The globalized world witnessed a surge in international trade over the past few decades. However, recent years have seen a concerning trend – the rise of protectionism. This necessitated the call for re-globalization by the DG of the World Trade Organisation (WTO), Dr. Ngozi Okonjo-Iweala at the World Economic Forum, (WEF) event in January this year.
Protectionism is making a significant comeback in global politics and economics, reshaping the way countries and corporations engage in international trade. In response, corporate governance is being called upon to adapt to the changing landscape, ensuring that businesses can navigate the challenges posed by protectionist policies while maintaining ethical standards, stakeholder interests, and long-term sustainability.
Protectionism refers to government policies and regulations aimed at restricting international trade to protect domestic industries from foreign competition. This can take many forms, including tariffs, quotas, import bans, and subsidies for local businesses. The resurgence of protectionism is driven by several factors, such as economic nationalism, concerns about job losses, income inequality, and security risks.
In the wake of globalization, which brought about increased trade, economic integration, and international cooperation, the rise of protectionism may seem counterintuitive. However, it reflects a growing sentiment among some policymakers and populations that globalization has left many behind, leading to social and economic discontent. As a result, countries are increasingly imposing protectionist measures to safeguard their domestic industries and promote local employment.
Several factors have fueled the rise of protectionism. Globalization has undeniably benefited consumers with a wider range of products at competitive prices. However, it has also led to job losses in certain sectors, particularly manufacturing, as companies shifted operations to countries with lower labour costs. This has fueled economic anxiety and resentment toward free trade among some segments of the population reinforcing the renewed call for protectionist policies.
Growing national Security concerns in the wake of global tension is another concern. Some governments believe that relying on foreign sources for critical goods and services poses a national security risk. This concern is particularly relevant in areas like energy, technology, and pharmaceuticals; necessitating stricter control on sourcing such services from other countries.
Closely related to national security concerns are geopolitical tensions. The rise of nationalism and the erosion of trust between major powers like the United States and China have made international cooperation more challenging. This has led to a more transactional approach to trade, where countries prioritize their own interests over multilateral agreements.
At the receiving end of this transactional approach to international trade are businesses across the world. Protectionist policies can significantly impact how corporations operate and are governed. It is therefore imperative to examine how it affects them.
Protectionist policies can significantly impact strategic planning. Companies may need to re-evaluate their global supply chains. Increased tariffs or import restrictions might incentivize companies to source materials and manufacture products domestically, even if it's less cost-effective. This can lead to higher production costs and potentially reduced profit margins.
It can cause corporations to focus on domestic markets, missing the opportunity to explore opportunities in the global market. Corporations may shift their focus from maximizing global efficiency to catering primarily to the domestic market. This could lead to less innovation and a decreased emphasis on international competitiveness.
Protectionist policies have the potential to increase regulatory burden. Governments may implement stricter regulations on foreign investment or technology transfer in a bid to protect domestic industries. This can create a more complex and bureaucratic operating environment for corporations.
Also, the traditional emphasis on maximizing shareholder value might be challenged. Protectionist policies could encourage companies to prioritize job creation or domestic sourcing even if it comes at the expense of short-term profitability. This could necessitate a more nuanced approach to corporate governance, balancing shareholder interests with those of employees, communities, and the broader society.
With heightened scrutiny on global supply chains and potential concerns around national security, governments may demand greater transparency from corporations regarding their sourcing practices and technology use. This could necessitate robust compliance procedures and enhanced communication with stakeholders.
In this evolving landscape, effective corporate governance becomes even more critical. There is a need for adaptable corporate governance.
Agility and long-term thinking are therefore a necessity. Companies need to be agile and adaptable to changing trade policies. Diversification of supply chains, investments in domestic production capabilities, and a focus on long-term resilience are crucial.
Protectionist policies can create new risks for businesses, including trade barriers, supply chain disruptions, and increased operational costs. Corporate governance frameworks must emphasize comprehensive risk management and compliance to ensure that companies remain resilient in the face of these challenges. Boards and executive teams must stay informed about international trade policies and understand how they could affect their operations.
Renew vigour in corporate social responsibility (CSR) initiatives. A strong commitment to CSR practices, including ethical sourcing, environmental sustainability, and community engagement, can help corporations build trust with stakeholders in an environment of heightened nationalism.
Constant engagement with policymakers to shape opinion and government policies. Corporations can play a constructive role by engaging with policymakers to advocate for free trade agreements that are fair and balanced. Multinational corporations can also lead by example by promoting open markets, fostering international cooperation, and advocating for a rules-based global trading system.
As protectionism continues to influence global trade dynamics, strong corporate governance will play a pivotal role in shaping the future of businesses. Companies that embrace adaptive governance frameworks, prioritize stakeholder interests, and commit to ethical practices will be better positioned to navigate the challenges and seize opportunities in a protectionist world.
Corporate governance must be flexible enough to respond to evolving trade policies while maintaining a focus on long-term sustainability. By fostering a culture of compliance, transparency, and collaboration, businesses can not only mitigate the risks associated with protectionism but also contribute to a more inclusive and resilient global economy.
Ultimately, a win-win scenario can be achieved through a balance between legitimate national interests and a commitment to an open, efficient, and fair global trading system.
Research & Advocacy Department,
Chartered Institute of Directors (CIoD), Nigeria
28, Cameron Road, Ikoyi, Lagos.