Playing To Win
Tariffs & Strategy
The Future Has Arrived
My home country, Canada, is in a tizzy about the Trump tariffs that were on, then delayed, then partially back, and now (apparently) reciprocal. Canadians are outraged at the Americans — boycotting American products and removing them from store shelves. It is understandable. When a system has been in place for the adult life of most participants, they tend to think it is the natural order of things and any player that doesn’t act accordingly is just plain bad. But a strategist must understand that systems do change — especially when they don’t work for all participants. And this one already has. When that happens, important strategy choices need to change. That is the subject of this Playing to Win/Practitioner Insights piece Tariffs & Strategy: The Future Has Arrived. And as always, you can find all the previous PTW/PI here.
The Awakening of Big-Company Procurement
Let me begin with an analogy — and it is one that I have discussed earlier in this series in Small is Beautiful, so I will be brief, and you can go back to that piece for more detail if you desire.
The post-WWII period was one of rapid growth for big companies, especially US-based ones that didn’t have to recover from being blown up in the war. During that period, as these companies went from big to gigantic, the best thing was to be a supplier to one of them, whether GM, McDonalds, IBM or similar. As those giants pursued rapid growth, all they cared about in their suppliers was security of supply while they grew.
Consequently, in the era that led up to the turn of the 21st century, a supplier’s biggest customers were typically also its most profitable and fastest growing customers. So, the imperative was to find big customers and grow with them, dedicating your best resources to serving them — and hanging on for the wild ride. Parts supplier, Frank Stronach at Magna became a billionaire serving the giant auto OEMs. The McCain brothers became billionaires meeting McDonald’s frozen french fry needs as it globalized.
Then around the year 2000 (depending on the company/industry), big customers woke up and realized that their suppliers were getting fantastically rich serving them. And that started the era of aggressive big-company procurement, that continues full force today, and that has slowly but surely made your biggest customers your least profitable customers.
The system changed and the strategy — in particular Where-to-Play (WTP) — needed to change. Now the proper strategic use of big customers is to have them baseload your capacity at low profitability so that you have the scale to earn attractive margins on your small customers — which is why in the modern era, small is indeed beautiful when it comes to customers.
The Golden Age of Small Countries: 1945–2000
This is analogous to the golden age of small countries — and its end.
For most of history, it sucked to be a small jurisdiction. A jurisdiction with a large enough economic base to fund an intimidating military apparatus could achieve dominion over jurisdictions — whether cities, principalities or countries — that were too small to defend themselves. Largeness was always a function of population AND purchasing power. Being populous (e.g. Brazil or Indonesia) didn’t provide protection if the jurisdiction had a rudimentary economy (which Brazil and Indonesia had at the time of their colonization).
Prior to 1945, tariffs around the world were generally high, giving a huge economic advantage to countries that possessed a large internal market, with the US being the prototypical example. It went from a British colony to the largest economy in the world in an era in which it was protected by high tariffs — like every other country. But no other country had an internal market as big (population X GDP/capita) as the US did.
At no time did it suck more to be a little country than during the 20th century’s two world wars. If you were Belgium, Netherlands, Poland, Greece, Philippines, Viet Nam, etc., you just got rolled over whenever a big country (e.g., Germany or Japan) wanted to. The best a little country could do was to ally for protection with as friendly a big country as possible.
The devastating toll of two horrible wars within one generation caused a fundamental rethink of the system under which the world had operated for centuries, and out of this rethink, an entirely new system emerged, featuring epochal changes that created a golden age politically, militarily, and economically for small countries.
Politically
In 1945, the United Nations (UN) was created to attempt to give every country whether big or small a political voice. Yes, there was a Security Council, but even it included a majority of small countries. If little countries got together, they could outvote a few big countries — though any vote could be vetoed by one of the five large countries with veto power.
Militarily
In 1949, the North Atlantic Treaty Organization (NATO) was created, which provided military protection of many of the little countries in Europe against the new (and giant) aggressor, Soviet Union/Russia. NATO is the world’s biggest alliance but there are many more across the world like ANZUS, FPDA, NORDEFCO, and dozens more.
Economically
In 1947, the Global Agreement on Tariffs and Trade (GATT) was born (which morphed into the World Trade Organization (WTO) in 1995). Based on the prevailing economic theory of the era that lower tariffs made everyone better off, GATT worked to dramatically lower tariffs around the world on as many categories of goods as possible. And it (and successor WTO) succeeded in dramatically reducing tariff barriers to trade and overseeing a huge increase in global trade. Free trade agreements including the European Union (EU) and North American Free Trade Agreement (NAFTA) went even further, creating trade blocks with zero tariffs.
Importantly, small countries benefited disproportionately. For example, I did a quick check of countries ranked by exports as a percentage of GDP — i.e. how much of their economy is fueled by exports out of their tiny country into countries whose tariffs had been driven down by GATT/WTO. Of the top 50 countries in export share of GDP, 47 are tiny countries with population under 20 million (Vietnam, Thailand, and Poland are the only exceptions). Their export-driven economies wouldn’t have been possible except for the rules of the system in this small-country golden age. Of the bottom 50 in Export Share of GDP, 20 have population over 20 million, and they include most of the largest economies in the world (India, China, USA, Indonesia, Brazil, and Japan) These countries need trade the least but have the most attractive markets in the world for exports from small countries.
A Tougher Age for Small Countries
Around the same time that big companies awakened to their inherent size-driven purchasing power, the world’s biggest countries started to awaken and assert themselves. In terms of truly big countries from a combined military and economic standing, clearly only three remained in the 21st century: US, China and Russia. Japan was completely militarily neutered coming out of World War II and Germany largely. Plus, Germany played the role of the big EU country that all the other little EU countries exploited for decades, sapping its strength as a once-big player.
Some of the awakening manifested itself militarily as with China crushing Hong Kong under its steel-toed boot after regaining control in 1997, building artificial islands in the South China Sea in a laughable effort to legitimize military control of a broader area, and flying warplanes over Taiwan whenever the desire strikes it. More recently, so has Russia with the military annexation of Crimea in 2014 and the full-scale invasion of Ukraine in 2022.
China and Russia simply ignore the criticism of the world, no matter how strenuous, signaling that for them, the 1945–2000 golden age for small countries is fully over. They are going to take what they want, and the small countries of the world are free try to stop them militarily if they want to try. It’s obviously not good for the world, but they don’t care.
Economically, China was first out of the gate to awaken, which happened as soon as it entered the WTO in 2001. It knew it had the fastest-growing large market in the world, and despite the WTO free-trading regime for which it signed up, it began to charge high tolls for access to its markets. Its tool, which it probably learned by watching Japan for decades, was non-tariff barriers that enabled it to claim it was a free trader while being anything but. China forced foreign companies to enter joint ventures with local Chinese companies (often state-owned enterprises) and shamelessly stole foreign company intellectual property. That became its price for access to the Chinese market.
The US was the last to awaken, but it was inevitable. The theory that underpinned the tariff reducing age — i.e. that freer trade made everybody better off — was increasingly shown to be just plain wrong thanks largely to the seminal work of Harvard Kennedy School professor Dani Rodrik. His work demonstrated that freer trade massively damages the economic prospects of a large swath of workers — primarily low-medium skilled workers in tradeable goods industries — from which they never recover. Everyone else in the economy gets the benefit of cheaper goods while these workers are sacrificed.
The US, like China before it, has figured out that it can and will charge small countries for access to its huge market — just like giant companies are charging their suppliers for access to their purchased volumes. On top of that, it is going tit-for-tat with the long-since-awakened China. What exact shape the charging takes will be revealed over time. But this genie isn’t going back in the bottle any time soon.
Practitioner Insights
This is not an economic fight that little countries can win. If they try to fight, they will learn the lesson Amex did with Costco. The two companies entered a long-term partnership in 1999 by which Amex became the exclusive credit card for Costco. By pretty much everyone’s definition, it was a gigantic success for both companies. But when the original deal came up for renewal in 2015, Costco competitively bid out the agreement. Amex was outraged, feeling that it had a partnership, not simply a supplier arrangement. Disgusted, Amex dropped out before the final round, which was won by rival Citibank/Visa.
Canada can hold its breath, stomp its feet, and say nasty things about the US and/or the Trump administration. But outrage is going to work as well for Canada as it did for Amex. Canada is small. The US is big. Canada needs the US market vastly more than the US needs Canada’s. Canada will have to come to some accommodation that works for both sides.
The system has changed and strategy can’t remain fixed. Canada needs to do something that I have been arguing for decades in the economic policy work I used to do in Canada: it needs to diversify its export destinations. Last year, 77% of its exports went to the US. That is an incredibly focused geographic WTP.
Imagine if 77% of Amex’s revenues had been from the Costco deal as of 2015. Amex would have gone bankrupt — or accepted a dreadful deal to survive. What has kept Amex prospering? Amex has giant businesses with consumers and with small business customers — where the power relationship is weighted for, not against, Amex. Its prosperity for damn sure isn’t from either the corporate or co-branded card businesses.
The future for all small-to-medium-sized countries — Canada included — is to increase the share of their trade with other similarly-sized countries, who have the same interests as they do. As always, WTP is an important strategy choice. For the better part of 80 years, Canada’s WTP for exports worked just fine. But it doesn’t anymore.
And every export-driven company needs to rethink its WTP in this new world. For some, the existing strategy will be just fine. For others, the future won’t be friendly for a strategy that was built for an old system.
I will finish by stating proactively that I am in no way arguing that I like what has befallen the golden age of small countries. I am simply helping observers understand why what is happening is happening. Typically, when I do that, some readers assume that because I am writing about a thing, I am in favor of that thing. Nope. There is no correlation. My job is to explain a confusing world to help readers understand how to deal best with that world.
