Waking Up to the Global Economy

MURRAY WEIDENBAUM <i> holds the Mallinckrodt Distinguished Professorship at Washington University in St. Louis</i> .

Conventional international trade policy is being pulled by two conflicting trends--regionalization and globalization--and the outcome is in uncertain.

On the most visible level, governments are entering into regional coalitions or trading blocs. Witness the rise of the European Community and the pending North American Free Trade Agreement. At a more subtle but perhaps more fundamental level, individual enterprises are learning how to overcome the trade and investment barriers erected by governments.

One result of these two contrasting developments is that the role of the individual nation-state is diminishing, especially as a force in international trade policy. The development of the EC is a highly desirable movement. Elimination of national restraints permits economies of scale that promote efficiency and productivity. However, another result of regionalization commands far less attention--the development of more insular patterns of international commerce.

The raw statistics on intra-EC commerce are disconcerting. In 1960, before the Common Market gained momentum, more than 60% of the foreign trade of those 12 nations was outside what is now the EC. But now, 60% or more of the trade of those nations is inside the community. The completion of the EC process in 1992 is bound to increase that ratio.


The inclusion of the European Free Trade Area nations--Austria, Switzerland, Norway, Sweden, Finland and Iceland--in the expanded European Economic Area is a noteworthy development. That could quickly bring the ratio of intra-Western European trade to the neighborhood of 70%.

Another example of regionalization is less formal--the rise of the Asian Rim economies under the leadership of Japan. There is no formal intergovernmental structure involved comparable to EC or EFTA. However, some Japanese executives are referring to the phenomenon as the Greater East Asia Co-Prosperity Sphere, a term not heard for half a century. Like the EC, more than 60% of the trade of the Pacific Rim nations stays within the area.

An examination of the substantial flows of investment within the Asian counties--especially from Japan, Taiwan and South Korea--to the newer industrialized nations such as Thailand, Malaysia and Indonesia is instructive. The development of a unified trading area is clearly evident. By 1995, it is likely that Japan will provide the largest market for the exports of these nations. For some, notably Malaysia and Indonesia, Japan is already the leading export and import trade partner.

Given the expansion of trade and investment in Western Europe and East Asia, it is not surprising that the nations of North America have, belatedly, responded. Following the U.S.-Canadian Free Trade Agreement, a similar tripartite arrangement with Mexico is being formulated.


A question arises: Will regionalization reduce or increase world trade? The data will be difficult to interpret. The continued rise in regionalization will coincide with the growth in international commerce. However, it will not be a cause-and-effect relationship. It is another development--the globalization of business--that will pace the growth of world trade.

It is commonplace to say that France exports wine and Germany BMWs to the United States and that we export jets to both. But nations and governments only record and tax those cross-border transactions. It is business firms that engage in international commerce.

When we examine foreign trade from that viewpoint, we can gain new insights. For example, about one-half of what governments call foreign trade involves cross-border transactions between different parts of the same company. That ratio holds true for Western Europe, the United States and Japan. A domestic firm may ship goods to or receive items from an overseas subsidiary; a foreign firm may engage in similar transactions with its divisions in this country.

In a geopolitical sense, this is foreign commerce. But from an economic viewpoint, these international flows of goods and services are internal transfers within the same firm. That is the global enterprise in full swing.


An extreme case was cited by former U.S. Secretary of State George P. Shultz. He tells of a shipping label on integrated circuits made by a U.S. firm, which reads: “Made in one or more of the following countries: Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. The exact country of origin is unknown.”

Technological progress--especially in communication and transportation--makes possible a variety of business innovations that often overcome the obstacles imposed by parochial governments. Discussions of cross-border joint ventures and strategic alliances have moved from the school room to the board room. Often electronics companies in Europe, Asia and the United States engage in joint ventures to develop new products, co-produce existing products, serve as sources of supply for each other, become customers of each other--and compete against each other.

There is no set pattern. Partially owned subsidiaries, associated firms, licensing, franchising and correspondent relationships are all increasingly popular ways in which business firms respond to changing threats and opportunities in the global marketplace.

While private enterprise is increasingly global, government policy is still parochial. Yet another force comes into play: consumers--who vote every day, in dollars, marks, yen, pounds, francs and lira. Consumers buy products and services made everywhere in the world, giving more weight to price and quality than to country of origin. Unwittingly, they are adapting to the global economy.


If consumers were not oriented to the global marketplace, the pressures on government to restrict international trade would not arise. The combined power of economic incentives and technological change will increasingly compel voters and government officials to wake up to the positive implications of the global economy. The real liberalization of trade in the years ahead will come from the competition among business firms operating in global markets.

MURRAY WEIDENBAUM holds the Mallinckrodt Distinguished Professorship at Washington University in St. Louis, where he is also director of the Center for the Study of American Business.