Sep 2018: Trade Imbalance leading to Protectionism – Time to Internationalize

As per IMF’s External Sector Report which assesses “The Trade Position & Exchange Rates of The World’s Biggest Economies,” Current-account balances amounted to 3.25 percent of the world’s gross domestic product last year, roughly unchanged from the previous year. About 40-50 percent of last year’s global current account balances were deemed excessive.

“Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.

Over the medium term, sustained current-account deficits could limit global growth and result in “sharp and disruptive currency and asset-price adjustments.”

What has Protectionism done?

As per research, It has been revealed that the world’s top 60 economies have adopted more than 7,000 protectionist trade measures on a net basis since the financial crisis.

These could have been made in order to shore up key industries, protect jobs and maintain a strategic international advantage in the wake of the financial crash and the main offenders for creating harmful trade policies are the US and EU.

Since 2009, the US has passed 1,297 economic or trade measures deemed to be ‘harmful’ to global trade, compared to just 206 regarded as liberalizing.

In a world where tariffs are now worth more than USD 400 billion, 15 of the 20 countries have passed the highest number of trade-restricting policies, many others have also imposed harmful measures.

Christine Lagarde (M.D., IMF) has warned protectionist policies and trade wars could “tear apart” the global economy. If a nation is too protectionist the negative impact of a closed market creates a lack of competition with side effects such as the cost increase for consumers and the decline of quality and innovation.

It is impossible for a country to be self-sufficient in every product, industry or resource: it will need to join forces and exchange strengths to properly cover its needs. Opening and maintaining strategic alliances will result in the strength and competitiveness necessary should a country wish to be a strong player.

While trade tariffs may boost national economies and employment in the short term, the potential long-term effects outweigh these benefits for anyone other than a select few.

You can see the ‘Trade Protectionism Heat Map’ from Low to Very High across the globe.

Why can Internationalization be the solution?

Tacking Trade Protectionism will not be easy for businesses around the world, however, taking a proactive approach to Internationaliz­ation would make companies more robust and potentially more successful, with a far greater client base and more scope to e­xpand.

While internationali­zation typically denotes big busi­ness carried out on a global scale, even the smallest companies can in­ternationali­ze successfully with limited resources if they play their cards right.

There are  proactive reasons for incorporating internationali­zation into the competitive strategy of an SME (Small Business), including:

  1. Taking advantage of other markets growth and development
  2. Moving activities in the value chain to more competitive regions
  3. Exploiting economies of scale and reach
  4. To gain knowledge about other clients and markets, the capacity of competitors at a global level in a particular industry or sector, and even the cul­tural diversity typical of teams in global companies.

Any business that wants to break into new markets must begin by asking itself what competitive advantage are we trying to gain? It then needs to dedicate time to producing answers to three big questions:

  • What markets to enter?
  • With what strategy?
  • With what type of structure?

Internationalisation processes represent an opportunity for rapid growth of businesses and are a phenomenon which affects big businesses, mid-sized businesses and small businesses alike.

We can see from the chart below with different options available for businesses who want to Internationalize.

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