I talk a lot about company Success Formulas. They are easy for us to see, and easy to discuss. But did you know that economies have Success Formulas as well? Countries, and the people who run them, have Success Formulas and Lock-in which can have a huge impact on our results.
China and India long have had Success Formulas based on limited trade, and reliance on central planning for everything they do. China focused most of its attention on its enormously long border with the Soviet Union, and it maintained its Lock-in to traditions centuries old as it protected itself from its most critical enemy to the west. After India found independence from England its leaders formed a sort of quasi-socialist government which constantly balanced trade and subsidies from the Soviet Union and the USA. Both countries, desperately poor, were more focused on protecting themselves from war with the nearby Soviets even if it meant widespread poverty – for which it asked the USA to help.
Then the Berlin wall crumbled, as did the Soviet Union. This sudden market shift challenged both countries to rethink what they needed to do. Quickly, both made changes in their policies which allowed them to open up White Space for doing more with the USA. Without a need to balance the US against the Soviets, it became in their best interests to find ways to be more pro-American. As a result, both quickly made advances to use capitalist principles for doing business with US and European companies (more US than Europe, by quite a bit however). Internally things didn’t change much in either country, as these White Space projects were really geared only on selling to America in order to gain badly needed foreign exchange which could be used for development as decided mostly by their central planning committees.
Today, despite the altered world order, the Chinese and Indian internal Success Formulas are largely unchanged. Think of the export zones in which all these offshore people work as "skunk works" projects within the country. In both countries, well over 90% of the population does not share in the wealth created by the offshore work. Poverty is still rampant, potable water scarce, and the population struggles for education and better circumstances. There was no "Disruption" within each country. Only a willingness to experiment in doing something different if it could improve its position by earning foreign exchange and increasing aid from the wealthy Americans. There was no Disruption, and largely no internal change in how either country felt economies should be planned.
Behind the business scene, largely not even known by most Americans, there have been ongoing negotiations about import tariffs and trade quotas between America and Europe – largely versus China and India. Organized under the banner of the World Trade Organization (WTO) these "Doha negotiations" have been going on for years (read about the Doha development negotiations here). These negotiations are where the official governments discuss things like subsidies and tariffs for agricultural products, and basic materials like steel. Its here where Asians yell at Americans for subsidizing farmers, which lowers grain costs, while these countries refuse to import American grain because they fear it will force their peasant farmers into starvation on their small, uneconomic farms. It’s here where the offshore players scream for market access to sell steel at their marginal cost, while Americans point out that their steel was made in grossly polluting plants, using labor barely paid above slave wages in conditions intolerable by any western standard.
This week, after 5 years of ongoing negotiations to allow for more trade growth (largely through more U.S. exports), the talks broke down. (read article here) Some say it’s "fair trade capitalism" versus "communism". But these labels don’t much help us understand the importance of this breakdown. As Tom Friedman pointed out in The World is Flat, we now operate in a global marketplace. Lots of people depend on those containers of goods moving over the ocean – or those terrabytes of digital information passing along the satellite connections and undersea cables. Everything from what we buy at the local store, to the price of rice, to the production of automobiles is affected by these negotiations. There is no doubt that our imports and their lack of imports has made a huge difference in the everything from the number of jobs in America to the value of the greenback. Because no country operates without some subsidies and tariffs, everyone has them. And right now, these agreements are highly valuable to the Chinese and Indians, while not so good for Americans.
The only way to understand how we can move forward is to understand the differences in the Success Formula for the American economy, and theirs. Americans long ago swallowed the bitter pill of agricultural reform. Today less than 5% of our population works in agriculture – compared to over 80% in China and India. Additionally, we have been willing to allow low-value work in things like textiles and metals production to go elsewhere (including Mexico and many other developing nations) while our workers moved into higher-value-added white collar jobs. The American Success Formula is to allow companies to fail, to allow market forces – brutal as they may be – to alter the what people do, and how much they are paid. So Americans see no problem with open borders – and even view trade as a form of detente foreign policy. Laissez Faire economics is largely acceptable.
But this is not true for the Chinese or Indians. If they allow food products to decline even 1%, there will be mass failures and no clear answer to where these near-subsistence farmers will find work. The governments fear mass starvation, because the central planners have no idea how they could parse out work to the remote, rural areas. If they had work. Because there is precious little manufacturing work – despite all the exporting done to the USA – given the size of their populations. And, if these central planners forced better working conditions in its plants they might lose sales to Korea, Thailand, or Bangledesh. It wasn’t long ago that shipowners who wanted to scrap their vessels didn’t bother with a dock, they just ran the ship ashore in Bangledesh where near starving people ran out when the tide left to cut it up with no safetry procedures at all (nor concern for collecting hazardous mateials they merely let go into the sea.) The Chinese and Indian negotiators are fixated on these countries that are even poorer than them! And their Success Formula is all about planning a better future for their country – without the swings of market-based systems.
Given these two very different Success Formulas, how could anyone expect negotiations to make a difference? Years ago the USA could easily give in, because it was rich, its population well fed and well employed, and its currency very strong. But now, the USA has much more at stake. Jobs are not as plentiful, huge government deficits have cut the value of the currency almost in half, and people are concerned about their future. The USA now has quite a bit to gain – and the Chinese and Indians a lot to lose. This change means we can expect other negotiations to find trouble reaching an accord – such as with the environment (read WSJ article here.)
In this environment, the only hope is for a significant Disruption in one or the other groups. Either the Chinese and Indians consider a significant switch away from central planning – toward market forces – and the inevitable pain this will cause, or the USA has to agree to far more central planning of its businesses and the detailed use of tariffs and other tools to protect its people – just as the Chinese and Indians do. Either action would be a major Disruption in what is considered permissible. But it is required. Until one group changes its Success Formula, this is a religious war unlikely to be resolved across a negotiating table.
The U.S. will take the hit for the talks failing – but that is unfair (Read FT article here). The Success Formulas are too far apart for meaningful change to happen. Until one party or the other Disrupts its economic approach, there can be no agreement. Which will change is yet to be seen – but given the mood in America today don’t be surprised if you see a lot more tariffs and other protective measures go into place – and pretty quickly.