Lonely islands: Businesses trying to cope with fragmented world

In his first speech to the United Nations, President Donald Trump proclaimed that he will put “America first” and suggested that other world leaders naturally all put their own countries’ interests first. This “my country first” policy calculus is yet one more manifestation of an increasingly fragmented and “islandized” global environment. 

Politics everywhere have taken a sharp turn toward islandization, with growing levels of nationalism, protectionism and parochialism, and Trump is not the only culprit. In fact, many of the countries that still vocally support globalization and integration are also quietly islandizing.

Chinese President Xi Jinping, for example, championed globalization’s virtues at the World Economic Forum annual meeting in Davos this year, yet China continues to limit capital outflows and requires technology transfer to Chinese companies from foreign firms operating in China.

While German Chancellor Angela Merkel has bucked many of the “islandizing” trends of others, the country’s more careful scrutiny of prospective foreign takeovers of domestic critical infrastructure companies reflects a more insular policy orientation.  

There are already unmistakable signs of the consequences of evermore restrictive policies on immigration, trade and other cross-border flows rippling around the world. Most telling is that trade as a share of GDP has still not recovered to its pre-global financial crisis level.

But an arguably less obvious sign of islandization is in the digital walls that are going up. The Trans-Pacific Partnership (TPP), the U.S. withdrawal from which has called the pact’s future into question, was the first major trade agreement to include binding commitments to preserve cross-border information flows and to limit digital protectionism, including provisions explicitly banning data localization measures motivated by commercial self-interest and discrimination against foreign digital products.

Without agreements like TPP, the emerging cross-border flows of the 21st century digital economy may be subject to increasingly islandized regulations, with potentially significant costs for businesses and consumers alike.

However, while islandization presents some obvious challenges for companies with globalized business models, many have begun trying to improvise. Businesses with local brands or images are likely to thrive in this environment, helping to explain the increased acquisition of local brands by large consumer product companies.

Some multinational corporations — most notably General Electric — are harnessing the prevailing political winds by implementing localization strategies. Setting up shop in key markets around the world enables businesses to establish a local identity while complying with government policies that require or favor local production.

Sensing that governments are playing an ever-greater role in shaping the economy, others are trying to influence the direction of islandizing policies by beefing up government relations teams, even at the regional and local government level.

While these mitigation strategies are useful, long-term robust growth prospects depend on a return to the globalizing and integrating initiatives that characterized the 1990s and 2000s. That will not happen until the underlying issues that sparked islandization are addressed.

Economic insecurity and inequality are likely to intensify due to accelerating technological advances in machine learning and automation, which pose a growing threat to low- and middle-income jobs and wages. The atomization of our media and social media environment are only hardening worldwide social, political and economic divides.

As important as a return to globalizing policies are to reigniting sustainable, robust growth, the current policy environment promises more fragmented and restrictive policies globally.

For the foreseeable future, businesses will succeed by developing and implementing creative approaches to adapt to islandization of supply chains, consumer demands and government regulations.

Paul A. Laudicina is partner and chairman emeritus of A.T. Kearney, and chairman of the Global Business Policy Council. In addition to more than 40 years of private-sector experience, Laudicina has served in the public sector, including as legislative director to then-Sen. Joseph Biden (D-Del.) from 1977 to 1982.