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Changes in Europe Will Challenge US Competitiveness

By Murray WeidenbaumMurray Weidenbaum is Mallinckrodt Distinguished University Professor and Director of the Center for the Study of American Business at Washington University in St. Louis. / December 19, 1989



IN change, there is both threat and opportunity. The rapid turn of events in Europe - both East and West - requires rethinking conventional business approaches. We are witnessing, on the positive side, an expansion of world markets. The nations of Eastern Europe are abandoning the closed communist trading system for the far more open Western trading community. Within Western Europe, trade and regulatory barriers are being dismantled among the 12 nations now members of the European Community.

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All this is taking place in an atmosphere of substantial reduction in military and political tensions. The result is an acceleration of the slowdown in defense spending that has been occurring in the United States in recent years. Despite the inevitable adjustments that will be faced by individual companies and their communities, in the aggregate these are positive developments. They encourage Americans to look to the global marketplace for new business.

Not all of the developments overseas are positive in terms of their impacts on companies in the US. There is no evidence that the European Community's trade barriers are coming down. Those barriers are being strengthened by means of ``domestic content'' and ``reciprocity'' restrictions on imports.

Ironically, those are precisely the restraints that Congress rejected, in part because of the pleas of the Europeans that such measures were unfair and would provoke retaliation. When Americans informally chide our European friends on the obvious inconsistency of their positions, they tell us not to worry - that the measures are aimed at the Japanese. Of course, we do not know how good their aim is.

Turning to Eastern Europe, there is a lot of pent-up demand for American goods. The problem, however, is that many of those countries are already heavily indebted to the West. The challenge to East Germany, Hungary, Poland, Czechoslovakia, etc., is to convert their inefficient nationalized industries to competitive private enterprises.

That will take much more than generous supplies of equity capital from the US and other western nations - which is no modest task. It will require dismantling the elaborate networks of controls established by their Marxist governments. To convert bureaucratic companies into true business firms, however, it will be necessary for the rank-and-file employees to do a 180-degree turn in their attitude toward management. They will have to learn quickly what American workers have learned over a long period of time: although the interests of management and labor may not always coincide, there is a basic relationship between the productivity of workers on the job and the ability of the company to be a good employer. Both the longevity of the job and the prospects for improvements in pay and fringe benefits hinge on productivity improvements.

If the Eastern Europeans succeed in getting their respective economic acts together, they could be tough competitors for the US and other Western nations. Their labor costs are very low. In Poland, for example, the average factory worker is reported to earn approximately $20 a week.

Even if the necessary adjustment is made for the heavily subsidized cost of living, a relatively modest level of productivity would enable Polish firms to be competitive in world markets while delivering improved living standards to their employees. That depends in good measure on their ability to penetrate the most logical major market for their products - Western Europe. But the positive export picture for Eastern Europe will take reducing or at least bypassing West European trade barriers.

By the end of 1992, the economic integration of the present members of the European Community (EC) should be far advanced - although each likely will have its own currency and tax system. Soon after, other nations will be knocking on the door of the EC seeking admission. The earliest candidates are likely to be the Scandinavian countries, especially Norway and perhaps Iceland, Sweden, and Finland. Austria is another logical candidate for entry into the EC and that could be a strategic move. Hungary and East Germany might be close behind and Czechoslovakia and Poland likely would request to join - at least as associate members.

Looking beyond the initial adjustment period, an economically united Europe might become the dominant economic power on the globe early in the 21st century.

Thus, companies in the US might find very rough competition across the Atlantic Ocean - in Europe - as well as across the Pacific, on the part of Japan and the other Asian rim nations. All of these developments point up the need to strengthen the competitive positions of American businesses.

The constructive response is not to ape the plea of that mythical business executive who yelled, ``Stop the world, I want to get off.'' Erecting trade restrictions would be counterproductive. It would encourage US firms to avoid making the tough decisions that control costs and enhance productivity.

There is a role for government and it is well known: reduce tax and regulatory burdens and lower the real cost of capital in the US by curbing deficit financing. Most fundamentally, public policy should focus on the area of its responsibility: the inadequate education of the American work force. We cannot blame our low literacy rates or our high dropout rates on foreigners.

Those critical shortcomings have a ``Made in America'' label.