Global Competition Is Increasing and Economic Integration Is Changing the Landscape

For the past 200 years, the United States' enormous internal market has more than satisfied the needs of U.S. firms. But today, this is no longer the case.

The world is quickly becoming economically integrated, forcing unprecedented changes at every level of industry. U.S. companies, small and large, are facing record levels of foreign competition for domestic market share. In addition to this, the world landscape is changing as never before.

In an effort to achieve a higher level of productivity and, in turn, economic security, the world has emerged into three primary trading blocs composed of Western Europe, East Asia and North America. Based on past trade patterns and policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence. Within each bloc, free trade has and will continue to become more entrenched. However, it is likely that trade among blocs will increasingly become managed by governments.

On December 31, 1992, the European Community achieved the elimination of physical, fiscal and technical barriers to trade. Now referred to as the European Union (EU), the 15-member bloc encompasses Belgium, Britain, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain; and on January 1, 1995, Austria, Sweden and Finland became members. In years to come, it is likely that East European countries will join the 350 million population of the EU, expanding the market to include 850 to 900 million consumers.

The demise of Soviet Communism and the fall of the Berlin Wall has exposed Eastern Europeans to the free market economy for the first time since World War II. In an attempt to shift from the Communist system of central planning to markets governed by supply and demand, much of Eastern Europe has been plagued with economic and political instability.

For the past several years, negative growth and rampant inflation were recorded in varying degrees in Eastern Europe and the former Soviet Union. Shortages of industrial equipment and spare parts, the breakdown of traditional distribution channels, hyperinflation, and the collapse of monetary controls have contributed to the economic decline of the region. According to the U.S. International Trade Commission, in 1992, the former Soviet Union registered a decline in gross national product of 18% -- a steeper decline than Eastern Europe as a whole. The eruption of ethnic conflict in parts of Eastern Europe, including the former Yugoslavia and elsewhere in the old Soviet Union, has accelerated the economic and political deterioration.

Much of the EU's vested interest in allowing East European countries to become full members is aimed at preventing a potentially large mass migration. It is estimated that emigration from Eastern Europe, especially former Yugoslavia, and North Africa has risen from roughly 1 million in 1985 to 3 million in early 1993. This poses a serious problem for the EU. By integrating East European economies with the EU, the economic and political stability of the region will likely improve.

In recent years, East Asian nations have moved markedly toward increased economic integration. For example, both the Asian-Pacific Economic Cooperation Forum and the Pacific Economic Cooperation Council have emerged to facilitate greater regional integration. Others, such as the Association of Southeast Asian Nations (Asean), have advanced without U.S. membership.

In January 1992, the six-member Asean, comprising Malaysia, the Philippines, Singapore, Thailand, Brunei and Indonesia (325 million population) agreed to established a free trade area. Originally established on August 8, 1967 to counter the spread of Communism, Asean has recently begun to effectively deal with economic integration. The region grew by an average of 8% annually throughout the 1980s, among the fastest growth rates in the world.

Many fast-growing East Asian countries have a more favorable trade relationship with the United States than with Japan. However, due to Japan's economic power, investment and influence in the region, it has forged an informal trade bloc among East Asian countries. According to Harvard Professors Kenneth Froot and David Yoffie, Japan appears to be the only major industrial country whose domestic market remains protected from both foreign trade and direct investment. They conclude that with Japanese expansion in East Asia, North American firms may increasingly lack access to an East Asian bloc.

In an effort to better fortify our economic position, the United States implemented the United States-Canada Free Trade Agreement (U.S.-Canada FTA) on January 1, 1989. The North American Free Trade Agreement (Nafta), which built on the achievements of the U.S.-Canada FTA, was implemented on January 1, 1994.

Preferential access to Mexico and Canada, guaranteed by Nafta, put U.S. companies at a competitive advantage relative to rapidly expanding European and East Asian trade blocs. Nafta not only opens up the Mexican market of 92 million customers, but creates a trade area of 360 million consumers ensuring secure markets for U.S. products. Importantly, Nafta promotes greater efficiency, making our products more competitive not only in North America, but in Europe, Asia and throughout the world.

Last December 9th, the leaders of 34 Western Hemisphere nations met in Miami for the Summit of the Americas. The goal: to establish a free trade area of the Americas by the year 2005, further building on the achievements of Nafta. During the Summit, Chile was invited by the United States, Canada and Mexico to begin negotiations to accede to the trade bloc.

The Potential Effect on American Business

These trade blocs are continuing to liberalize trade among members. However, as intra-trade bloc barriers are eliminated, non-members are concerned that trade barriers applied to their products may actually increase. Fear that competing trade blocs will become inwardly focused and protectionist, not allowing cost-efficient, non-member producers to sell their products on the basis of competition, has promoted a race among nations to achieve the largest and most powerful trade area.

Should Europe or East Asia become inwardly focused, U.S. exports there could be severely curtailed -- harming U.S. business interests and the economy. According to Lester Thurow, a contemporary economist, "Those who feel they will be hurt in the economic integration (the Spanish banks feel threatened by the German banks) will go to their governments for protection. Their governments, however, cannot give them direct protection if integration is to go forward. In lieu of direct protection from bloc members, their governments will offer them protection from non-member competitors. So, less competition from American and Japanese banks will be offered to Spanish banks to compensate them for more competition from German banks."

The EU doctrine of reciprocity, for example, is based on equal treatment and access to one another's markets. If non-EU banks wish to do business in the EU, their domestic laws must parallel EU laws. Economists argue that the Europeans can keep American banks out of Europe or prevent those already operating there from expanding unless American banking laws are radically changed. For example, the United States does not allow interstate banking. Consequently, if a European bank does not have access to all of America, then American banks in Europe can be denied access to all of Europe. This can be interpreted as protectionism.

Even if existing barriers remain the same to EU non-members, the effects of trade diversion or regional trade preferences may have a similar impact as protectionism. Trade diversion occurs when members of a trade group buy more goods from each other, due to the elimination of internal trade barriers, displacing non-member goods. For example, due to preferential access, the British are likely to buy more German and French goods at the expense of the United States. Likewise, U.S. businesses will benefit from the creation of a trade bloc of the Americas, where members buy increasingly from each other.

In 1985, 53% of European Community trade was with member countries. This percentage has risen to 59.6 in 1991 and it will continue. There is concern that increased trade by EU members will likely come at the expense of non-members, resulting in trade diversion.

In 1988, 22% of East Asian trade (10 countries) was with one another. By 1991, this had risen to 35% according to the U.S. International Trade Commission.

The Uruguay Round Agreements of the GATT — Providing Balance

The GATT Uruguay Round Agreements (URA), implemented by the United States and over 100 other countries on January 1, 1995, phases out quotas and cuts tariffs by about one-third on most products traded globally.

GATT is the international body that governs approximately 90% of world trade. It is responsible for reducing international tariffs from an average of 40% in 1947 to 5% in 1990, which has permitted international trade to expand enormously, national incomes to substantially increase and international competition to flourish resulting in higher quality, lower priced goods. However, before the successful passage of the URA, the formerly perceived failure of GATT to effectively deal with rising world trade barriers resulted in a lack of confidence in the organization. Consequently, many individual countries took it upon themselves to establish regional trade blocs in order to secure market access to other countries.

During the phase-in period, the URA will eliminate many non-tariff barriers and expand intellectual property protection. The new World Trade Organization (WTO), created by the URA, is expected to be much more effective at enforcing internationally agreed upon trade rules and regulations and settling disputes among members. GATT and the new WTO will attempt to police the forces that may promote protectionism among trade blocs.

New Strategies Are Required in Order to Successfully Adapt to Global Realities

In the past, an abundance of natural resources once secured competitive advantage. This has changed. Abundance too often can lead to waste, misuse and abuse. Conversely, limited resources have forced companies to achieve higher levels of efficiency, as the Japanese have proven. For example, technical progress in the development of stronger and lighter materials is quickly replacing raw materials. In today's global environment, knowledge, not an abundance of natural resources, is key to success.

In order for U.S. companies to sustain themselves and generate growth well into the next century, they are advised to establish strategies designed to gather and analyze information from throughout the world, and use this to achieve international expansion.

Its no longer "business as usual." If your company does not take steps to expand internationally, your competition will. Your level of risk will likely increase, market sectors will become more competitive, and market share may be lost.

With the advent of Nafta and the benefits derived from the GATT Uruguay Round, international trade and investment opportunities will flourish. However, these opportunities will only benefit those companies whose corporate cultures view the world as one global village -- and act on it.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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