Harry Broadman

The Global Crisis in Supply Chains Has Much Less to Do with The Pandemic Than Widely Believed; It’s The Result of a Significant Transformation Previously Underway: Should it be Embraced?

It’s conventional wisdom that the primary source of the crisis in global supply chains is Covid-19. In fact, the pandemic has played a much smaller role than most observers suggest or even assert. The strains largely reflect pre-existing fundamental adjustments in the conventional functioning of supply chains and the logistics services industry, a sector with which Broadman became intimately familiar as the lead US trade negotiator for all services industries at the establishment of the WTO in the 1990s.

The cross-country differentials in the speed and the nature of these adjustments—for example, the utilization of artificial intelligence (AI) and digitalization in logistics operations in China versus the U.S.—is a key source of the current problems observed.

Such adjustments will need to be embraced, in fact heavily invested in, if the world economy—consumers, workers and firms—wish to continue to move more toward a system of “just-in-time” market transactions and just-in-time “factory-to-end-user” deliveries and away from the legacy “just-in-case” regime.

Key Takeaways

• Contrary to conventional wisdom, in the advanced democratic economies, there is little government can do since our global supply chains are largely dominated by private actors.
• Moreover, our public sector does not have a command of the intricacies and complexities of how the modern global logistics industry operates. (Of course, China, with its state-dominated economy, is another matter.)
• Businesses need to assess if they want to retain the traditional supply chain model that relies less on globalization and more on producing locally. If so, that means increasing investments in warehousing and in-company stock management as ways to mitigate risks. 
• For workers, it has significant implications for the geographic locus of where employment takes place as well as the configuration of workers’ skill-mix in different locations—both at home and abroad.
• If we stay on the current course, at the minimum, consumers should be willing pay far higher prices for more rapidly produced and delivered products and far lower prices for those they receive at a slower pace.
• Eventually today’s global supply chain distortions will disappear, but not due to Covid’s elimination or because supply chains will revert to pre-Covid times.
• Do not rule out more government intervention in the U.S. and other advanced democracies if the clogging of ports—particularly if the private sector fails to make necessary innovations in logistics systems—poses a serious threat to national security.

What’s the Most Effective Way to Deal with China as a World Trading Partner?

For years, Washington has not tackled in any meaningful way the thorniest international trade problem that has been confronting the nation—indeed all the world’s other advanced democracies—for two decades: China.

In exchange for being granted accession to the WTO and gaining preferential terms on which to trade with the then more than 140 (now 164) WTO member countries, China agreed in 2001 to both implement significant domestic economic reforms so that market incentives and transparency would be the norm, and to alter its foreign trading practices so that they would follow the rules specified by the WTO membership. China has largely ignored or papered over the implementation of most of these commitments for the past two decades. 

Most recently, Trump’s Phase 1 deal, which was subsequently embraced by Biden, is transaction- and not reform-oriented; it imposes US tariffs on imports from China, which harm Americans more than the Chinese; and it is bilateral. 

What is missing is a multilateral approach—one that employs collective action by the US and its allies. That is the most effective strategy—one that Beijing worries about the most. Broadman knows this well, having worked on the ground throughout China since the early 1990s and then serving as US Assistant Trade Representative.

Key Takeaways

• One might hope that with both his deep foreign policy acumen and long experience in the U.S. Senate—where coalition-building is the sine qua non for success—Biden will seize the logic of collective action toward China. To date that has not happened.
• Like all WTO countries, China undergoes regular “peer reviews” of its trade policies. In the most recent such review—in 2021, China’s last was in 2018—a number of significantly important WTO members were harshly critical of Beijing’s trade practices; far more so than ever before.
• This should be the ammunition Biden and the leaders of other advanced democracies should use to press China to reform.
• The U.S., its allies and China should take an adult approach, where Biden makes clear to Xi that China is free to have any kind of economy it wants. That is the prerogative of the Chinese population. But China simply cannot have its cake and eat it too.
• The members of the WTO, led by the U.S., should give China three clear choices: 
  • (i) until such time as Beijing implements, in full, the reform commitments it made in its 2001 Accession Agreement it will be suspended from enjoying any of the economic benefits that come with WTO membership;
  • (ii) if China chooses to not want to implement in full the 2001 Accession Agreement, it is entitled to renegotiate the terms for accession and then complete the execution of the revised set of reforms, at which time it will be able to re-access WTO membership on terms commensurate with the reforms undertaken (in the interregnum China will be suspended from enjoying any current economic benefits from WTO membership); or
  • (iii) China can exit fully from the WTO, in which case Beijing can operate its economy wholly as it sees fit and the remaining 163 members are fully free to impose conditions on trading with China that they wish.

Sustainability is More than a Corporate Aspiration; It’s the Functional Heart of a Business’ Operations

The growth of Chief Sustainability Officers (CSOs) in C-suites and of Sustainability Committees in boardrooms suggests sustainability is being taken seriously at the highest levels of the modern corporation. But a deeper review of how companies engage in the practice of sustainability is less promising. 

The fact is that—at least inside “corporate America”—there is an all too limited understanding of what it takes to achieve sustainability, whether in terms of the environment, social matters or corporate governance. Many commercial enterprises today—whether publicly traded or privately held—view sustainability as an aspiration, or at best a strategy. Most often, sustainability is equated with firms’ or investors’ statements that they adhere to ESG (environmental, social and governance) or CSR (corporate socially responsible) principles. But that is not nearly enough; in fact, it misses the boat.

“Sustainability” is usually thought of as a relatively new concept. But it first entered the global lexicon in the early 1980s—a time when Broadman began his career as a natural resources economist working on environmental matters long before “sustainability” became the fashion it is today!  The term has matured ever since.

Effective pursuit of sustainability will entail undertaking operational decisions that lie at the core of a business’s day-to-day functions to maximize its long-run growth as well as assessing their impacts on the firm’s performance across an array of dimensions, both economic and non-economic

Key Takeaways

• The current “movement” to proclaim embracement of ESG principles is nowhere nearly enough. Achieving sustainability is far more than reforming how firms see their environmental, social or governance impacts.
• Sustainability goes to the commercial heart of a firm’s day-to-day operations. Indeed, its purview is multi-dimensional, requiring an assessment across a broad array of economic, structural, and institutional factors. 
• It is also an intertemporal concept: pertaining to the durability of business practices, the employment of long-term time horizons in decision-making and execution, and the measurement of a firm’s outcomes on a long-run basis
• Properly seen, the CSO (as well as boards’ Sustainability Committees) should be responsible for ensuring the drive for business sustainability arises company-wide from a well-defined set of activities, such as: (i) maximizing the net value added of the company’s net assets across all its functions; (ii) organizing and operating the firm’s entire supply chains (global and domestic) in ways that mechanistically provide for the full realization of that value added; and (iii) ensuring that at the highest level of the enterprise decisions are undertaken for the company to achieve its highest rate of long-run growth.
• The systemic integration of sustainability into the day-to-day operations of the modern corporation remains in its infancy; and the role of a CSO is still very much evolving.
• In concrete terms one might think of the responsibilities of the ideal CSO as a combination of “Chief Long-Run Growth Operations Officer,” “Chief Corporate Strategy Officer,” “Chief of ESG and CSR Strategy and Execution,” and “Company-wide Integrator-in-Chief.”

Antitrust Policy Needs to Be Modernized, But Mustn’t Throw Out The Innovation Baby With The Bathwater

Much of the current debate about changes required domestically to strengthen America’s competitive forces is out of synch with the day-to-day realities of the underlying dynamics driving the U.S. economy. It is also at odds with the shifts underway in the international landscape in which U.S. firms and their workers compete with their counterparts in foreign countries.

A few “superstar” technology firms (or “big tech”) have sparked antitrust concerns, especially in the areas of retail, informatics, internet search, social networking, and telecommunications, among others. This has led to a debate about competition in the wake of corporate consolidation and market concentration in the U.S. and other countries of the world.

The very visible changes in competition underway within the US economy produces benefits and costs and thus winners and losers. While certain firms in particular sectors have grown larger, occupy greater market share, and engendered job losses, they have also created new jobs as well as invented new products and services.

If U.S. antitrust policy makers are not careful or well-equipped to fully understand these subtle and complex matters, they could throw out the baby of American innovation with the bathwater of potential anti-competitive practices. These tradeoffs are well-known to Broadman: his doctoral thesis in economics was on antitrust.

Key Takeaways

• The role of antitrust policy is to minimize the costs and maximize the societal benefits of such changes. If government functions as it should, it is to facilitate the transfer of some of the gains of society’s winners to society’s losers, both to compensate them for their losses as well as to finance retraining or similar activities. Of course, this construct doesn’t function smoothly. But it must be the guiding framework for government actions.
• The majority of economic research carried out on the competitive impacts of “big tech” has generally been thoughtful and systematic. (This contrasts with research on some other highly charged economic issues.)
• Many of the core questions at hand are at the forefront of the economics profession, e.g., how to assess the extent and impact of market power arising in an industry where “economies of scale” are not linear but nonlinear because an industry’s product or service becomes increasingly effective and valuable with user growth?
• President Biden’s “Executive Order on Promoting Competition in the American Economy” indicates he wants an “activist” antitrust policy and a “whole-of-government” approach to reverse economy-wide corporate concentration that he views as producing high prices, lowering wages, and stifling innovation.
• Depending on how it is utilized, it could stimulate competition in certain industries and markets; yet it may well also inflict harm. The key is to fully assess the economic and social benefits and costs of applying “remedies” before policy decisions are taken, and to gauge not only the near-term impacts but also those further down the road. This dynamic assessment is on the frontier of antitrust.

Why and How The G7 Democracies Should Enhance Their R&D Collaboration to Counter China

The G7 nations engage in commerce with each other based on long-evolved superstructures—international trade agreements (the WTO) and international investment agreements (Bilateral Investment Treaties or “BITs”)—that lubricate cross-border relationships. These institutions have served the G7 well, allowing consumers to buy goods and services less expensive or not readily accessible at home, and businesses to attract capital from foreign markets and into which their products and services can be exported.

But when it comes to mechanisms to collaborate on international research and development (R&D) to stimulate innovation, the G7’s rules of the road are woefully primitive. 

Advanced countries’ international sovereign-to-sovereign science and technology (S&T) agreements are inadequately systemized. Unlike their trade and investment counterparts they incorporate weak rules, incentives and penalties for violations.

Most significantly, they are rarely harmonized to vigorously promote commercial outcomes from which all can benefit. That international S&T agreements are referred to as furthering “science diplomacy,” says a lot about their objectives.

Key Takeaways

• Current international S&T agreements among the G7 exposes these countries to technological advancement and national security risks from China.
• There is pronounced heterogeneity among the G7 in the structure and functioning of the “nation-state R&D enterprise.” These differences are exploited by China. An overhaul of the arrangements for R&D collaboration among the G7 is called for.
• The G7 must take bold steps to mitigate these risks. The June 2021 G7 Summit’s announcement of a “Research Compact” was a good start but very insufficient.
• But we need an “R&D7” to form a body that ensures these S&T agreements recalibrate intra-G7 R&D collaboration to enhance the countries’ collective competitiveness and to better capture the value from their R&D investments.
• Moreover, the G7 countries need to redesign their approach to R&D collaboration so that it is integrated it into their international trade and investment strategies. Put another way, international S&T agreements should now be viewed as the “third leg” of each nation’s international trade and investment “competitiveness stool.”
• New G7 international S&T agreements need to be based on “reciprocity,” the same benefits (or penalties) are applied to all parties to an agreement; and “national treatment,” treating foreigners the same as domestic parties. They need to specify who owns the IP generated by joint R&D activities, how confidential business information is to be treated, and the parameters governing joint R&D commercialization.  

CFIUS at the Age of 45 Years Old Has Become a Mature, Agile Agency

The lion’s share of the media’s attention given to the Committee on Foreign Investment in the US (CFIUS) focuses only on the transactions that involve decisions by the Oval Office—such as TikTok and Broadcom. In fact, those cases are the exception rather than the rule. The vast majority of transactions reviewed by CFIUS are decided at the sub-cabinet level, and most of those tend to be approved. In fact, they have been for as long as CFIUS has been in existence. Having been a Member of CFIUS in the early 1990s, I can testify that was indeed the case back then.

Much of the perception held by outsiders—both in the US and in foreign countries, such as China—to the CFIUS process is skewed. With the overwhelming passage by Congress in 2018 on a fully bipartisan basis of FIRRMA (Foreign Investment Risk Review Modernization Act in 2018—–enactment of, CFIUS’s decision-making calculus has become regularized and transparent. 

Now at 45 years old, CFIUS is setting the world’s standard for balancing openness to cross-border capital flows and mitigating risks arising from foreign direct investment from states whose objectives or conduct are deemed to undermine U.S. national security.

Key Takeaways

• Unlike its earlier days, CFIUS is now a dexterous agency and is taking a “whole-of-government” approach. CFIUS’s origins trace back to 1975.
• New data from CFIUS show countries in its have adjusted their expectations about the prospects of being able to consummate direct investments in the U.S. unless they and their home governments reform certain practices seen as posing risks to U.S. national security.
• China is an obvious example of a country who has climbed the CFIUS “learning curve.” While Chinese transactions accounted for the largest share of CFIUS reviews in 2017 and 2018, in 2019 and 2020 they are being outnumbered by the Japanese, some EU countries, Canada and Australia.
• CFIUS has stepped up its scrutiny of “non-notified” transactions, that is, past deals for which the parties did not file with CFIUS. If these are in violation of CFIUS/FIRRMA they can be forced to unwind
• The key for CFIUS going forward is to continue to recognize that an important engine of U.S. economic growth over the past century has been our ability to produce an investment-friendly policy environment that can attract overseas investment.

Where in the World is Growth?

Most mainstream US and European media stories on the future prospects of the world economy dwell on the fortunes of either the advanced economies or the BRICS. Businesses and investors buying into this myopic view are missing the real story on what is driving global economic growth. Over the last 2½ decades, a large number of emerging markets have been growing at annual rates two to three times those of the industrialized economies. And this “delta” between the growth rate of emerging markets and that of industrial markets has been occurring even across business cycles and disturbances such as the Covid19 pandemic. 

• What are the fundamental sources of this phenomena? It is not a one-time change. It is a structural transformation of the global economy based that will play out for years to come.
• Companies in the advanced North that do not grasp this phenomenon and capitalize on it are losing out on higher rates of risk-adjusted rates of return on investments.
• In fact, they are also losing out to competitors from companies in the South itself, such as firms based in China, India among others. Those firms are rapidly engaging in “South-South” trade and investment, which is increasing at more than twice the rate of the conventional “North-South” trade and investment.
• Northern firms tend to fundamentally misperceive the risk-opportunity tradeoffs of doing business these days in emerging markets, whereas yet firms from the South itself have a much better read on them. Indeed, Northern firms’ fiercest competitors are increasingly Southern firms (not, other Northern firms). And Southern firms will increasingly compete with advanced country businesses on the latter’s’ home turf (that is, South-North trade and investment).
• New strategies are being developed by certain—clever—Northern firms to both fight off competition at home and as well as successfully win in emerging markets, in the latter case more accurately perceive and mitigate risks in foreign markets. 

Is China Really Destined To Be an Economic Powerhouse?

The conventional wisdom is that it is inevitable that China will soon dominate the global economy. While at present, doubts are voiced due to the current slowdown in China’s output and the bubble in its real-estate sector, at the fundamental level those concerns are widely seen as temporary speed bumps in China’s inexorable march to be the world’s economic captain. Yet, a deeper understanding affords a different—and more credible—perspective.

• The underlying inbred structure and functioning of Chinese banks and enterprises, the framework governing policymaking in Beijing, and the arc of the Communist Party’s stronghold over the economy are increasingly revealing fundamental contradictions inherent in the “socialist market economy” model that have been underway for years. 
• On-the-ground firsthand observations/conversations with Chinese paint a picture of intensifying resentment of Xi Jinping and the role of senior Party officials and anxiety about the economic future.
• There is also palpable fear among the citizenry about the mishandling of the economy and of the growing environmental degradation across the country.
• The Belt Road Initiative is not only an attempt of Xi to “export” the excess capacity of the nation’s state owned enterprises but also build alliances in other emerging markets. But it is resulting in significant resentment of China abroad as well as miring a number of countries in huge debt burdens.