By Bill George
January 27, 2017

The world turned upside-down last week when, within just seven days, the United States and China each reversed a posture they held for the past 70 years. In his inaugural address, U.S. President Donald Trump announced his newest slogan, “America First,” which effectively withdraws the nation from its global leadership role. Meanwhile, China is stepping up as the new leader of world economic order as President Xi Jinping accelerates China’s efforts to do business with the world, albeit one where it writes the rules to its own benefit. The consequences of these sudden changes will be profound and far-reaching with uncertain outcomes.

Xi Jinping, the first Chinese president ever to attend the World Economic Forum at Davos, opened the annual gathering last week with a full-throated endorsement of globalization, free trade, and cooperation between nations. “It is true that economic globalization has created new problems,” he said, “but this is no justification to write economic globalization off completely. Rather, we should adapt to and guide economic globalization, cushion its negative impact, and deliver its benefits to all countries and all nations.”

Xi warned that populist approaches can lead to war and poverty. “Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air,” he said. “No one will emerge as a winner in a trade war.”

Meanwhile, Trump took precisely the opposite tack in his inaugural address. “From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families,” he announced. “We will follow two simple rules: Buy American and hire American.”

While other nations have long looked to America for global leadership, the new president has made clear he will pursue a level of isolationism not seen since Col. Charles Lindbergh and the America First Committee of 1940-1941. Demonstrating that he plans to follow through on his campaign promises, President Trump formally withdrew from the Trans-Pacific Partnership on Monday, which in turn, will force reluctant Asian nations to negotiate their own bilateral agreements with China.

During the World Economic Forum last week, I had the opportunity to speak privately with several dozen corporate CEOs from America, Europe, and Asia, all of whom are scrambling to adapt to these sudden changes in the global order. Many of them have invested billions in building up their businesses in China. Now, they fear their plans are in jeopardy. Major global manufacturers from the automotive, pharmaceutical, chemical, medical technology, and consumer products worry that Trump’s new policies could disrupt their global manufacturing plans, which have been carefully constructed to optimize the efficiency of their supply chains based on free trade policies.

Retailers like Walmart (WMT), Target (TGT), and Best Buy (BBY)—which import most of their clothing and electronic products from China, Korea, and other Asian countries—worry that Trump’s threats of tariffs on imported goods or House Speaker Paul Ryan’s proposal for a 20% border tax would force them to raise prices by that amount, thereby curbing consumer spending. Their greater fear is that Trump’s policies could set off a global trade war in which countries retaliate with restrictive tariffs of their own.

For all the sturm und drang over job losses caused by imports, the reality is that 85% of lost jobs from 2000 to 2010 were actually “outsourced” to technology, a point cited by Secretary of State John Kerry at Davos. Under an “America First” scenario, these losses will likely accelerate as more companies automate their manufacturing plants and also service operations.

The greater concern—if there are indeed trade wars—is the loss of international revenues and the jobs they have created. The Commerce Department reports that in 2014, U.S. trade with the countries in the now-cancelled Trans-Pacific Partnership created 15.6 million American jobs, and an additional 6.9 million with the European Union. Exports to Mexico and Canada in 2015 accounted for 2.2 million jobs—a number that has grown during the last five years. Collectively, the number of jobs created by exports exceeds the 7.5 million Americans who are unemployed.

American farmers are especially concerned. In 2015, they exported $133 billion in farm products, which accounts for more than one-third of their total production, much of it to Mexico and Canada. Also overlooked in the debate over globalization is the fact that 98% of the 300,000 U.S. exporters are small and medium-sized businesses, not just large, global companies.

There is no doubt that President Trump is getting his message across, as he meets directly with CEOs of major global companies and sends out tweets threatening those that move jobs offshore. His approach offers the carrot-and-stick: He promises incentives like reductions in corporate taxes and regulations, while asserting he will punish those that go offshore. CEOs—including Ford’s (F) Mark Fields and Amazon’s (AMZN) Jeff Bezos—have found it enticing to join hands with the new president. The leaders of foreign companies like Fiat Chrysler (FCAU), Alibaba (BABA), and SoftBank have also tried to appease Trump with promises of U.S. investment and job creation. Such moves may work in the near-term to ease the political pressure, but are unlikely to bridge the widening gulf between Trump’s policies and the rest of the world’s opportunities.

 

Automobile makers are in a particularly difficult spot. In recent years, they have optimized their global manufacturing footprint and supply chains to produce large, profitable vehicles in the U.S., while shifting small vehicles, where margins are paper thin, to the lower-cost markets of China and Mexico. With the U.S. auto market at its peak, they are unable to expand U.S. production, especially when the greater opportunities for General Motors (GM) and Ford are in China with its large and fast-growing market.

While Trump is gaining short-term reinforcement for his “America First” policies, in the longer term, basic economics will dominate the thinking of U.S.-based global companies. These companies can ill afford to pursue uneconomic decisions without loss of their international business, which in turn will create increased pressure from shareholders demanding improved earnings.

The larger concern is the U.S. retreat from its 70-year role as the leader in global trade. This leadership has largely enabled us to set the rules governing trading transactions. If the U.S. steps aside, it will enable China to aggressively fill this vacuum, setting its own rules. If this occurs, America’s global companies and their employees will be the biggest losers, ceding leadership of their industries to emerging Asian and European companies.

The Trump administration is still making its opening moves. Nobody can predict how these early efforts ultimately play out. However, if the Trump administration focuses entirely on U.S. domestic manufacturing under its new “America First” moniker, the U.S. will hand China the leadership reins in a new era for the global economy.

Bill George is senior fellow at Harvard Business School, former chair and CEO of Medtronic, and author of Discover Your True North.

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