Outlook: America dare not risk another slight to multinationalism

Banking threat; Marshall/BA
Click to follow
The Independent Online

With its heart, the Bush administration preaches free trade, yet with its mind firmly set on next year's presidential election, it practices protectionism. It is now nearly two years since the US slapped a 30 per cent tax on imports of foreign steel. The World Trade Organisation agreed yesterday that the tariffs are illegal. In the meantime, it is not just foreign importers that have suffered for the greater good of the uneconomic American steel industry, but American manufacturers too, which have had to get by on prices 30 per cent higher for a key raw material than anyone else.

With its heart, the Bush administration preaches free trade, yet with its mind firmly set on next year's presidential election, it practices protectionism. It is now nearly two years since the US slapped a 30 per cent tax on imports of foreign steel. The World Trade Organisation agreed yesterday that the tariffs are illegal. In the meantime, it is not just foreign importers that have suffered for the greater good of the uneconomic American steel industry, but American manufacturers too, which have had to get by on prices 30 per cent higher for a key raw material than anyone else.

Yet even now the Bush administration feigns not to agree. Despite the threat of retaliatory action from the European Union, Washington is still refusing to go along with the WTO decision, due to be formally ratified by the middle of next month. The US has already trampled roughshod all over Kyoto and the United Nations. Is the WTO to be the next multilateral organisation to be sacrificed to US economic and political interest? Following the failure of trade talks at Cancun, the US has the opportunity to set an example to the rest of the world. Whether Washington agrees with the decision or not, it must seize the moment to demonstrate that the system of multilateral trade law, so painstakingly assembled over the past 50 years, does mean something.

Through Chapter 11 insolvency mechanisms, American steel is already ringed around with all manner of protections and advantage not available to foreign competitors, state subsidised or not. Cynically, the US has bought its steel markets a period of further protection, for which the present ruling by the WTO demands nothing by way of compensation. Now that the world price of steel has recovered sufficiently to return these companies to profit, it's time to give in gracefully. With the already monstrous US trade deficit continuing to grow, threatening jobs and long-term economic health, it is understandable that Washington should want to find ways of halting and reversing the flow of trade. Yet as the US Treasury Secretary, John Snow, repeatedly points out, the best mechanism for dealing with such imbalances is through the market, not tariffs or currency pegs. There could be nothing more damaging to the still-fragile recovery in the world economy than an all out trade war. Yet that's the likely outcome if America continues to flout the multilateral trade system.

Banking threat

There is always something that pundits would have us believe is about to wipe out the hegemony of the big banks - whether it be sovereign debt, recession, a systemic meltdown in derivative markets, the internet, or the doomsday machine of the moment - the consumer debt timebomb. None of them have yet managed it. Indeed, the history of the last downturn suggests that the banking cycle has been virtually abolished. In Britain and the US, at least, there has been no banking crisis to accompany the bursting of the technology bubble.

The fact of the matter is that most of the big banks have got a whole lot better at managing risk. Of course, we don't yet know how the consumer credit boom, which has been helpful to the banks in supporting profits through the downturn, is going to pan out, but there are good reasons for believing that whatever bad debt experience does emerge will be limited and manageable. The biggest challenge to the banks today comes in any case not from the economy cycle, which was the old cause of difficulty, but from competition and deregulation. This threat too can be exaggerated. At the height of the dot.com boom, it was widely thought the big banks were toast. Extensive, legacy branch networks and cumbersome cost bases seemed to doom them to extinction. Yet they proved resilient. In the end, it was the dot.coms that disappeared, not the big banks. Nor was it just an inertia thing that sank the new species, or that the internet failed to develop as fast as anticipated. Actually it was something much more primeval. Hated though they sometimes are, the banks are also trusted. In practice, few wanted to trust their cash to cyberspace.

So what to make of the latest challenge to the banking oligopoly - the supermarkets? According to an IBM Business Consulting Services report published yesterday, the number of supermarket banking customers is likely to rise by nearly 150 per cent over the next five years from 5.8 million at present to 14.4 million. As things stand, the supermarkets have only 1.6 per cent of the British deposit market. Even if this were to double, the impact on the big high-street banks would not be that great. On the other hand, the supermarkets' share of the credit-card and personal lending markets is already much more significant at 8.9 per cent and 2.6 per cent respectively.

According to the report, which was commissioned by Sainsbury's, supermarkets typically operate on costs of just 25 per cent of the average financial services company, enabling them to price much more aggressively than the market as a whole. For instance, car insurance from Sainsbury's and Tesco is around 11 per cent cheaper than the average. There are some other natural advantages that supermarkets enjoy over banks, most obviously convenience and exceptionally low cost of customer acquisition.

For the moment, the supermarkets largely confine themselves to bread-and-butter banking - the consumer credit and deposit markets - leaving the higher margin, more complex products such as mortgages to the incumbents. Yet even here, they are capable of doing quite a bit of damage to the big banks' prospects of achieving decent levels of top line growth. On the "if you cannot beat them join them" principle, HBOS and Royal Bank of Scotland Group are joint venture partners with Sainsbury's and Tesco in their banking endeavours. Interestingly, both joint ventures date back to when these companies were still smallish, Scottish regional banks, with little to lose from taking on the big clearers in the English market. Now they are part of bigger groups, the partnerships don't look so benign. Still, it generally pays to hedge your bets, and it may well be that the multi-brand approach to banking being pursued by both RBS and HBOS has more to commend it than the still monobranded strategy of HSBC, LloydsTSB and Barclays.

Marshall/BA

Lord Marshall of Knightsbridge is such an institution on the British corporate scene that it's hard to know what we'll do without him when finally he retires as chairman of British Airways next year. Part of the triumvirate that privatised BA back in the mid-1980s, he was at one stage coincidentally chairman of three FTSE100 companies - BA, Invensys and Inchcape - deputy chairman of a fourth - British Telecom - and a non executive director of a fifth - HSBC.

All of them, other than HSBC, have at one stage or another during Lord Marshall's reign been corporate basket cases. Three of them, BA, Invensys and British Telecom are even today not wholly out of the woods. Should Lord Marshall be held accountable? As chairman, he can hardly escape it. It was perhaps his example more than any other that has led to the Higgs ban on holding the chairmanship of more than one FTSE 100 company. It's bad enough having to preside over just one corporate crisis, but to have three or four going on at the same time?

Lord Marshall is one of life's great enthusiasts. He also led BA as chief executive during its glory years in the 1980s. More recently, about the best thing that can be said of his performance is that "he survived". Plenty of those around him from Bob Ayling at BA to Sir Iain Vallance at BT and Allen Yurko at Invensys, did not, dispatched by Lord Marshall's bullet.

He will be leaving BA on a bit of a down note, but still better placed and financed than most other full-service airlines. That's something to be proud of, as well as being a decent legacy to hand on to his successor, Martin Broughton.

jeremy.warner@independent.co.uk

Comments