This whole tariff thing may resolve, but the real loss will be trust. The back and forth, unpredictable style of Trump makes many uneasy about what the future will hold. It is going to start the ball rolling for businesses to develop long-term plans to avoid of these types of risks. Taking quantifiable and reasonable risks is inherent in running a business successfully.
Lately, the securities markets are like a manic depressive with the tariff “negotiations”. When markets fluctuate so erratically, it indicates that the markets are wavering on their assessment of future earnings.
Let's take a step back from the securities markets. The market reflects the future expectations of business earnings. So, let's look at the businesses.
As you can imagine, business leaders are feeling a lot of stress from Trump's mercurial "negotiation" style. You can be sure that they are looking for ways to avoid the risks caused by these unpredictable moves. The number one goal of business leaders is profitability. They have enough to worry about without adding huge uncertainties that significantly and directly affect their companies’ profitability.
That means shifting production overseas in many cases where tariffs are not a risk. This enables them to have a better handle on their profitability. Already, capital expenditure activity is dropping off. Asset heavy businesses have to think about the long-term ramifications of capricious government policies. It takes a long time to shift production and supply chains. It is no easy matter. Asset light businesses, such as software, are much more nibble with their footprint. This makes shifting production to other venues infinitely easier.
Over the twentieth century, America has shifted from a highly manufacturing focused economy to a technology economy.
While it is no easy feat for any business, technology companies have much less restraints to shifting operations overseas. Furthermore, technology builds capabilities that add to high productive efficiencies and, thus, higher paying jobs.
Every economy moves through several phases as they evolve in their development.
The development of an economy begins with having coordinated human effort to build and produce goods and services. While this phase builds a higher level of productivity versus uncoordinated individual efforts, it is inefficient in comparison to future phases of economic development. Economies with a huge number of people who lack capital are characteristic of this phase. Africa, at its current stage of development, is an example of this phase. They have many people, but capital and technology is insufficient.
Next, capital is imbued to build products more efficiently with machinery and the economy improves to a great degree. Think of automation of production lines using machines. America went through this phase during the late 1800’s and early 1900’s.
The last step is when technology is imbued in the economy. Technology multiplies the use of capital to grow the economy at a highly enhanced rate. This is computerization of machines to simplify and quicken the production cycle, while enhancing quality. Computers are much more effective in making complex adjustments in a consistent way.
The difference in productivity from the first stage to the third stage is exponential!
Much of the world’s technology was rooted in developments achieved in the US. Allowing others to “steal” this intellectual property should not be permitted. I completely agree with Trump on this, but this heavy handed approach will hurt the very manufacturers and workers it is intended to protect.
Trust is an intangible that is invaluable in business. Once lost, it is very hard if not impossible to recover.
Trust has been lost between haves and have nots, labor and management, shareholders and management, consumers and producers, and the electorate and politicians. Maybe this whole “negotiation” has brought the trust issue to a critical juncture. It doesn’t bode well for the future of America or the world. Part of the problem is the excessive focus of winner take all. The world moves forward when we all move together. Sure, some will do better than others, but it doesn’t have to be a zero sum game.
