New political risks are forcing companies to reassess investments, while anti-globalist positions are adding complexity.
Many factors are contributing to this climate of uncertainty and volatility, including the June 23 United Kingdom referendum to secede from the European Union, a more aggressive China and Russia, and an unpredictable President Trump.
Trump’s ambiguous statements are keeping many in the business community guessing. For example, he has expressed interest in applying a 45 percent tariff on Chinese imports and a 35 percent tariff on Mexican goods — actions that could significantly disrupt supply chains and cost 5 million U.S. jobs, according to the Peterson Institute for International Economics, a Washington, DC-based think tank.
Additionally, his executive order to exit the Trans-Pacific Partnership could empower the Chinese in East Asia, threats to renegotiate or terminate NAFTA could alter long-standing beneficial trading relationships, and other anti-globalist actions could severely undermine U.S. economic growth.
What’s behind President Trump’s anti-globalist positions?
Globalization is Like Fire
Trends in trade, globalization and automation were strongly reflected in the November 8 election of President Donald Trump. But the emphasis was on the downside.
International trade delivers approximately $1.7 trillion in benefits to the U.S. economy, says Matthew Slaughter, professor at the Tuck School of Business. And it accounts for nearly one in every five American jobs, according to the Business Roundtable, an association of chief executive officers of leading U.S. companies.
Trade has become increasingly important since markets outside the United States represent 80 percent of global purchasing power, 97 percent of economic growth, and 95 percent of world consumers, reports the U.S. Chamber of Commerce.
Furthermore, globalization has lifted millions of people out of poverty and may have benefited the United States more so than any other country. But globalization is like fire: it can keep you warm, cook your food or burn your house down. Unfortunately, it has created new challenges, especially for companies with low-technology products and for employees with limited skills.
Automation and Jobs
Automation empowers fewer workers to generate greater output in less time. And the resulting productivity gains are a major contributor to improvements in our standard of living.
But there’s a problem: an increasing number of jobs are being replaced by machines and robots. In fact, automation — not offshoring to low-cost countries — accounted for more than 85 percent of job losses in manufacturing from 2000 to 2010, says the Center for Business and Economic Research at Ball State University.
And that’s not all. Within in two decades nearly half of total U.S. employment is at risk due to automation, according to studies published by Oxford University and the McKinsey Global Institute.
What to Do
The inability to adapt to fast-paced changes produced by globalization and automation have caused fear, instability and job losses among significant numbers of people in the United States and Europe. This reality was a major focus of Donald Trump during his Presidential campaign, by supporters of Brexit, and it continues to be echoed by populist politicians in Europe.
But history tells us that anti-globalist positions, like raising barriers to trade and investment, are not a viable solution and could do tremendous damage to companies and workers in the United States and around the world.
On June 17, 1930, President Hoover signed the Smoot-Hawley Act that raised tariffs nearly 60 percent. Due to retaliation, U.S. exports decreased by nearly two-thirds, growth in domestic industries slowed, and the unemployment rate in the United States rose to 25 percent in 1933.
Today, companies need to prepare for higher levels of risk and anti-globalist legislation. For some firms, this may mean building larger inventories, reassessing site selection decisions, and diversifying sources to reduce supply chain disruptions.
This article was originally published in the Milwaukee Business Journal.