Trade barriers force multinationals to rethink global strategies

Brexit, trade sanctions imposed by the Trump administration and growing nationalism worldwide are throwing globalisation into reverse and are forcing multinational companies to rethink their global value chain strategies, according to researchers at the University of Sydney Business School.

Associate Professor Catherine Welch and Dr Jacqueline Mees-Buss studied multinationals' transition to highly specialised and fragmented global value chains that enabled them to flourish in an open international trade environment. 

Their study concludes that although this approach has greatly benefited these companies over the past two decades, it may no longer be viable in this changing environment.

"During the era of globalisation, value-adding activities such as R&D, design, production, procurement and sales and marketing have been centralised and located where it has been most efficient to do so," explained Associate Professor Welch. "This gave multinationals a huge efficiency advantage over local or regional players."

"One of the side effects was that the activities of the local subsidiaries were greatly diminished," she said. "While some countries managed to position themselves as the centre of expertise for some of these value-chain activities - for example, India for information technology or Mexico for car manufacturing - most subsidiaries in Australia became primarily sales offices."

"A very visible aspect of this trend in Australia was the closure of a lot of factories, but other jobs the multinationals used to provide, such as brand design, R&D or procurement, moved overseas as well," said Associate Professor Welch.

"When there is no going back on the past, how will multinationals respond as globalisation is thrown into reverse?" the researchers asked. "They won't be going back to subsidiaries that used to have entire value chains within them because that will not meet the efficiency needs of the global economy," insists Associate Professor Welch. 

Dr Mees-Buss adds that the backlash against globalisation threatens the multinationals' ability to operate with greater efficiency than local or regional players. "This model only works when goods and services move freely across borders," she said.  

Since coming to office, President Trump has campaigned to bring manufacturing back to the US, and has imposed trade sanctions on Iran, Russia, Venezuela, Argentina, Zimbabwe, Syria, Turkey, Canada, Brazil and Mexico. He has also launched a trade war with China which has deteriorated into a series of tit for tat tariffs.

Britain's withdrawal from the EU also threatens to undermine free trade.

"The debate is underway," says Dr Mees-Buss. "Companies are saying they need to become more local again, but how that localisation will happen we are not sure yet."

"What our research has shown is that multinationals' response to these types of changes is a cyclical path of trial and error," she added. 

"Some multinationals are looking at regional strategies, but they are not talking about recreating the national citadel that we had where locally based subsidiary companies had all of these value adding activities," Associate Professor Welch concluded.  "What we do know is that the future will depend on those who start to experiment first and learn fast."