Simon Evenett on the impact of globalization and protectionism on Swiss SMEs

In his studies, Simon Evenett concludes that there have been significantly more protectionist measures in the last five years. But what influence does protectionism have on globalization and how can Swiss exporters operate in this area of tension? An interview.

Simon Evenett: "Globalization continues because technology is changing."
Simon Evenett: "Globalization continues because technology is changing."

Simon Evenett, you coordinate the Global Trade Alert Initiative. Together with your team, you document interventions in the economy. What are your conclusions from these reports?
We have three conclusions. First, that protectionism is far more pervasive than government officials would like to admit. Second, that protectionism is probably affecting up to 80% of the G20’s exports to the rest of the world – the G20 being the largest economies in the world and therefore the countries that we focus on. The third conclusion is that most contemporary protectionism doesn’t reduce the level of trade, it actually reshuffles trade between exporters. Governments are using different types of export incentives to help their firms win contracts in overseas markets, and other firms, which are not helped, lose contracts. So more than restricting trade, it is about stealing market share in overseas markets for your country’s firms at the expense of other countries.

Can you give some examples of protectionist actions?
Let me give you four examples. First: the Chinese government dramatically expanded the range of products that could receive tax incentives for export at the beginning of the crisis, and these policies were copied by other emerging markets. Second: at the beginning of the crisis, you may remember the United States expanded its Buy American provisions in government contracts, which essentially reserved more contracts for products that used American iron and steel. Third: we have countries like Indonesia and South Africa renouncing their bilateral investment treaties with other countries on the grounds that they didn’t feel that they were appropriate in the 21st century. This of course disadvantages foreign investors, including Swiss foreign investors in those countries. And fourth: a piece of home-made protectionism we have in Switzerland is the Swiss made initiative, which insists that products labeled ‘Swiss made’ meet a specific, very high level of local content.

What are the causes of protectionist actions?
There are several causes of protectionism. Fundamentally, the very slow economic growth and recovery of the world economy since the crisis has made governments desperate to try and stimulate their economies, since they are reluctant to use a spending policy for this and monetary policies are already at their limit. Governments have increasingly tried to boost exports abroad to add to national income. That’s one important driver. The second driver is the tendency for governments to copy other governments’ bad behavior.

On the other hand, we have globalization. Globalization has changed international trade. What kind of observations have you made in this regard?
Globalization, the integration of markets, continues because technology is changing – technology relating to information and communication, which helps people to make transaction across long distances and organize production over long distances. So that longer-term trend is still with us and still offers great opportunities for countries to specialize and to focus their production on what they are very good at, and to source the rest from other countries which are better at producing those goods.

There is one other technological development I should mention which might actually reduce the amount of trade that we will see. This is the introduction of 3D printing, which will enable many more firms to produce very close to their customers. And if that takes off, then we might see less cross-border trade and perhaps much more local production for local customer needs, or indeed direct foreign investment resulting in factories that produce according to local needs using 3D printing. Technology on the whole for the past 30 or 40 years has been a very positive factor in integrating national markets and creating opportunities for business. But it’s also a factor that could go in the other direction, depending upon how quickly 3D printing, for example, spreads.

How does globalization change the Swiss economy?
Being so heavily integrated into the Western European economy and also into the global economy, Switzerland is profoundly changed by globalization. I think we see enormous opportunities for Swiss firms to focus on very high-end products and to earn incredible margins selling those great products abroad.
We also have very strong Swiss export advantages in services. When you look at the Swiss economy, it is so diversified across manufacturing and services and it is very well represented at the high end. Swiss firms are able to scale up their production and scale up their customer bases because there are foreign buyers who want to get their hands on these excellent Swiss products and services. I think that is the huge opportunity which is created by globalization.

Companies are in an environment between globalization and protectionism. How is this affecting the economy?
It would not make sense to generalize that all Swiss firms face one circumstance or another, as they all react in different ways. The mix between integrational markets through technology and trade distortions and protectionism varies across sectors. In some sectors, you will have much heavier intervention, perhaps in the areas of food or sometimes in pharmaceuticals, life sciences and the like; in other sectors, you may find much lighter levels of intervention.

Have you also observed any uncertainties?
For sure, we have faced lots of uncertainties in 2017 – and 2018, as we go into this next year. One of the biggest uncertainties is the trade policy of the United States. We think here of the potential actions of the Trump administration that may take a very aggressive line against China – or may not, who knows – that’s one area of concern. Another form of uncertainty, which is perhaps more regionally based, is what happens with the UK’s exit from the European Union. Switzerland has invested a lot of money in the UK and there are Swiss subsidiaries operating there, which are clearly affected by this decision by the UK population. Then on a more positive side, we don’t know how trade negotiations for new free trade agreements will unfold. These might well create positive opportunities as well. There are plenty of uncertainties out there, but there always are, and I think that talented executives know that they have to balance these different forms of uncertainty and figure out what are the best risk mitigation strategies if indeed some risks do pose a threat to the viability and profitability of their business.

About Simon Evenett

Simon Evenett is Professor at the University of St. Gallen. He is responsible for overseeing the MBA program and teaches business economics, corporate strategy, international business, and about the European Business Environment. Simon Evenett is also coordinating the Global Trade Alert Initiative, the independent trade policy monitor.

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