It’s time to play hardball! Protect the home front. Batten down the hatches. Bring manufacturing jobs back home. Apply high import tariffs on foreign goods. Keep the foreigners out, make and buy only U.S. products, and make America great again!
These protectionist positions were instrumental in getting President Donald Trump elected. Why? Because America is feeling the pain of China’s rapid growth and prominent global economic strength. Americans, and Westerners overall, enjoyed the ride during China’s growth journey. They underestimated China’s status, growth potential and plans.
China made itself the cheap manufacturing center for the world, but this was not their end game. Companies worldwide took advantage of China’s manufacturing efficiencies and enjoyed higher margins when reselling these products globally, and it also fed Americans’ voracious buying behavior.
While Americans made some complaints over the years about unfair trade practices, the U.S.-China trade imbalance and currency manipulation, not enough was done in time to rectify the situation. The West often ignored China’s bad behavior, procrastinated serious action or looked the other way, so as not to deal with the possible trade-offs of taking a tougher stance.
This situation stimulated a defensive panic, proposing protectionism as the next best step. The protectionist response is understandable and often taken by countries that feel threatened or feel that there is an unfair balance in trade. We are not only seeing this with the recent U.S. movement but also with Brexit. And who can dispute the indicators like China’s 6.7 percent annual growth rate last year that outpaced the U.S.’s comparatively sluggish 1.9 percent?
The good news is that America is waking up to the need to address this alarming situation. It is clear that America’s economic growth, strength and global position is in question and needs to be reclaimed. And even more promising is the fact that President Trump appears to be softening (or turning a corner) on his aggressive protectionist stance by engaging in U.S.-China trade agreement discussions, as announced last week. (I’m not commenting on the substance of the agreement, just the fact that the U.S. is open to such trade discussions.) He and his team realize that a middle-ground approach will foster a more productive outcome for the American people; that a combined competitive and cooperative approach to China -- a "coopetition" strategy -- is the way to go. And startups are in the best position to benefit from this coopetition shift as they initially establish their global expansion strategy.
While the details and impact of trade agreements can always be debated -- and some are more favorable than others -- it is a move in the right direction by the Trump administration, considering what the original alternative was. We do need to take serious action, and his making the U.S.-China trade discussion a priority is a good thing. While protectionism is a natural reaction and a perceivably effective one, the benefits are short-term and short-lived. Moreover, protectionism is damaging to our economics in the long run, domestically and in global markets. Here’s why:
1. The U.S. doesn't rule the world anymore -- or not for very much longer.
America has long been the global sweetheart with respect to product innovation and brand recognition, and it has had the cache of setting high standards for what the world wants and needs. For example, emerging markets consumers like those in China would strive to pay top dollar for the latest iPhone model as a status symbol, an indicator that they have reached new heights of wealth. They have even gone as far as traveling to get the latest release from Hong Kong or Singapore in order to be among the first.
However, this power and influence is waning. Emerging markets are innovating, too, and they need the West less than they did before. Apple experienced a market share decline in China for the first time in 2016, losing share to rising Chinese smartphone manufacturers. Emerging markets are innovating for themselves and getting good at it.
Solution for entrepreneurs: Innovate for emerging markets. While long established companies now need to re-create themselves in this new global economy, or need to re-vector their strategy, startups are in an advantageous position to "pre-create" themselves at the get-go. This means that they can innovate for the burgeoning, rising middle class of emerging markets by creating products that address the particular needs of this large customer base. Startups can have emerging markets in mind as they set their global strategy and anticipate the competitive solutions that are being offered by emerging companies, which are not only priced right but also possess the unique characteristics of a new marketplace.
2. The world will hate you more.
The world has become bigger and smaller at the same time. Selling in global markets is an essential part of most companies’ growth strategies, particularly startups that are seeking to differentiate their strategy and leap-frog their success to the next level. With the rapid growth of India as well as China and the ascension of a significant part of its population into the middle class, companies cannot afford to not sell into these markets, which host half to two-thirds of the world’s population if not more.
Instituting protectionist measures in your domestic market will ignite a retaliatory response from other nations. It is already hard enough to do business in China given their bureaucracy and rules. Imagine if they make it even harder in retaliation to the U.S. imposing high import tariffs? American companies cannot afford to be denied market access to these burgeoning populations.
Solution for entrepreneurs: Playing in each other’s sandboxes is the key to globalization success. The economies of nations are too intertwined and reciprocal market access needs to be enabled. The key to success in global markets is taking on a role of becoming "frenemies" -- both friends and enemies (or in this case, competitors). And the Chinese know this well, given Sun Tzu’s advice of keeping your friends close and your enemies closer. More positively stated, a "coopetition" approach must be practiced -- a combination of cooperation and competition philosophies, whereby business competitors collaborate, in the hope of mutually beneficial results. This will ensure protection of economies and respective competitiveness while also instilling a proactive, collaborative growth setting.
Startups are in a favorable position to instill and influence this philosophy in their host nations because western countries are looking to stimulate growth in their economies, and this will come from new companies that are innovating in new, competitive ways. Startups can lobby their governments to ensure that market access is enabled and promoted on both sides in order to ensure the competitiveness of their own companies as they expand worldwide. Startups can also establish win-win partnerships with targeted markets and remain competitive by identifying allowances in trade that do not jeopardize their own success.
3. You can’t have your cake and eat it, too.
Protectionism and bringing all manufacturing home domestically means higher production costs (given higher labor rates, unionization, higher standards of living, etc.), which often results in higher product prices. Higher priced products make companies less competitive as they sell globally, where lower cost alternatives are available on the market. Manufacturing at home also lends to inflation because higher costs lead to higher interest rates, reduced investments and spending. And with less disposable income, how will Americans continue to satisfy their excessive shopping habits?
Solution for entrepreneurs: Build partnerships and relationships abroad and be shrewd at identifying what you do best (most efficiently) and what others can help you satisfy more optimally. This is also an opportunity to retrain and develop your workforce in future growth areas, and this can be tied to your evolved innovation strategy for new, emerging markets. Building relationships and developing your cultural IQ is another long-term strategy to help startups root themselves in new markets and be welcomed for their integrative approach. Taking a long-term approach to this relationship building is key to establishing the trust required by other nations, particularly in emerging markets.
So now what?
The U.S. and other G7 countries realize that their cooperative approach in the past has benefitted them and has also contributed to China’s growth as well as that of other emerging countries. However, given the new global power shift, new players and different competitive dynamics, it is time to tweak the formula as it relates to global trade standards and a new world order.
The U.S. still need to take a tough stance in representing the interests of American businesses in China and abroad. A competitive angle is required to ensure a more balanced and fair interchange -- yet in a cooperative manner. Both the U.S. and China know that a trade war would hurt both nations and that a "coopetition" approach is in the best interest of all involved and the key to success.