Estimated reading time: 5 minutes
Businesses trying to navigate the turbulent waters of international trade during current storms can afford neither starry-eyed idealism nor the comfort of theoretical abstraction. Economists can and do tell us how the world could be organised more efficiently, more productively and in a way that provides the certainty and incentives businesses need to thrive – but there are other competing priorities shaping policy, and they’re in the ascendency.
So how did we get here, and where is ‘here’ exactly?
To paint with an incredibly broad brush, the decades preceding this one saw the gradual emergence of a consensus around the desirability of predictability in international trade. That sounds trite and perhaps even obvious, but it represented a considerable trade-off.
When we talk about “predictability” in international trade policy, what we’re actually describing is a series of commitments made by governments to their peers not to do things.
Through the World Trade Organization, free trade agreements, bilateral investment treaties, and more, governments worldwide signed legally binding deals, tying their own hands.
The logic was simple: “While there might be times I want to raise tariffs exponentially or regulate in an unfair way, the benefit of living in a world where no one is allowed to do that kind of thing outweighs any advantage I might gain from doing so myself.”
The first challenge for a modern business is that this logic is no longer compelling to a lot of governments.
The second challenge is that its fraying is not universal, but inconsistent and unpredictable, with much of world trade experiencing limited policy disruptions while individual sectors become battlefields.
The third challenge is that the logic of where the battlelines are drawn is not consistent, clear or apolitical. Governments are intervening in some sectors and not others, with motivations ranging from national security to environmental protection, with plenty of good old fashioned electoral populism sprinkled on top.
The combination of these three challenges is causing sleepless nights for C-Suite executives. Not because they threaten established trading patterns, but because of how hard they are to predict.
The business community can generally find ways to innovate and structure their business models around most trade barriers, onerous procedures or regulatory hurdles.
Yet this apparent agility masks the real costs of such pivots. Finding alternative suppliers, restructuring processes to adhere to new regulatory standards, and undertaking complex compliance and transparency exercises all come at a price.
The smaller the business, and the more frequent, unpredictable and radical the changes, the steeper the price.
Tangible next steps: How to respond to changing circumstances
Faced with this reality, what are practical steps businesses might consider in shaping their own responses, and their messages to government?
I can only offer a few suggestions, none of them a panacea.
- First, accept and internalise that trade instability is here to stay for the foreseeable future, and that the international rules-based trading order built since 1947 is no longer a vaccine against it.
Faced with priorities like national security, climate change, environmental protection, reindustrialisation, income inequality and populism, major governments are increasingly willing to act in ways contrary to the spirit and letter of their international treaty commitments.
“This could be challenged as illegal under international law, and will undermine the rules based trading system” is simply not a slam-dunk argument anymore in several major capitals. This, in turn, drives pragmatic divergence even in places that still hold the system dear, like the European Union, as playing by the rules while your trading partners flout them becomes increasingly politically untenable.
- Second, understand and map out the exposure of your particular sector. The trade disruption is not happening evenly across the entirety of global trade, and likely will not do so absent an utterly apocalyptic geopolitical event like a shooting war in the Taiwan Strait.
For a range of reasons, some logical and some purely political, governments are confining the bulk of their policy firepower to a subset of internationally traded goods and services, with the giants (the US and China) also disproportionately targeting one another. Some of these are intuitive, others far less so.
There are battlelines being drawn over cars and electric vehicles, semiconductors and critical minerals, as well as at the cutting edge of research into quantum computing and artificial intelligence.
However, other sectors from soybeans to whiskey can end up in play as governments look to weaponize politically sensitive producers in the hopes of causing political pain to their geopolitical adversaries. Understanding how likely you, your upstream suppliers, or your downstream customers are to end up in the crosshairs is difficult, but an educated guess is possible and can be invaluable in strategic planning.
- Third, frame your messages to governments about the policy options they’re considering in light of the new reality. Increasingly, arguments will need to accept the government’s underlying diagnosis of problems such as national security threats, deindustrialization, unfair competition, or carbon leakage in order to be heard at all.
Continuing to speak about the importance of systemic stability, open markets and good competition isn’t without merit, but governments will listen first and foremost to those that they believe are interested in solving the problems they view as most pressing.
In a similar vein, identify where the fights worth fighting may lie – and appreciate that these may often be on the implementation of an idea rather than at its highest levels. No business is going to convince the European Union to abandon its signature Carbon Border Adjustment Mechanism (CBAM), and it will only alienate and infuriate policymakers if it tries.
Yet, the finer details of how the CBAM operates, how it is enforced, and how it evolves are a far more fertile field for engaging constructively with policymakers and officials toward outcomes that make a real commercial difference on the ground.
We are headed into uncertain times and business is already scrambling to adjust to new realities. The foundations of the old status quo have weakened, and engaging with the new order will require that business becomes even more astute, with more sensitive political radar and one eye on the great geostrategic game. Yet uncertainty properly managed can be weathered and even unearth new opportunities. I hope fortune favours you all.
