The world is not flat: The return of protectionism

In flush times when the markets are roaring, the world can seem like one big open marketplace. Companies can outsource jobs, rake in profits, and do business wherever they like. But when times are tough, and jobs and resources are tight, suddenly national borders again become more important, and the engine that fuels this rush into a global free-market economy can come grinding to a sudden halt.

It’s a lesson business leaders have been learning firsthand since the Great Recession began six years ago, and some of our nation’s most prominent CEOs don’t see the trend abating soon. Recently I asked General Electric chairman and CEO Jeff Immelt where it had gotten tougher to do business since he took the helm of the company in 2001. His response: “Everywhere.”

That’s not just a commentary on his company’s recent wrangling with the French government over the deal to purchase a major chunk of Alstom’s operations. (For a closer look at cross-border acquisitions, read here.) Governments everywhere are displaying more protectionist tendencies, he says. It no longer matters if you are a good corporate citizen—now the No. 1 priority around the globe is employment. “Jobs are your only calling card today,” says Immelt.

That dynamic is the logical result of a difficult economic environment worldwide—xenophobia often emerges in the wake of economic upheaval—and it’s a wake-up call for zealots of the allegedly inevitable wave of globalization that has been prophesied in business schools and investment seminars for the past two decades: Despite a belief that we live in a more enlightened age of free trade (which may be true), corporations are constantly reminded that the promise of “free” trade definitely comes with a cost.

Graphic Source: U.S. Department of State
Problematic Policy? The U.S. keeps educating international students—but not retaining them.

American political leaders aren’t helping the cause. In fact they’re as guilty of erecting walls as the next country. Washington has all but given up on the idea of comprehensive immigration reform, even though nearly everyone agrees we’re essentially kicking out U.S.-educated engineers and specialists as business leaders lament being unable to find qualified candidates to fill high-tech and other skilled jobs here in America.

And in the U.S. and around the world governments have continued to heap on new regulations. Add to the mix political uncertainty (look at the rise of the hard right in Europe) and a risk-averse business community post-2008, and you can see why companies have sat on the sidelines. “We’re more nervous overall,” says Tom Fanning, chairman, CEO, and president of electric utility Southern Co. “It causes people not to commit capital and causes business leaders not to hire.”

But there finally are signs that business confidence is returning. Companies appear ready to plow money back into the economy. More than a third of the S&P 500 say they will spend more on capital expenditures this year than analysts expected, according to Thomson Reuters. Merger activity is running at a pace we haven’t seen since before the Great Recession began.

And some governments are starting to rethink their policies for attracting enterprise. The World Bank does an annual ranking of the best and worst countries in which to do business, measuring things like how long it takes to start a business, get electricity, import products, or settle a commercial dispute. Over the past 11 years, the time frame for all those transactions has shrunk—substantially for many of the lowest-ranked nations. The gap between the top (Singapore) and the bottom (Chad, at No. 189) has narrowed considerably. “Countries are now aware how this red tape makes it harder for businesses, and makes them less likely to come and create jobs,” says Rita Ramalho, who compiles the report for the World Bank. Perhaps the worst really is over and global markets—even Chad—will once again become hospitable to corporations.

This story is from the July 21, 2014 issue of  Fortune.