The Changing Context
Once the initial burst of patriotic fervor subsides, there is a risk that the direction of U.S. foreign policy and the interests of American multinationals will diverge. At a minimum, much more tension will exist between the two than existed before. During the last few decades, American companies have internationalized more than is generally acknowledged. Their production, supply systems, sources of finance, work forces, and management are increasingly global. Many Fortune 500 companies now derive more than 50 percent of their revenues from abroad; for most of the rest, global diversification remains an important objective. The Bush administration, though, is riveted, quite reasonably, on national interests. U.S. CEOs will naturally try to align themselves with the administration. But they will not be able to completely match actions with rhetoric, given their need to balance interests in the U.S. with those outside its borders. The fact is, companies have much more interest in an open world economy than in one focused on increasing regulation.
The trend away from economic openness and liberalization will manifest itself in numerous ways. Among the initial contextual changes CEOs can expect is the increasing politicization of international economic policy. The U.S. will pressure the International Monetary Fund (IMF) and the World Bank to pump funds into countries whose antiterrorism goals are compatible with American goals. The World Trade Organization (WTO) is likely to admit new members, such as Russia, more quickly, even if they have not met the policy prerequisites that China and other nations have had to achieve.
It is a certainty, as well, that Uncle Sam will promise economic inducements to nations that cooperate in the fight against terrorism — incentives that may not have strong linkages to sound economic policies. The large-scale aid packages promised recently to Pakistan and Uzbekistan — countries that were in disrepute with Washington just several months ago — are harbingers of what’s to come. The U.S. is also bound to provide trade preferences for countries in the coalition (again, absent the policy reforms that in past years were a quid pro quo for most-favored-nation status), just as it has done recently for Columbia and other Latin American nations as a reward for fighting drug lords.
Other differences between the interests of multinational businesses and those of the government are likely to surface. There is a danger that, in its campaign against terrorism, Washington may not be able to sustain adequate attention to macroeconomic problems that affect the world economy, to the detriment of U.S. firms that have gambled so much on a strong and open international economy. As we enter a global recession, for example, a number of emerging-market economies in Latin America and Asia are in trouble, including Argentina, Brazil, and South Korea. Because they are not on the front lines of the war against terrorism, these countries may not receive the attention they need. Yet if history is a guide, the failure of one or more could become contagious, especially against the backdrop of a rapidly weakening global economy. Short-term debt relief and intervention in the capital markets will go only so far in propping up these faltering economies; long-term direct investment in emerging markets is slowing down, too, indicating that the perils they pose to global economic stability will exist for a long time.
These are not the only global economic challenges brewing. The exchange rate system is more precarious than it has been in a long time; the dollar is overvalued, the yen is being held down by major Japanese intervention that cannot last, and the euro is still to be tested. Japanese banks are in increasingly bad shape, putting more pressure on the global banking system.