parochial, and that's the bias that I wish I could get rid of.

Let me give you an example. Two political scientists recently did a survey of the United States in which they presented U.S. respondents with two possible scenarios: (1) a trade policy in which the United States gained a job and the rest of the world lost 1,000 jobs; (2) a trade policy in which the United States lost a job and the rest of the world gained 1,000 jobs.

From the way I've been building up to this, you can probably guess what the results were, which is that people were in support of a hypothetical trade policy that would create one job in the United States but cost the rest of the world 1,000 jobs, but strongly opposed to a trade policy in which the United States lost one job and the rest of the world gained 1,000. I think that's not so much a myth about globalization as it is a psychological predisposition. But this thousandfold "home bias" multiple does strike me as a very significant constraint on our ability to negotiate trade agreements, think about each other's welfare, etc. So my biggest wish would be if we could reduce the amount of "home bias," as economists call it, in the world, that might actually not be a bad thing.

I'm not saying we have to treat foreigners exactly the way we treat those citizens, but a thousandfold gap in terms of how much we value a domestic job versus a job overseas? That seems like the kind of thing that is not very consistent with visions of tapping further gains through globalization.

JOANNE MYERS: At a time of great angst and uncertainty about globalization, it is enormously important to have a fact-based perspective on the phenomenon. Thank you for providing the clarity that is needed.

PANKAJ GHEMAWAT: Thank you so much, Joanne.

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