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In 1992, Canada, Mexico, and the U.S. signed NAFTA—the North American Free Trade Agreement. And with it, the global business landscape changed overnight.
Pankaj Ghemawat studies how companies have adjusted their strategies to that disruptive change—from rethinking their supply chains, to learning to navigate unpredictable trade policy environments. In this episode, he discusses how companies can navigate an ever-evolving world of international supply chains and cross-border information flows.
This episode originally aired on HBR IdeaCast in February 2017. Since then, a lot has changed about the specific policies that they discuss. But the broader strategies for addressing disruptive changes and navigating unpredictable environments are as relevant as ever. Here it is.
SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green Carmichael. Back in the 1980s, General Electric earned 80 percent of its revenue within the United States. Today, GE earns more than 70 percent outside of the US.
CEO, Jeff Immelt, first joined GE in 1982. And he witnessed the company’s transformation due to globalization. It’s also why he surprised so many people by announcing a shift in strategy to one of localization.
JEFF IMMELT: In the face of our protection environment, companies are going to have to navigate the world on their own. It’s going to be about localization. Sustainable growth, in the future, is going to require local capability inside a global footprint.
SARAH GREEN CARMICHAEL: Immelt’s announcement came in a speech last year to graduates of the NYU Stern School of Business. And it immediately got attention.
JEFF IMMELT: Big companies are distrusted. Governments and global institutions are failing to address the world’s challenges. And globalization is being attacked like never before. And it’s not just true in the United States, but everywhere.
SARAH GREEN CARMICHAEL: Immelt is hardly the only CEO grappling with these changing attitudes. And watching his speech was NYU and ESA professor, Pankaj Ghemawat, an expert on globalization. He agrees that around the world, yes, many people are looking for ways to press the undo button on globalization.
But, he warns, that may not be realistic, or even desirable. He joins me now to talk about the state of globalization, and where it’s heading next. Pankaj, thanks so much for coming on the HBR IdeaCast.
PANKAJ GHEMAWAT: Delighted to be with you.
SARAH GREEN CARMICHAEL: So I just have to ask, we’re sitting here in the studio, you have the most amazing cuff links on. They’re little globes that actually spin. Tell me about those.
PANKAJ GHEMAWAT: Well, since men have fewer choices, in terms of accessories, than women tend to, I tend to focus on cuff links. So I actually have a whole set of global cuff links, as a way of reminding myself what it is that I work on. So they’re these globes that spin.
I have a not entirely symmetric pair where one cuff link has the Western hemisphere, and the other cuff link has the Eastern hemisphere. I have, based on the title of my world 3.0 book, a pair, in which one says world, and the other says 3.0. And so this just happens to be a little hobby of mine.
SARAH GREEN CARMICHAEL: This is so great. Do they also come from all around the world?
PANKAJ GHEMAWAT: The cuff links are, in fact, diverse in their national origin. So they truly are globalized, just as a way of using one of my few degrees of freedom, in terms of how I dress myself, to signal my interest in this phenomenon, which really does absorb me.
SARAH GREEN CARMICHAEL: That’s so fun. There is a sense that globalization has been this inevitable force moving forward, that it is this juggernaut that is changing the way we’ve all done business. So how globalized is the world actually?
PANKAJ GHEMAWAT: Globalization is one of those things that we think we know so much about from our daily lives, that we usually don’t feel the need to either start with the data or return to the data for validation. So I’ve been spending a fair amount of my time just compiling simple metrics of globalization. So I ask people, for instance, questions like, of all the phone calls in the world, of all the phone calling minutes, what percentage last year were accounted for by international phone calls?
Turns out, the answer is about 3%, if we focus on plain old telephone service, actually somewhat lower. And if we add in Skype calls, it gets, perhaps, close to 5%, no higher. Or I ask people questions like, foreign direct investment, what percentage of all the investment going on in the world last year was accounted for by cross-border investment? Turns out, the answer was less than 10%. So these numbers are way lower than most people expect. And so this is a phenomenon that I refer to very neutrally as globaloney.
SARAH GREEN CARMICHAEL: What about something like international news consumption, or the internet? Because we’re told, right, the internet is this great democratizing force and information flows freely around the world. So is that any higher?
PANKAJ GHEMAWAT: Well, it’s a bit higher. But again, less than you might think. I think the latest estimates say off Facebook is that less than 10% of people’s friends on Facebook live in countries other than where those people themselves are based. And that’s actually, in some sense, while it’s higher than the phone call number, is more interesting. Because international phone calls are depressed by the fact that the phone companies charges so much for phone calls.
Whereas, on Facebook, in principle, you could friend somebody halfway around the world just as easily as somebody next door. And so I suggest that there is a huge difference between connectivity, or the potential for connectedness, and actual levels of connectedness. And the actual levels are way lower than the technological constraints might lead us to expect.
SARAH GREEN CARMICHAEL: So if money and information aren’t flowing across borders as much, what about products? What about trade?
PANKAJ GHEMAWAT: Well, trade is certainly more globalized than the examples I just mentioned, at least on the merchandise side. So when I look out on the World Trade Organization’s estimates of trade as a percentage of GDP, the estimates depend on whether you correct for multi-country supply chains or not. So for instance, if an iPhone is shipped from China to the US, it actually embodies a lot of components made in other parts of East Asia.
Those components are usually counted more than once in the official trade statistics. So South Korean company ships a component to China, that component gets counted once there. Then when the assembled iPhone is shipped to the US, that component, effectively, ends up getting counted again. When we correct for that, the number is more like 20% of GDP. 20% is accounted for by trade after you adjust for double counting and triple counting.
SARAH GREEN CARMICHAEL: Is it big countries, like China and the US, that are doing most of the importing and exporting, or is it other countries?
PANKAJ GHEMAWAT: Well, it depends on whether you’re looking at absolute volumes of trade, or whether you’re looking at how intensely a country is engaged in trade. In terms of absolute volumes, well, we know that China is roughly 1,000 times the size of Mongolia. So China is, obviously, going to have, typically, way more trade with a third country than Mongolia would.
However, when we account for the fact that China is a large economy, and try looking at things like, what percentage of the Chinese economy is focused on exports, or what percentage of the US GDP is accounted for by imports, what you see is that both of these very large countries actually rank in the bottom 10% of the countries that we look at in the DHL Global Connectedness Index that I prepare every two years.
SARAH GREEN CARMICHAEL: If globalization is mostly a bunch of globaloney, we think that we’re more connected than we are, and if, especially, the United States isn’t actually doing that much trade with other countries, why do we see this huge backlash against globalization, if it’s actually not that big a trend in some ways?
PANKAJ GHEMAWAT: Well, I think it important part of the backlash against globalization has to do with exaggerated conceptions of how much stuff crosses borders. And given the recent focus on immigration, maybe it’s helpful to think about people flows, which in addition to trade flows, capital flows, and information flows, are the fourth pillar of our Global Connectedness Index.
So when you look at first-generation immigrants, people born in another country, who have chosen to live in the US, as a percentage of the total US population, the number turns out to be about 14%. When you look at people’s estimates of the percentage of first-generation immigrants in relation to total population, the three surveys I’ve looked at most recently serve up estimates ranging from 32% to 42%.
SARAH GREEN CARMICHAEL: So that’s more than twice the actual number.
PANKAJ GHEMAWAT: More than twice, up to three times. And then the one thing I would add is that when you actually tell people about the 14% number, that apparently cuts in half the people who think that there are too many immigrants in the US. So it doesn’t solve all the tensions around immigration, but it certainly helps alleviate them.
SARAH GREEN CARMICHAEL: What about jobs? Because that’s something that come up a lot in the United States, and I think in Britain with the Brexit vote. Is that something you’ve looked at?
PANKAJ GHEMAWAT: Yeah and my general conclusion about the job situation is that there is misdirection going on here for different types of reasons, and with different mechanisms at work. The general estimate is that technology causes way more job losses than anything having to do with globalization. Second, you have to wonder why, with the US close to full employment, at least by some measures, why the loss of jobs is such a concern?
I certainly understand people’s concerns about trade depressing wages. But the availability of jobs in the US is a little bit less of an issue than, say, in Spain where I spend half the year, where the joblessness rate actually is quite high. And I think that the misdirection is in terms of ignoring the role of technology, and also blaming immigrants, in some sense, for a range of social ills. So that in Britain, I’ve heard people suggest that the real problem is not too many people coming in and taking jobs away from the locals.
The real sector is the failure of the British government, since the time of Margaret Thatcher’s privatizations, to invest in public infrastructure. And as a result, when the waits get long at the National Health Service, when it takes a long time to get a flat, when it’s hard to get your kid into school, the obvious target consists of people who look unlike yourself. And say, if it weren’t for these people, my situation would be much better.
SARAH GREEN CARMICHAEL: Maybe at this point, this question is a little bit overdue. But is global evasion a good thing?
PANKAJ GHEMAWAT: Yes.
SARAH GREEN CARMICHAEL: [LAUGHING] OK. Like, why?
PANKAJ GHEMAWAT: Well, I think first of all, we’ve already talked about some of the reasons that people hate globalization. One is that they tend to overestimate it. Second, under the assumption that it’s all pervasive, anything that goes wrong gets blamed on globalization. But that’s just an argument about the costs are not as big as you think. And it’s worth reminding ourselves of what the benefits are.
And here, I could cite economic models. But an example of how costly it can be to move from a globalized situation to a de-globalized situation is provided by the example of this textile designer in Philadelphia, who decided she didn’t like the fact that so much of the clothing in the US was imported. And so she decided to make a suit out of materials, and buttons, and so forth, all available within 100 miles of Philadelphia.
Six months later, after 500 hours of work by 20 skilled artisans, she came up with a suit of sorts. And by sorts, I mean, OK, first of all, it didn’t have sleeves. So it doesn’t perform all the functions that you would like a suit to perform. Second, despite the six month time that it took to make this suit, she still had to get 8% of the inputs from more than 100 miles away. And this is a relatively, in some sense, simple industry.
So if you think of trying to de-globalize something like, say, consumer electronics, where the supply chains have totally disappeared from the US, and where scale economies matter, you start to get a sense that restarting sub-scale production without the right supply chain in the US would actually be far more costly, in terms of the additional costs imposed, than the suit example would suggest. So I like to show my students a picture of the suit, and ask them, even if they strongly believe that job should stay where local demand is concentrated, would they really want to wear a suit like that?
SARAH GREEN CARMICHAEL: So does this point, perhaps, a way forward for some people to start defending globalization? Because no one really seems to win any votes from the public defending globalization.
PANKAJ GHEMAWAT: Part of it is pointing out that the costs are lower than people think. And part of it is pointing out that the benefits are greater than people think. When you think broadly about the gains from globalization, there are typically an order of magnitude or higher than the very narrow trade models tend to indicate.
Gains of a couple of percentage points of GDP, those are large numbers. We’re starting to talk, potentially, $1,000, $2,000 maybe $3,000 per American. That’s a large number.
SARAH GREEN CARMICHAEL: That is a large number. And yet, I’m thinking back to a study that you cited, I think, in one of your articles for HPR.org, that showed, if there’s a trade policy that creates 1,000 jobs outside the US, and costs one American job, people basically oppose it. And then the flip side, if there is a trade policy that, by contrast, costs another country 1,000 jobs, but creates a single American job, people are in favor of it.
PANKAJ GHEMAWAT: To have 1,000 to one preference for domestic jobs over foreign jobs is very, very different from the idealized world imagined by economists, where anything that increases global welfare is pursued, and then just some redistribution happens that makes whoever lost their job, or whatever, better off than before. I think, first of all, there’s a lot of evidence indicating that the more you know about foreign countries, the less likely you are to treat them with the kind of discount that that 1,000 to one comparison we just talked about implies.
There is a stunning correlation between how well-connected countries are, in terms of cross-border information flows, and the extent to which the locals agree with the statement that our culture is superior to everybody else’s. So at one extreme, you have the chill Scandinavian countries, which are very well-connected informationally with the rest of the world, according to our DHL Global Connectedness Index, and where only 24% of Swedes think that their culture is better than everybody else’s. At the other extreme, I’m sad to say, we have my native India, which ranks very low on informational connectivity, and where 90% of people agree with the statement, our culture is superior to everybody else’s.
Even more paradoxically, more than 90% of the Indian respondents agree that local culture needs protection. So it’s an interesting pairing. Our culture is superior, but also particularly in need of protection. And it’s hard to see how that contributes, by itself, to advancing globalization, or improving how globalization is perceived, as opposed to demonizing it.
SARAH GREEN CARMICHAEL: If trade does slow down, who is going to be heard the most by that?
PANKAJ GHEMAWAT: Well, interesting study suggesting that most of the gains from trade are concentrated in the lower income deciles of the US population. And if that seems hard to believe, think of Wal-Mart, which is the largest single importer, I believe, into this country of products from China. It’s not really the top 10% of the income distribution that goes to shop at Wal-Mart. And so the estimates are that, while everybody’s goods and services are cheaper with trade than without trade, in terms of the percentage gains, there is significantly greater at the lower end of the income distribution than at the upper end, which is one of the reasons why I find some of the populist anger against globalization a little bit, not only misplaced, but self-defeating, as in likely to significantly worse than the fortunes of the people who are most opposed to globalization.
SARAH GREEN CARMICHAEL: Right. So what is this world we find ourselves in now mean for companies? We’ve talked a little bit about what it means for people. But what about companies?
PANKAJ GHEMAWAT: The world looks significantly more complicated from the standpoint of a company trying to run cross-border operations than it used to. You have to worry about a range of different things that weren’t quite as apparent in the days when everything seemed like smooth sailing, and lots of people were convinced that soon the world would be just one giant country, which is not a delusion that is quite as widely shared at this point in our history. So companies have to think even harder.
They always had to think about this– but some of them deluded themselves that the borders were going away– about how you operate in a world where differences across countries are significant, where borders are not entirely permeable, and where access to markets is, to some extent, contingent on popular opinions about globalization, with the popular opinions, at least in many advanced economies, becoming quite negative. And so what I would argue, though, is that this is the kind of environment in which managers and researchers, such as myself who seek to provide advice to managers, have to spend more, rather than less, time thinking about globalization, and how to run a global company than in what, in retrospect, seemed like the good old days, when it looked like borders were going to disappear, and distance wouldn’t matter at all.
SARAH GREEN CARMICHAEL: Are we heading more towards a more multi-polar world, or a bipolar world? Or is there going to be a new sheriff in town? How do you see this all playing out?
PANKAJ GHEMAWAT: In some sense, the postwar moment, which was the moment when the US had the maximum share of world GDP, close to 40%, was an unusual moment, in the sense that Europe’s productive capacity had been destroyed by World War II, as had Japan’s. And so the whole thing was unsustainable. There’s no going back to the period like the 1950s when the US with X%, where X is less than 5 of the world’s population, accounted for 40% of the world’s GDP.
So this was inevitable, not because something went wrong in the US, but because other countries rebuilt their productive capacity, and started to move forward. In terms of whether there’s a new sheriff in town, well, first of all, it’s not clear whether the old sheriff fully recognizes that it’s no longer the old sheriff. But if you look at the arithmetic, it’s a little bit hard to think of any country playing the kind of role that Britain did, quantitatively, at the beginning of the 20th century in driving exports, that the US did after the end of World War II, or that China did in the 1990s up through the financial crisis.
I’m originally from India. So I take a particular interest in some of the opinions that get floated there. And this notion of India replacing China as the world’s new driver of trade growth, India would have, I calculated last year, to grow at 10% for 10 years plus in order to achieve the kind of status that China had in the world economy back in 2005. It’s not happening.
Like it or not, we are going to have more of a multi-polar world, where it’s not one hegemonic power that’s dictating things, or even one country that’s really the key driver of export growth. To the extent that there is trade growth, it’s going to be spread around more than it was at some of those other moments where there was a clear global champion.
SARAH GREEN CARMICHAEL: Do you To think globalization will slow down, or even go into reverse, go to zero? What do you see happening?
PANKAJ GHEMAWAT: We’ve clearly seen a slowdown already. In fact, the DHL Global Connectedness Index that I release every two years indicates that what happened after the financial crisis was a huge drop off in trade and capital flows across borders, and that we finally, in 2014, 2015, just got back to the levels of globalization that we had before the financial crisis. So to those who argue that globalization cannot go into reverse, well, it already did. So it’s worth going back and looking at the data.
I think the dangerous thing, though, is I think a lot of people are confusing the pause button, or the rewind button, with the off button. And so when I read these discussions of, is it the death of globalization, well, it is very, very hard to imagine a scenario in which globalization shrinks to such a point that it becomes irrelevant. To take an example, the US, as I mentioned, is not particularly intensive in the extent to which it trades with the rest of the world.
So if I remember correctly, imports and exports average 13% or 14% of US GDP. When Moody Analytics tries modeling the effects of a trade war with Mexico and China accompanied by a stronger dollar, they’re predicting a 5% decrease in US trade levels– not five percentage points, but 5% of that 14% number. So might go from 14% to 13%. Does that mean that we can forget about it? I think most reasonable people would agree, no.
SARAH GREEN CARMICHAEL: What is a trade war exactly? And how does it work? And when was the last time that we had one?
PANKAJ GHEMAWAT: Well, there have been many, many trade wars in history. Because countries do do things that are not in their own interest. And the human history would be a lot simpler if that weren’t the case. But the one that I go back to for reference purposes, in terms of how bad things could get, is the one truly global trade war with really global consequences that we saw, which was back in the 1930s when the volume of global trade dropped by 2/3.
Nobody is predicting, even with a trade war, a 2/3 drop off. As I mentioned, Moody’s is working off a 5% number. The Peterson Institute of International Economics has a trade war scenario that indicates a 5% drop off. But even if the drop off were larger– suppose for the sake of argument that we actually did have a 2/3 drop off in world trade now. As happened in the 1930s, we would still have, thanks to the growth of trade and FDI, from levels that were minuscule back then, to levels that are noticeable and significantly higher, but far from complete now.
With a 2/3 haircut, we would still end up with a higher level of trade intensity than at the prewar peak. And given that people at the prewar peak were saying, ah, the world is completely globalized. And it’s a key phenomenon to focus on. I cannot imagine a scenario in which globalization shrinks so much that it becomes a negligible factor in economics.
SARAH GREEN CARMICHAEL: So there are many myths about globalization that you have punctured in your career writing about this. If there was one biggest one that you wish people would just forget and walk away from, what is that?
PANKAJ GHEMAWAT: Despite the times we live in, probably the single biggest delusion is still that somehow technology is going to make the world one soon, no matter what else happens. This is a staple of the discussion about globalization. So if you go back to the 1850s, David Livingstone was talking about the railroad, the steamship, and the telegraph, integrating East Africa perfectly with the rest of the world.
And you look at that, and you think, what a visionary. Because 160 years later, East Africa still has appalling levels of connectedness with the rest of the world. And so I think what’s old is this tendency to sort of invoke the technology du jour as the silver bullet that finally is going to dissolve borders, kill distance, et cetera. And I think it’s useful to go back and look at history, in order to form an assessment of how incredible some of the current claims are.
SARAH GREEN CARMICHAEL: Well, Pankaj, this has been so interesting. Thank you for coming and talking to us today.
PANKAJ GHEMAWAT: Sarah, thanks so much for such an interesting set of questions.
HANNAH BATES: That was Pankaj Ghemawat in conversation with Sarah Green Carmichael on HBR IdeaCast. He’s a professor of strategy at the Stern School of Business at New York University, and he also directs the Center for Globalization of Education and Management there.
We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.
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This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.
