Context
In common with B&C, I believe that ICs could well become an important feature of the world economy in the near future. I see a number of possible industry settings in which cooperation or coordination among MNEs and national governments could improve industry conditions. As a first example, consider primary products. As the carbon-based energy sector declines under pressure from climate change restrictions, B&C point out that cartels are often used to manage declining industries. At the same time, the anticipated shift of energy production is already generating increasing demand for minerals such as lithium and rare earth minerals for use in batteries and electric motors. While these minerals are widely distributed, world supplies today largely come from China, where government policies support very low-cost production, but make global supply chains vulnerable to political disputes, as has already been seen in the case of a territorial dispute in which rare earth supplies to Japan were cut off by China a few years ago. Making other locations cost competitive for mining and smelting processes operated by private enterprises will likely require cooperation to minimize price competition and to reduce costs as much as possible.
Second, rising populations and climate change seem likely to raise the threat of food shortages due to drought, flood, and political machinations. The recent history of massive starvation and population displacements in response to these crises suggests that the current mix of national policy, multinational corporate interests, and non-governmental organizations is no longer viable. Cartelization of commodity agriculture on a global scale to stabilize production at levels above what consumers can afford seems a possibility from both the precautionary and the progressive perspectives of B&C. Such cartels would certainly require government and inter-governmental support given the current levels of intervention at national and regional levels.
A third sector has been exposed by the COVID-19 pandemic (Li, Reference Li2020). As vaccines are brought online and majorities of the populations in industrial nations are immunized, critics point out that minimal levels of vaccination in poorer countries are both tragic in their own right and present the possibility of new viral variants that are vaccine-resistant and can reinfect the world. Vaccine development and distribution already offer cartel-like characteristics, with government guarantees of markets, sharing of knowledge and cross-licensing, demands for the relaxation of patents, etc. If the prediction of more and more pandemics in the future is taken seriously, the use of ICs to formalize a public-private partnering effort on a global scale to provide vaccines and other pharmaceuticals with major public health implications seems a potential alternative to uncoordinated and politically fraught ad hoc solutions.
A fourth context for cartelization on an international scale is the global information technology (IT) sector – particularly the manufacture of commodity inputs such as computer chips. The current crisis in automotive production caused by the inability of chip manufacturers to quickly ramp up production of the relatively simple chips that are essential to modern cars demonstrates the limitations of market mechanisms when volatility of demand simply cannot be matched by complex and highly technical supply. This same sector has experienced problems with single sourcing for key components due, for instance, to floods in Thailand a few years ago or the 2011 earthquake and tsunami in Japan (Li, Reference Li2020). Beyond this, supplies of the most advanced chips are highly concentrated and subject to political risk. As described in The Economist (‘Living on the edge’, 2021), Taiwan Semiconductor Manufacturing Corporation (TSMC) is predicted to generate more than 80% of the world revenues in the most advanced integrated circuits in 2021. Some 97% of TSMC's long-term assets and all of its advanced fabrication facilities are on the island of Taiwan. So, even though over 60% of TSMC's revenues came from IC design firms based in North America, actual production of the most advanced chips is concentrated on one small island that is subject to earthquakes and tropical storms and is at the heart of China's political objectives of consolidating what it sees as its historical territories. For users of the most advanced computing technology, supplies of their single most critical input are tied to both one location and one company – and TSMC seems to have no economic incentives to change the situation. Governmental engagement to both encourage TSMC to diversify its production sites and to support regional alternative suppliers of both standard and advanced chips seems ideally suited to cartelization.
These four examples hardly exhaust the potential problems in a world economy where cost-driven competition has forced much primary product and commodity component production to a small number, if not a single, location (Li, Reference Li2020). At the same time, the capital requirements and scale economies in many sectors have reduced the number of major competitors dramatically. Key minerals, food, vaccines, computer chips – global supply chains have shifted their sources more and more to a few locations and a few global companies, reducing resilience in the face of natural disaster, pandemic, and political interference.
ICs as a Solution?
The previous section laid out four global industry settings in which world supplies have become more subject to interruption and less resilient in the face of changing conditions (Li, Reference Li2020). In answer to B&C's questions, I submit that the greatest need for reconsidering market structures is in those commodity industries most subject to cost pressures (Buckley, Reference Buckley2021). While the risk that natural disasters will interrupt supply chains on a global scale due to single sourcing of obscure, yet critical, components is real, the fact that so many supply chains either originate in or pass close to emerging world powers such as China, with its goals of disrupting current political and economic systems (Witt, Reference Witt2019), does increase the political risk to the smooth functioning of current supply chains. Beyond the political risk considerations raised by B&C in relation to single-sourcing for global supply chains, the hazards presented by natural disasters, especially as climate change seems likely to present unexpected weather-related risks, may encourage international cartels. What are some possible developments in the near future for world supply chains and how might ICs figure in the emerging world economy?
Of course, one alternative future is that things stay much as they are. Large MNEs dominate supply chains and production of commodity goods of all types remains in the lowest cost location with few adaptations by companies to build resilience into supply chains. Governments attempt to protect their own national interests by some combination of overlooking issues such as human rights, military aggression, or active attempts by supplier companies to misappropriate intellectual property, establishing quotas or tariffs on imports, restricting inward investment, and limiting exports of technology with possible military applications – hardly an efficient market. However, there is no reason to expect that the current threats to global supply chains will change for the better. Intense and uncontrolled cost competition in these industries will still tend to drive consolidation of production toward a small number of companies in a small number of, or even a single, low-cost location.
Another alternative, which indeed has been the direction of the last few years, is the continued shift of governance from vertically integrated MNEs toward de-integrated supply chains relying on networks of contracts and alliances supported by IT oversight. Production shifts from MNE subsidiaries to local firms in supplier countries, but cost pressures toward single supply locations are maintained, and indeed second and third tier component suppliers may consolidate so that multiple supply chains all end up relying on a single source (S&P Global Market Intelligence, 2021). Because global MNEs are replaced by multi-tiered supply contracts, the risks of disruptions may increase with little awareness by either end-user companies or the governments of market countries. Decentralized supply hypothetically opens up the possibility of second-sourcing, re-shoring, and other policy gains for resilience, but today's economic reality suggests that cost pressures will continue to drive out responses that offer flexibility and resilience. De-globalization impacts individual MNEs but left to pure market pressures is not likely to seriously alter global supply chains and single sourcing of key inputs. As Petricevic and Teece (Reference Petricevic and Teece2019) put it, the bifurcation of market governance between rule-of-law (mostly industrialized) countries and autocratic (mostly emerging) countries highlights the need for a new approach to the world political-economic order.
A third solution, and the one that Buckley and Casson (Reference Buckley and Casson2021) propose, is the emergence of international production cartels in a variety of commodity production industries. Why might ICs be useful in these industries? Essentially, production is currently concentrated in a small number of low-cost locations, some with outsized threats from natural processes and/or from undemocratic and expansion-minded governments. Diversifying production is a costly option for companies in a purely competitive market. Developing new sites – rare earth mining and smelting, cutting edge chip foundries, cost-efficient battery factories – is expensive and disruptive, environmental and community health risks are often high, and pressures for local production compete with ever increasing economies of scale. Indeed, without import protection it is not clear that, for instance, rare earth mining and processing in the Western US (where known deposits have been processed in the past, but where environmental protection concerns are high) can be profitable for private industry. Cartels offer an organizational mechanism through which companies can coordinate to support prices that cover increased costs, share innovations in product and process technology, and ensure that localized events or political disputes do not interrupt worldwide supply chains – without increasing the market power of MNEs (see Buckley, Reference Buckley2021).
Government engagement in such ICs can offer economic incentives and political cover for the member firms to maintain production levels that are stable and high enough to cover peaks of demand in volatile industries through stockpile purchasing and price supports, support national or regional facilities with coordinated subsidies, and protect markets from excessive cost pressures with jointly determined tariffs and quotas focused on imports from more productive locations. From the perspective of firms that might be members of these ICs, government participation or even leadership encourages transparency, provides consistent incentives, and should reduce incentives for cheating – which, as B&C say, is the downfall of many cartels. From the government perspective, of the industrial market economies in this case, engagement in ICs offers the opportunity to move (or keep) production onshore, to coordinate subsidies and tariffs, and to avoid being put into competition with other governments by member firms. Government leadership also allows national priorities to be emphasized in the formation, organization, and management of ICs.
INTRODUCTION
Buckley and Casson (Reference Buckley and Casson2021) offer a comprehensive history and detailed description of international cartels (ICs), their historical significance, their characteristics, and their various roles in the world economy. They also offer thoughts on the value of cartels, or cartel-like organizations (Buckley, Reference Buckley2021), in the current and likely future world economies. Their historical summary, descriptions, and typologies are clear and primarily descriptive, and based on their usual careful scholarship. I do not see that there is much to be added to this part of the discussion, so will stick to a few observations. Rather, I propose to focus on the possibility that cartels (or cartel-like, multi-firm organizations) will have real importance to the world economy of the future. Buckley and Casson ask three key questions: Will increased political risks result in ICs replacing MNEs? Will MNEs within ICs become less multinational? And are ICs likely to be concentrated in certain industries? They offer a qualified ‘Yes’ to each of these questions. I agree and will expand a bit on these ideas – a speculative exercise for which a comment seems well suited. I also address a fourth question: Are ICs a mechanism to overcome the disruptions to global supply chains attributable to single sourcing of key goods (Li, Reference Li2020)?
A BIT ON DEFINITIONS, HISTORY, AND CONTEXT
Buckley and Casson (B&C) begin by defining cartels and international cartels, and contrasting them with other forms of cooperative inter-firm organizations. With an eye to the future possibilities for international cartels, I specifically take note of their discussion of government-led cartels in this section. The political risk focus of their first question about the future of ICs reflects the importance of a rising multi-polar world, and specifically the rising economic, political, and cultural challenges of China to the established dominance of the US and its traditional allies (Witt, Li, Välikangas, & Lewin, Reference Witt, Li, Välikangas and Lewin2021). I agree with B&C's sense that ICs may be an important response by the current industrial democracies to China's economic model, which argues for government engagement, while the commitment to market economics by these countries and regions suggests that the actual IC members will be MNEs, not the governments themselves.
A key aspect of the argument for government-led ICs in support of the world market economy is that the United States would clearly need to be involved – which would be a departure for a country that, as described by B&C, has traditionally focused on the predatory aspects of cartels and pushed back against OPEC and other efforts to organize industries in support of price or quantity (or both) fixing in world markets. However, the US does have a history of accepting domestic cartel-like organizations in primary product industries such as agriculture (where cartel-like ‘co-operatives’ or ‘co-ops’ are common) or production of minerals, coal, oil, and gas (especially on public lands), a precautionary approach to strategically and politically important industries. Indeed, collaborative strategies in such industries often are supported by federal government departments in the name of stabilizing production at greater-than-market-demand levels, often by providing price supports to keep more marginal farms and mines in operation. Governmental offices also support progressive efforts at innovation in these industries, while industry associations for lobbying efforts are quite common. Americans may hesitate to accept designating organizations as ‘cartels’ or ‘trusts’ or ‘syndicates’, but they do recognize that substantial cooperation within an industry offers both economic and societal benefits in some settings.
Raising these issues specific to the US market only supports B&C's statement of the historical importance and current influence of cartels worldwide and the need to understand the behaviors and structures of cartels and cartel-like organizations, which are often hidden from or at least not clearly explained to the general public in countries with market economies. I focus on the US because it is likely to play a critical role in the possible renaissance of ICs in the coming decades and because its position and policies toward production cartels are more complex and supportive than are apparent in public rhetoric.
THE FUTURE AND NEW INTERNATIONAL CARTELS
Context
In common with B&C, I believe that ICs could well become an important feature of the world economy in the near future. I see a number of possible industry settings in which cooperation or coordination among MNEs and national governments could improve industry conditions. As a first example, consider primary products. As the carbon-based energy sector declines under pressure from climate change restrictions, B&C point out that cartels are often used to manage declining industries. At the same time, the anticipated shift of energy production is already generating increasing demand for minerals such as lithium and rare earth minerals for use in batteries and electric motors. While these minerals are widely distributed, world supplies today largely come from China, where government policies support very low-cost production, but make global supply chains vulnerable to political disputes, as has already been seen in the case of a territorial dispute in which rare earth supplies to Japan were cut off by China a few years ago. Making other locations cost competitive for mining and smelting processes operated by private enterprises will likely require cooperation to minimize price competition and to reduce costs as much as possible.
Second, rising populations and climate change seem likely to raise the threat of food shortages due to drought, flood, and political machinations. The recent history of massive starvation and population displacements in response to these crises suggests that the current mix of national policy, multinational corporate interests, and non-governmental organizations is no longer viable. Cartelization of commodity agriculture on a global scale to stabilize production at levels above what consumers can afford seems a possibility from both the precautionary and the progressive perspectives of B&C. Such cartels would certainly require government and inter-governmental support given the current levels of intervention at national and regional levels.
A third sector has been exposed by the COVID-19 pandemic (Li, Reference Li2020). As vaccines are brought online and majorities of the populations in industrial nations are immunized, critics point out that minimal levels of vaccination in poorer countries are both tragic in their own right and present the possibility of new viral variants that are vaccine-resistant and can reinfect the world. Vaccine development and distribution already offer cartel-like characteristics, with government guarantees of markets, sharing of knowledge and cross-licensing, demands for the relaxation of patents, etc. If the prediction of more and more pandemics in the future is taken seriously, the use of ICs to formalize a public-private partnering effort on a global scale to provide vaccines and other pharmaceuticals with major public health implications seems a potential alternative to uncoordinated and politically fraught ad hoc solutions.
A fourth context for cartelization on an international scale is the global information technology (IT) sector – particularly the manufacture of commodity inputs such as computer chips. The current crisis in automotive production caused by the inability of chip manufacturers to quickly ramp up production of the relatively simple chips that are essential to modern cars demonstrates the limitations of market mechanisms when volatility of demand simply cannot be matched by complex and highly technical supply. This same sector has experienced problems with single sourcing for key components due, for instance, to floods in Thailand a few years ago or the 2011 earthquake and tsunami in Japan (Li, Reference Li2020). Beyond this, supplies of the most advanced chips are highly concentrated and subject to political risk. As described in The Economist (‘Living on the edge’, 2021), Taiwan Semiconductor Manufacturing Corporation (TSMC) is predicted to generate more than 80% of the world revenues in the most advanced integrated circuits in 2021. Some 97% of TSMC's long-term assets and all of its advanced fabrication facilities are on the island of Taiwan. So, even though over 60% of TSMC's revenues came from IC design firms based in North America, actual production of the most advanced chips is concentrated on one small island that is subject to earthquakes and tropical storms and is at the heart of China's political objectives of consolidating what it sees as its historical territories. For users of the most advanced computing technology, supplies of their single most critical input are tied to both one location and one company – and TSMC seems to have no economic incentives to change the situation. Governmental engagement to both encourage TSMC to diversify its production sites and to support regional alternative suppliers of both standard and advanced chips seems ideally suited to cartelization.
These four examples hardly exhaust the potential problems in a world economy where cost-driven competition has forced much primary product and commodity component production to a small number, if not a single, location (Li, Reference Li2020). At the same time, the capital requirements and scale economies in many sectors have reduced the number of major competitors dramatically. Key minerals, food, vaccines, computer chips – global supply chains have shifted their sources more and more to a few locations and a few global companies, reducing resilience in the face of natural disaster, pandemic, and political interference.
ICs as a Solution?
The previous section laid out four global industry settings in which world supplies have become more subject to interruption and less resilient in the face of changing conditions (Li, Reference Li2020). In answer to B&C's questions, I submit that the greatest need for reconsidering market structures is in those commodity industries most subject to cost pressures (Buckley, Reference Buckley2021). While the risk that natural disasters will interrupt supply chains on a global scale due to single sourcing of obscure, yet critical, components is real, the fact that so many supply chains either originate in or pass close to emerging world powers such as China, with its goals of disrupting current political and economic systems (Witt, Reference Witt2019), does increase the political risk to the smooth functioning of current supply chains. Beyond the political risk considerations raised by B&C in relation to single-sourcing for global supply chains, the hazards presented by natural disasters, especially as climate change seems likely to present unexpected weather-related risks, may encourage international cartels. What are some possible developments in the near future for world supply chains and how might ICs figure in the emerging world economy?
Of course, one alternative future is that things stay much as they are. Large MNEs dominate supply chains and production of commodity goods of all types remains in the lowest cost location with few adaptations by companies to build resilience into supply chains. Governments attempt to protect their own national interests by some combination of overlooking issues such as human rights, military aggression, or active attempts by supplier companies to misappropriate intellectual property, establishing quotas or tariffs on imports, restricting inward investment, and limiting exports of technology with possible military applications – hardly an efficient market. However, there is no reason to expect that the current threats to global supply chains will change for the better. Intense and uncontrolled cost competition in these industries will still tend to drive consolidation of production toward a small number of companies in a small number of, or even a single, low-cost location.
Another alternative, which indeed has been the direction of the last few years, is the continued shift of governance from vertically integrated MNEs toward de-integrated supply chains relying on networks of contracts and alliances supported by IT oversight. Production shifts from MNE subsidiaries to local firms in supplier countries, but cost pressures toward single supply locations are maintained, and indeed second and third tier component suppliers may consolidate so that multiple supply chains all end up relying on a single source (S&P Global Market Intelligence, 2021). Because global MNEs are replaced by multi-tiered supply contracts, the risks of disruptions may increase with little awareness by either end-user companies or the governments of market countries. Decentralized supply hypothetically opens up the possibility of second-sourcing, re-shoring, and other policy gains for resilience, but today's economic reality suggests that cost pressures will continue to drive out responses that offer flexibility and resilience. De-globalization impacts individual MNEs but left to pure market pressures is not likely to seriously alter global supply chains and single sourcing of key inputs. As Petricevic and Teece (Reference Petricevic and Teece2019) put it, the bifurcation of market governance between rule-of-law (mostly industrialized) countries and autocratic (mostly emerging) countries highlights the need for a new approach to the world political-economic order.
A third solution, and the one that Buckley and Casson (Reference Buckley and Casson2021) propose, is the emergence of international production cartels in a variety of commodity production industries. Why might ICs be useful in these industries? Essentially, production is currently concentrated in a small number of low-cost locations, some with outsized threats from natural processes and/or from undemocratic and expansion-minded governments. Diversifying production is a costly option for companies in a purely competitive market. Developing new sites – rare earth mining and smelting, cutting edge chip foundries, cost-efficient battery factories – is expensive and disruptive, environmental and community health risks are often high, and pressures for local production compete with ever increasing economies of scale. Indeed, without import protection it is not clear that, for instance, rare earth mining and processing in the Western US (where known deposits have been processed in the past, but where environmental protection concerns are high) can be profitable for private industry. Cartels offer an organizational mechanism through which companies can coordinate to support prices that cover increased costs, share innovations in product and process technology, and ensure that localized events or political disputes do not interrupt worldwide supply chains – without increasing the market power of MNEs (see Buckley, Reference Buckley2021).
Government engagement in such ICs can offer economic incentives and political cover for the member firms to maintain production levels that are stable and high enough to cover peaks of demand in volatile industries through stockpile purchasing and price supports, support national or regional facilities with coordinated subsidies, and protect markets from excessive cost pressures with jointly determined tariffs and quotas focused on imports from more productive locations. From the perspective of firms that might be members of these ICs, government participation or even leadership encourages transparency, provides consistent incentives, and should reduce incentives for cheating – which, as B&C say, is the downfall of many cartels. From the government perspective, of the industrial market economies in this case, engagement in ICs offers the opportunity to move (or keep) production onshore, to coordinate subsidies and tariffs, and to avoid being put into competition with other governments by member firms. Government leadership also allows national priorities to be emphasized in the formation, organization, and management of ICs.
CONCLUSION
Buckley and Casson (Reference Buckley and Casson2021) offer a strong defense of the potential value of ICs in the future world economy by defining and describing the historical and organizational realities of cartels. I offer several examples of industries in which the current approach to global competition has hurt, sometimes dramatically, the ability of global supply chains to adjust to environmental challenges such as earthquakes, floods, pandemics, and political expansionism. Agreements among countries to limit restraints on trade within the cartel and to support multiple ‘national champion’ MNEs in competition by using price supports and (in some future where demand drops) purchase agreements, should permit the development of multiple, widely spread production sites with enough certainty in markets to allow private development. Governmental oversight can limit the pernicious effects of limited competition such as price collusion or predatory behavior in the name of real monopoly. I find that B&C are quite convincing when they propose that in industries exposed to political risk (or other exogenous threats), vertically integrated MNEs and strictly competitive global supply chains have severely reduced market resilience and opened the possibility that international cartels (and especially ICs with government engagement) might provide a means to more stable international markets. In a world rife with political and social pressures for de-globalization (Witt et al., Reference Witt, Li, Välikangas and Lewin2021) but economic pressures for global production, cartels may well offer a less disruptive, more manageable, solution than the current volatile, uncertain, and clearly inefficient markets.