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The Impact of Globalization, Trade Agreements

and Emerging Trade Blocs on U.S. Industry
By John Manzella Thursday, January 01, 1998

Economy

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| Topic: U.S.

As we enter into the 21st century, a new era is approaching at warp speed that is affecting
virtually every aspect of our lives. As a result, many economic assumptions no longer seem

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to apply yet new realities still need to be defined. These ambiguities are causing us to
question our business tactics and reassess our strategies.
Ushered in with this new era are dynamic trends toward globalization, the proliferation of

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Keeping up with these changes is extremely difficult. And basing decisions on old

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The Trend Toward Globalization

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As a result, U.S. companies, small and large, are facing record levels of foreign competition. Consequently, for companies to survive

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A primary economic goal of the United States is to maintain a high and rising standard of living. To achieve this, the United States,
which accounts for only 4 percent of the worlds population, must sell and to the other 96 percent. Many U.S. firms have come to
understand this and are developing strategies designed to support worldwide exportation and investment. In fact, in just the last
decade, the number of companies exporting especially small and medium-size companies has increased significantly.
According to President Clinton, Exports now account for almost one-third of real U.S. economic growth and are expected to grow
faster than overall economic activity for the remainder of this decade.

U.S. Trade and Investment Is Rising

From 1988 through 1997, U.S. exports of goods and services increased from $430.2 billion to $932.3 billion, an increase of 117
percent. In 1997, the Office of Economic Affairs, Executive Office of the President, reported that U.S. exports of goods and services
supported 12 million American jobs. Predictions indicate that by the year 2000, exports will support 16 million jobs. In fact, the
number of export-related jobs has grown six times faster than total U.S. employment. Whats more, according to the Office of the
Chief Economist, Office of International Macroeconomic Analysis, Department of Commerce, workers in jobs supported directly by
exports are paid 20% higher than the average national wage. Workers in jobs supported directly in high-technology industries are
paid 34% more. And workers in jobs supported both directly and indirectly by exports are paid 13% more.
The non-traditional export of services also will become a major generator of economic growth in the future for many U.S. sectors.
Typically, services now account for 60 to 70 percent of gross domestic product (GDP) for industrial members of the Organization for
Economic Co-operation and Development (OECD). And because services are not yet internationally traded on a large scale, the
benefit to their trade balances is not yet evident. Currently, international trade in services is growing at a faster rate than trade in
goods, almost 13 percent faster from 1985 through 1996. As this trend continues, service exports will have a greater and greater
positive impact on a companys and countrys trade balance.
There is no doubt that companies that export generally fare better than companies that do not. According to a report published by
the Institute for International Economics and The Manufacturing Institute, research organizations based in Washington, D.C.,

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manufacturing companies involved in exporting:

Are larger than non-exporting companieson average four times larger in employment and six times larger in sales;
Adopt new technologies more frequently than non-exporting companies;
Have an advantage in avoiding plant shutdowns compared to non-exporting companies of the same industry, size, and capital
intensity;
Had an average annual failure rate of only 3 percent, as compared to 9 percent for non-exporters, during an 11-year period; and
Avoided employment shrinkage to a greater extent than other similar manufacturing companies during an 11-year period.

Globalization is Affecting Business in Every Country

Many companies in foreign countries already have been affected by globalization. For example, approximately 30 percent of
Canadian gross national product (GNP) is dependent on exports. Hence, in order for Canada to maintain its high standard of living,

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Canadian companies must operate on economies of scale that necessitate larger markets than are provided by its domestic
population base of only 27 million. As a result, Canadian exports are of extreme importance to Canadian companies and to the
overall well-being of the Canadian economy. Very simply, many Canadian companies must export or go out of business.
Companies in many other areas of the world, especially Belgium and Hong Kong, also have small domestic markets and need to
export to maintain their high standards of living. In many cases, what is exported are actually imports to which value has been
added by some means.
For the first time, in 1996, world merchandise exports exceeded $5 trillion. According to the World Trade Organization (WTO), the
United States was the leader, with 11.8 percent of world merchandise export share. However, on a per capita basis, the United States
ranked low as compared to other developed countries. Germany was second with 9.9 percent; followed by Japan with 7.9 percent;

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France with 5.5 percent; the United Kingdom with 4.9 percent; Italy with 4.8 percent; Canada with 3.8 percent; and the Netherlands

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with 3.8 percent. Interestingly, in ninth place was Hong Kong with 3.4 percent of world export market share; in 11th place was

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China with 2.9 percent, a country with a massive population compared to Hong Kong.

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The Proliferation of Trade Agreements and the Emergence of Trade Blocs

With the proliferation of trade agreements, which are resulting in the emergence of competing trade blocs, businesses are striving to
gain secure access to foreign markets, and in turn, are achieving a higher degree of economic security and competitiveness.
Since 1992, major agreements, such the North American Free Trade
Agreement, as well as 200 other lesser-known trade agreements, have
been negotiated with the United States. They are responsible for
substantially reducing foreign trade barriers, allowing U.S. companies
to export more of their products. Numerous other trade agreements
that have acted as building blocks in the establishment of trade blocs
have been negotiated that do not include the United States. These
include the Central American Common Market, the Asia-Pacific
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these agreements more internationally competitive industries have made business and government leaders in participating
countries aware of the benefits derived by the elimination of trade barriers.
But trade agreements have affected more than just trade barriers; they have had a major impact on trade and investment worldwide.
In fact, they are responsible for shaping business relationships among companies across the globe.
Today, the three largest trade blocs include the European Union, chiefly involving West European countries and spreading
eastward; the North American Free Trade Agreement, among Canada, the United States and Mexico and spreading south; and an
informal bloc in East Asia, currently dominated by Japan, but soon to be dominated by China. Based on past trade patterns and
policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence.

The European Union

The European Union (EU) now encompasses 15 countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,

Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Many other countries are waiting for full
membership. Turkey applied in 1987; Cyprus and Malta applied in 1990; Switzerland applied in 1992; and Hungary and Poland
applied in 1994. Six countries applied in 1995: Romania, Slovakia, Latvia, Estonia, Lithuania, and Bulgaria. And, the Czech Republic
applied for membership in 1996. As the EU expands, it will continue to gain greater economic and political strength, in addition to
an enhanced level of global competitiveness. Thus, should all Eastern European countries eventually become members of the EU, its
numbers of consumers would swell to 850 million to 900 million.
In 1997, U.S. exports to Western Europe exceeded $155 billion, up by more than 32 percent from 1990, and far exceeded exports to
Eastern Europe, which barely reached $7.7 billion. U.S. direct investment throughout Europe has outpaced exports, and reached
almost $365 billion in 1995, an increase of 54.6 percent since 1991. In fact, according to an Arthur Andersen report on international
investment, Europe was the worlds largest recipient of foreign investment in 1995.

East Asia
In recent years, trade among East Asian nations has increased at a much faster pace than trade outside the region. Through the
development of several trade agreements such as the Association of Southeast Asian Nations (ASEAN), comprised of Malaysia,
the Philippines, Singapore, Thailand, Brunei, and Indonesia the region is becoming more trade-cohesive. However, economic
integration is primarily influenced by Japanese investment in the region, creating an informal trade bloc. Even considering the
Asian financial crisis that began in 1997, which will no doubt have a massive impact on regional developments and world growth,
many predict that Asia will still become the worlds dominant region in the next decade.
Prior to the Asian financial crisis, many Asian economies were growing at the fastest rates in the world. However, as the region
emerges from the crisis, its purchasing power will again increase at favorable rates and provide a plethora of export and investment
opportunities. According to a report published by the Asian Development Bank, A modest recovery is expected in the affected
economies in 1999, but recovery to pre-GDP growth rates and per capita income levels will take a number of years. The report
predicted that the Asian Development Banks 35 developing member countries would see average GDP growth decline to 4 percent,
as compared to 6.1 percent in 1997. Yet, growth is expected to recover to approximately 5.1 percent in 1999.
Many U.S. companies that have watched Asian economic developments closely over the last decade do not appear to be dissuaded.
Thus, many are positioning themselves to take advantage of new opportunities, while establishing new strategies to mitigate risks
caused by the economic crisis.

The Americas
The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994, creating a trade area of 360 million
consumers and ensuring secure markets for U.S., Canadian and Mexican products. One of the primary goals of NAFTA is to
encourage expansion of business partnerships to promote greater efficiency, and to counter fierce competition from the Far East
and Europe. So far, NAFTA appears to be working.
Since the Agreements implementation, there has been a proliferation of joint ventures and strategic alliances between U.S. and
Mexican companies. Already strong ties with Canada also have prospered. The benefits derived from this teamwork will continue to
make the United States, Canada and Mexico more globally competitive at a time when regional trade alliances are becoming
increasingly important in the world economy.
For the first time in 1997, Mexico followed Canada as the United States second largest export destination, pushing Japan into third
place. And the coming Free Trade Agreement of the Americas (FTAA) in which all the benefits given to Mexico and Canada under
NAFTA will be extended to the rest of Central and South America will further increase cooperation among nations in the Western
Hemisphere. Such an agreement will make the Americas one of the largest trading areas in the world, with a population of 750
million consumers, and combined gross domestic product of more than $9 trillion.

Production Sharing In the Americas

Production sharing occurs when various aspects of an article's manufacture are performed in more than one country. U.S.
companies regard this as an important tool allowing them to improve the relative price competitiveness of their products, help them
keep higher wage jobs in the United States, and provide an important market for U.S. exports of components.
The growth in U.S. production sharing imports (primarily under HS 9802.00.80) in 1994 resulted mainly from larger shipments of
motor vehicles and parts, televisions, and other electronic products from Mexico; apparel from the Caribbean Basin and Mexico;
and semiconductors from Southeast Asia. Today, a production sharing shift is underway with more foreign assembly moving to
Latin America and away from East Asia.
U.S. textile manufacturers are one group that illustrates the benefits from closer economic integration with Latin America and
cooperation in production sharing. As such, the United States is one of the worlds largest and most efficient producers of textile mill
products. However, over the years, textile manufacturers output has dropped, primarily due to a reduction in apparel production in
the United States the single largest market for the textile industry. East Asian producers of apparel have become major suppliers

to the United States. Unfortunately for U.S. textile producers, the East Asians source their textiles in East Asia, not in the United
States.
In an attempt to sustain remaining domestic market share, U.S. apparel producers have expanded their production-sharing
operations in Mexico and the Caribbean benefiting from the lower wages and tariff preferences. This activity also benefits the U.S.
textile industry. Under a free trade agreement of the Americas, more U.S.-controlled apparel production will move to Latin America
from East Asia. U.S. textile mills will likely supply Latin apparel producers, where as Asian producers will continue to source their
textiles in Asia. Importantly, a free trade agreement of the Americas will secure Latin American market share for U.S. firms vis-a-vis
European and Asian firms.
Within each of the worlds trade blocs, small and large, free trade will continue to become more entrenched. Future trade between
blocs is not so clear. Many fear that individual blocs will become inwardly focused and protectionist. Even if protectionism does not
emerge outright, trade diversion could have a similar effect. Trade diversion occurs when members of a trade group buy more goods
from each other due to the elimination of internal trade barriers, and displace non-member goods. For manufacturers and
distributors, foreign market share may be at risk.
Should the EU or the Asian emerging bloc turn inward and establish protectionist measures, U.S. firms could be at a disadvantage.
Or through trade diversion, its possible that EU and Asian bloc members will purchase more goods from their own blocs at the
expense of non-member firms. However, provided the EU or Asia does not look inward and establish protectionist measures, a more
economically viable Europe and Asia could result in more U.S. imports. Further integration among EU members, for example,
creating one set of standards and regulations, could make the export and investment process less complex for outsiders.

Action Is Required By Government Agencies Interested in Attracting Investment

Many U.S. manufacturers, small and large, have taken steps to expand internationally. However, many have not and need to or
face stiffer competition for shrinking market share. In an effort to remain competitive, many U.S. firms will need to engage in
production sharing. And many state and local governments that have not developed a strategy to accommodate these changes
quickly will need to do so.
With the understanding that developing countries will continue to compete for low-technology, labor-intensive jobs, the Canadian
government has shrewdly positioned Canadian industry to compete well into the next century. It has identified and shifted
resources to industries where it has a competitive edge and created investment policies to suit the needs of its target market:
manufacturers of high-technology goods.
Many U.S. state and local governments should heed Canada's policy direction, which has been responsible for attracting the type of
investment that will help make Canada and its workers competitive for years to come. If not, highly sought after foreign investment
that is vital to creating high-paying U.S. jobs will float to more attractive locations.

This article appeared in U.S. Sites and Development, 1998

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About The Author John Manzella

[Full Bio]

John Manzella, a world-recognized author and speaker on global business, competitive strategies and
the latest economic trends, is editor-in-chief of The Manzella Report, and president of Manzella Trade
Communications Inc., a strategic communications, publishing and consulting firm.

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