It only takes a quick scan of any cable news network to realize that we have entered a whole new age of uncertainty. For many business leaders, it may be apropos to dub it the Age of Uncertainty.
Tariffs, tax cuts, energy policy, interest rates — these are just a handful of the major variables in play right now that could have a massive impact on near- and longer-term macroeconomic activity. It begs the question: How can businesses that operate in this environment hope to accurately forecast growth when the core policies that will help determine that growth are in flux?
The Volatility Economy
Take tariffs, for instance, arguably the most visible sign of the changing business landscape. Today, 25% tariffs on goods from Mexico and Canada officially went into effect, along with an additional 10% tariff on Chinese imports, which was added to a 10% tariff introduced in February. China responded quickly with retaliatory tariffs on U.S. agricultural goods, and Canada announced its own plans to impose 25% tariffs on U.S. products. Furthermore, according to the latest reports, the European Union is next in line. Although the impact of these actions will likely be significant, just how significant varies depending on whom you ask.
Critics of the tariffs point to the automotive industry’s heavy reliance on factories and suppliers in Mexico, chip makers’ giant manufacturing operations in China and Mexico and the basic materials industry’s close links to Canada as big potential risks. Advocates say domestic manufacturers and companies with heavily diversified supply chains, and of course, the U.S. government, could see significant business gains following the introduction of new tariffs. It is worth noting here that in 2019, during the Trump administration’s first term, tariffs on solar panels, washing machines, steel, and aluminum brought in some $79 billion in direct revenue to the government.
The conclusion to be taken from all of this is that major global trade wars do not affect all stakeholders in uniform — or even predictable — ways. The key factor separating businesses that succeed amid this type of volatility and those who are crushed under its weight is agility. Companies need to be able to see three steps ahead and around corners to develop the kinds of workarounds and course corrections that allow them to thrive in this type of fast-changing economic environment.
The Hits Keep On Coming
The volatility doesn’t stop with tariffs. The U.S. House of Representatives’ recent passing of the Republican’s budget resolution should allow them to extend the tax laws enacted under the 2017 Tax Cuts and Jobs Act, which include $4.5 trillion in tax cuts over the next 10 years. Exactly how that will affect businesses remains to be seen, but one thing is certain: corporate tax departments will need to shift gears from the strategies they were deploying under the Biden administration’s Inflation Reduction Act.
Add to that the uncertainty surrounding the future of global environmental, social, and governance and sustainability reporting requirements, the international implementation of the global minimum tax, and widespread geopolitical volatility. This creates a recipe for many unknowns in corporate growth forecasts for the coming months.
Predicting The Unpredictable
Fortunately, there are some tried and true approaches to getting out in front of these types of unpredictable policy swings — many of which were developed and refined during the first Trump administration. The first step is to develop a stress-testing mindset when forecasting future growth. The most important question corporate finance, risk and global trade professionals can ask themselves right now is: “What if?”
Thankfully, today, that wildly open-ended and hard-to-quantify question can be answered with predictive analytics, global trade management, and corporate tax software that is updated in real time as regulatory and policy changes take effect. While technology has made scenario testing and data collection easy, the challenge for business leaders is now to think creatively about all of the possible scenarios that could affect their businesses.
The other critical variable is flexibility. Businesses need to be ready to make big moves quickly, whether that means developing flexible supply chain models that can adapt to overnight changes in demand, supply, or market conditions or even moving key personnel and functions to different parts of the world. Big businesses have been the beneficiaries of a global economy for a long time. Now is the time to use that global reach to create flexible options for the future.
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