Editor’s note: Tradeshift does not espouse support for individual political parties or politicians, but rather seeks to offer nonpartisan commentary illuminating to the global business community.
Living standards and life expectancies have never been higher. Malthusian predictions of population implosion have come to naught. Information is connected more freely than ever before. These markers of economic and social progress have come to fruition largely as a result of the global trade in goods and ideas.
Trade dates to the dawn of civilization, with rudimentary specialization in stone tools giving way to digitized global supply chains over the last 10,000 years. The economic stakes have grown considerably higher as trade has grown more global. Most recently, World Gross Product–a proxy for the size of the world economy–was US$78.28 trillion1 in nominal terms.
This vast production owes much to trade. Consider that almost no good is manufactured with completely domestically sourced parts. Whether it’s guacamole in Whole Foods with Mexican avocados or a Boeing aircraft with electronics from Taiwan, cross-border flows are integral to reducing costs to consumers and enabling business innovation. For an illuminating example making the rounds in the financial press2, take a look at the top five “most American” cars, i.e. those made with the most American parts.
This phenomenon isn’t unique to the car industry, so rolling back globalization by regulation or tariff for political fodder is concerning. The social costs to some industries or individuals as a result of globalization are undeniable (and underestimated up until very recently), but artificially increasing the price and availability of goods is a form of regressive taxation–meaning it will disproportionately affect those already suffering financially.
In the recent US presidential election, both candidates tacked hard towards protectionism. President-elect Trump went so far as vowing to renegotiate the North American Free Trade Act (NAFTA) and flatly refuse to sign the Trans-Pacific Partnership (TPP), in an echo of the mercantilist economic policy of the 1930s. The policies adopted then, including the infamous Smoot-Hawley Tariff Act of 1930, presaged another decade of economic depression.
Now that the election is over, pundits and CEOs alike are wondering what to expect.
First off, rhetoric is not action. Policy tends to moderate when confronted with the realities of office. The president has more unilateral control over trade than other areas, making protectionist commentary concerning but by no means certain to result in material regulatory changes. It’s also worth noting that markets price in public information, including politics, meaning businesses have largely priced this uncertainty in already.
The current state of trade
Uncertainty is a headwind to business investment, a major driver of trade. In the last full year of data, trade has had to contend with a vitriolic presidential election, the continued rise of populism in Europe, and threats to the independence of key central banks.
The World Trade Organization (WTO) notes 2015 was the fourth consecutive year of global trade growth of less than 3%3. Sharp currency fluctuations also drove down the dollar value of trade, contributing to the unusual volatility seen in the chart below.
This isn’t a reason to panic yet. Businesses tend to hold off investing before elections, particularly in hard assets like warehouses, component parts, and shipping facilities–the sort of investments that fuel trade. Whether you think Trump’s election is certain doom or certainly better than the alternative, it is certainty nonetheless. This certainty is what businesses crave and besides the election, there’s more on the way.
What to expect next
Trade deals were a cushy punching bag on the campaign trail and early on Trump’s “to address” list. Trump will have to comment on the TPP one way or another within his first 100 days of office–same with NAFTA. Whatever happens, it will give clarity to business.
U.S companies alone are currently sitting on $1.7 trillion in cash and loath to pay it all back to investors in dividends. Expect to see some of that cash spread globally on the hard assets these firms have been holding back on.
Another subject likely to have a major impact on spending and trade is the potential repatriation of offshore cash by American companies.
U.S firms are currently holding $1.4 trillion in cash offshore to avoid punitively high corporate tax rates. Trump has made noises about lowering the corporate tax rate and specifically addressing the offshore situation, which would provide a large one-time stimulus to business spending. Just as with negative speculation, though, it’s still in the rhetoric stage.
So how can businesses prepare?
Whether more extreme and economically illiterate campaign pledges come to pass, global business and trade will continue. The smartest bet, rather than reading political tea leaves, is to invest in agility internally. Whether bluster lacks action and the business climate remains similar or trade deals and tax rates are shaken up beyond recognition, processes, and tools designed for all weather are instrumental in a digitized world.
Where this coincides most directly with global trade is in a company’s supply chain. It’s more imperative than ever to have 100% of suppliers uploaded to a cloud-based procure-to-pay platform. This allows for seizing new opportunities and rapidly scaling investment up or down. By getting all of this corporate spend under management, large companies will be able to run advanced analytics and understand just how policy changes are affecting their bottom lines.
What to read next:
1CIA World FactBook 2014.
2Todd Bliman. Markeminder.com on 11/10/2016.
3World Trade Organization. 4/7/2016.
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