The global business landscape has improved over the past year, and business leaders are growing more confident about opportunities overseas. With growth exceeding forecasts and Chinese demand finally stabilizing, 2017 promises to be the first year in living memory that no major economy falls into recession.
The JPMorgan Global Confidence Index is nearing a three-year high, and the 2017 JPMorgan Chase Business Leaders Outlook report–which provides a snapshot of the current business environment according to executives from midsized companies—shows that optimism about the global economy has tripled over the past year. Seventy-six percent of these executives expect the new administration will have a positive impact on their businesses.
Despite this rise in global business optimism, the report reveals a complex mix of attitudes toward global trade—the opportunities found in rapidly growing overseas markets are enticing, while new risks to international supply chains have emerged.
Executives’ rising optimism has been tempered by political uncertainties. The Brexit referendum and the emergence of Euroskeptic political parties across Europe have raised concerns about the long-term future of the European Union. No comprehensive global trade deal has been negotiated since the creation of the WTO in 1994, leaving large swathes of international commerce dependent on an increasingly outdated legal framework.
In the US, the Trump administration has pulled out of the Trans-Pacific Partnership and is taking a hard look at trade treaties such as NAFTA—with the president recently deciding not to terminate the agreement in favor of attempting a negotiation. The president is also evaluating tariffs on a wide range of goods imported from China, Japan, Mexico, Canada and Germany—a move that could spark trade conflicts with America’s largest trading partners.
Many companies that depend on international trade are growing nervous about the potential risks associated with changes to US trade policy. According to the report, 30 percent of midsized company executives are concerned about how changes in trade policy may affect their businesses. If the administration imposes tariffs and dismantles trade agreements, companies may lose some of the important benefits of international trade.
As midsized businesses become more integrated into the global economy, they are more sensitive to risks. According to the report, the surge in optimism about global conditions was not accompanied by an increase in the number of businesses planning to expand overseas in the coming year.
In an age of tightly interconnected global supply chains, changes to trade policy could create unintended consequences. For example, a tariff on goods manufactured in China would inevitably affect the nations that supply the raw materials, components and intellectual property that go into Chinese products. For every dollar of goods exported to the US from China, JPMorgan economists estimate that only 60 cents of value actually originates in China.
Consider a tablet PC made in China. The device might be assembled in a Guangzhou plant, with a screen manufactured in Korea. Its memory chips could be imported from a Taiwanese semiconductor foundry, the processor designed in Austin, and it will almost certainly run an operating system licensed from Silicon Valley. Before it ships, the tablet will be preloaded with apps developed by startups across the US and Canada.
Since US exports are dominated by manufactured goods, services and intellectual property, the impact of tariffs would be felt acutely by American businesses. Eighty-five percent of the value of US exports is sourced domestically, giving American manufacturers a high degree of exposure to any retaliatory tariffs.
The Business Leaders Outlook report indicates that most businesses planning to expand overseas are not searching for cheap imports; rather, a full 74 percent of respondents report that they are seeking access to rapidly growing consumer markets, and for good reason—according to the World Bank, close to 95 percent of the world’s buying population lives outside the US.
In recent years, exports have driven 46 percent of American GDP growth, and every $1 billion in new export activity creates approximately 6,000 new American jobs. Businesses are seeing opportunities in the vast consumer class that is emerging overseas, particularly in Asia, and they are laying the groundwork to tap into this growing market and establish closer relationships with suppliers.
Not every recent political development is related to trade—the promise of corporate tax reform could level the playing field and allow shareholders to repatriate profits trapped overseas. A cross-border tax proposal could reduce the tax burden on exports, making American goods more competitive abroad.
Despite the risk of trade conflict, the new administration’s cabinet is led by business veterans who understand the complexities of international commerce. Likewise, companies that monitor the administration’s proposed policy changes and prepare strategically for every outcome should be poised to succeed in the new international business landscape.
J.P. Morgan can help businesses navigate the regulatory landscape as they pursue new markets abroad. From managing currency risks to forging new partnerships abroad, our commercial team has the experience necessary to help your business thrive on the global stage.
This article was originally published in Business Insider.
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