Are You Protected from Protectionism?

The last time we tried protectionism in the 1930’s it didn’t go very well. As countries put up barriers to protect their own industries, other countries followed suit, drying up markets and slowing down trade.

For the first time in 80 years there is a nationalistic push towards protectionism growing in many parts of the world. This is most concerning in countries like the US and Britain, which are taking increasingly strong stances, but we have also seen rumblings of discontent in Italy, France, Poland, Hungary and even the Netherlands (who basically started modern globalism in the first place)!

Despite history’s lessons, this is not going away. Jeff Immelt of GE, in a talk with GE investors, predicted that protectionism is on the way and that GE would be ready to adjust to shifting sands of trade.

The challenge is especially acute in the US and Britain — the most vocal nationalists — in that if they continue with this trend, even with just the rhetoric, they will lose trading partners and induce higher tariffs. This will drive up prices and drive down product quality (if history is any guide) which will be significant drains on those two economies.

Beyond products there is a risk that we will see constraints to the movement of capital especially in and out of the U.S.

This foreshadows the type of depression-encouraging actions that led to the Great Depression.

Happily, we don’t live in the 1930s. Today the world is much more connected and open than it was. The US and Britain (and even Italy and France) represent only a fraction of the world’s population and the rest of the world may well continue along the path of sharing and trade.

So, we will likely see protectionism in some parts of the world with new trading blocs forming around them. Like Spain under Franco, some countries may opt for economic autarky, but that doesn’t have to bring down the global order.

The rest of the world did fine as Spain floundered.

If countries like The U.S. and Britain start erecting barriers and reneging on agreements, new trade blocs will likely form. Canada and Mexico continue to strengthen their relationships with China and Europe, providing these economies circuitous trade lines around Britain and the U.S.

We are starting to see a shift towards a more powerful China as they begin to step into the power vacuum created by the United States. In my talks with many Davos attendees, this dynamic was made even more evident as the Chinese showed up with 400 government representatives and the U.S. had none.

Many people aren’t taking China seriously but this wouldn’t be the first time that smart people underestimated China. See our post on the rise of China.

So what does this mean for you?

For companies in the US and Britain it means preparing for protectionist policies. Prices are likely to increase with tariffs and the nature of competition will change. If you are sourcing product outside of the US, you will now need to prepare for tariffs.

If your customers are domestic, you may be stuck with higher input prices but less competition which may work out.

If your customers are international, you will want to follow the GE lead and move some operations out of Britain and the U.S. That way you will be able to take advantage of the new blocs and avoid some of the business constraints.

Key questions to focus on:

  • How ready are you for higher tariffs?
  • If the US were to constrain capital flows and increase tariffs what does this mean for your business?
  • How will your business trade with new, emerging trading blocs?
  • How dependent are you on selling to export markets from the U.S. and Britain and how can you mitigate the risk of retaliatory tariffs?
  • Think also in terms of labor: if you use international labor for information work this could become more difficult as well.

The progression of protectionism is not well defined and there are important uncertainties:

  • Will we see tariff increases or just rhetoric?
  • Will rhetoric be enough to shift trade blocs?
  • How can the movement of capital be constrained and will this happen?
  • How will old powers deal with emerging powers stepping into the vacuum. Will we see conflict?

How will protectionism or just the trend towards it — whether we arrive or not — impact your business?

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