Tariffs Got You Down? Brush Off The 1930s Playbook

Now that Donald Trump has rendered irrelevant the iconic books that guided corporate thinking in recent decades — who still believes that the world is flat? — businesspeople are desperately casting about for guidance. In a recent column, I argued that US managers have much to learn from emerging markets. Today, I want to add that managers everywhere have much to learn from the interwar years.

The interwar period — marked by the turmoil of the 1920s and the depression of the 1930s — was the last great period of deglobalization. The century between the defeat of Napoleon in 1815 and the outbreak of the First World War in 1914 was an era of pell-mell globalization. International trade grew by 3.5% a year. The gaps in commodity prices between continents declined by four-fifths. Sixty million Europeans migrated to the US. In 1913, foreign direct investment was 9% of world output, a proportion that wasn’t equaled until the 1990s.

The interwar years replaced seemingly unstoppable globalization with seemingly unstoppable deglobalization. The US had never shared Britain’s cast-iron commitment to free trade — in 1870 America, tariffs of 50% were common — but between the wars, protectionism became rampant. Governments not only increased and extended tariffs but also put a near halt to immigration. The annual migration rate to the US fell from 11.6 immigrants per thousand in the first decade of the 20th century to 0.4 per thousand in the 1940s.

European countries responded with tariffs of their own. Governments abandoned gold and imposed currency controls. The Mexican government nationalized foreign oil companies. By the late 1930s, half the world’s trade was restricted by tariffs, and the world was divided into currency blocs. Deglobalization gathered momentum despite the emergence of new technologies such as airplanes, automobiles, telephones, and ocean liners that were relentlessly killing distance.

Multinationals adopted three main strategies to cope with this world of deglobalization and political instability.

The first was to jump over tariff barriers and currency restrictions by establishing powerful foreign subsidiaries. American companies led the way partly because they were so well managed and partly because the US government made life so difficult for foreign companies, particularly banks.

This produced paradoxical results. The number of multinationals increased even as the world fragmented. But successful multinationals put down deep global roots. “The national autonomy of subsidiaries grew as they were closer to the local market and local politicians,” says Geoffrey Jones, a professor at Harvard Business School and author of Multinationals and Global Capitalism. “They unwound global supply chains and produced more stuff locally.” General Motors purchased Opel, one of Germany’s 10 largest industrial companies, and Vauxhall, a smaller British company, and employed local managers to run them. American Home Products, a giant US pharmaceuticals company, rolled up several smaller British firms. Coca-Cola sponsored the 1936 Olympic Games in Berlin.

The second was to use institutional innovation to compensate for political turbulence. Many companies coped with the most obvious downsides of fragmentation, falling demand and unpredictable supply, by either consolidation or coordination. Giant new companies such as Germany’s IG Farben and the UK’s Imperial Chemical Industries in chemicals, Unilever (a merger of Dutch margarine producer Unie with the British soap maker Lever Brothers) in consumer goods and Shell in petrol formed from the merger of smaller companies. Cartels appeared in a wide range of markets (tea, tin, coffee, gold and diamonds, electric lights and matches) either to control prices or divvy up the world into separate spheres. Cartelization produced some of the world’s most powerful companies, such as the Anglo-American Corporation and De Beers in South Africa, and some of its most enduring price-fixing arrangements, such as the Tin Producers Association, which was started in 1929 and only wound up in 1985. The Swiss-registered Electric Light Consortium controlled three-quarters of the global supply of electric lights and was itself controlled from behind the scenes by America’s General Electric, which wasn’t even a member.

Others adopted a new institutional form: the multidivisional firm or “M form” for short. General Motors pioneered the M form under Alfred Sloan’s leadership as a way of coping with the fragmentation of the consumer market: Powerful product managers were given control of producing different models for different consumer markets (Cadillac for the rich and so on down the income pyramid). But that approach turned out to be equally appropriate for a fragmenting geographical market. Both US and German behemoths began devolving enormous operational power to regional managers and restricting the headquarters to producing broad strategic plans.

The third was to treat regional fragmentation as a business opportunity rather than as a barrier to global ambitions. British companies such as Cadbury’s in chocolate and Dunlop in rubber focused on securing supplies and markets across the British Empire and the wider Commonwealth. Barclays purchased banks across Africa. Ford purchased a rubber plantation in Brazil and the United Fruit Company tightened its grip on South American bananas. State-allied oil companies such as Britain’s Anglo-Persian and America’s Standard Oil battled for control of supplies in the disputed Middle East, with plenty of help from the secret services.

Harvard’s Jones is struck by the similarity between today and the 1930s, with technologies working to bring the world together and policy makers and parts of the electorate pushing in the opposite direction. “The first lesson of history,” he says, “is that politics always matters more than technology in the direction of travel.” This means, in my view, that companies would be wise to abandon their “one world” strategies from the heady years of globalization and instead reorganize themselves into federations of national firms that can respond to local circumstances and, if necessary, pretend to be local companies. They also need to embrace anything from mergers to alliances that will give them the bulk to deal with collapses in demand or interruptions in supply: The more unpredictable markets become, the more companies need to do things internally.

But these years contain some powerful moral as well as practical lessons. CEOs can’t be expected to sacrifice their businesses to defend social or political causes of the day far outside their realm of operations. But there are limits to what they ought to tolerate. Some of America’s most successful companies placed no limits on how far they would go to get German business in the 1930s. General Motors’ Opel produced trucks for the Nazi war machine; IBM worked so closely with the Nazi regime that its boss, Thomas J. Watson Sr., was awarded the Order of the German Eagle in 1937. CEOs will be judged by their investors on how well they adapt to a rapidly deglobalizing world, but they will also be judged by history if they lose their moral compass in order to bow to the will of autocrats and scoundrels.