The ballots have been cast and in this century’s most historic election, Donald Trump is to become the 45th President of the United States of America alongside Republican majorities in the House and Senate. Much like the British referendum to leave the European Union, the election results have left the western political establishment in shock. The impact of the election on the global economy will not be fully felt until President-elect Trump takes office, however, it is clear that the undertone of nationalism has spread far more than the world predicted. In this post, we have outlined an international business outlook after The 2016 Election.
In both the case of Brexit and the US election, similar discourse reflecting a disenchantment with big business and the financial sector has come into play. As reported by Gross and Fidler of the Wall Street Journal, it seems clear that voters in the two Anglo-Saxon countries are seeking independence from the status quo, and pushing back against the causes of free trade and open markets, economic principles which have long been the hallmark of both governments.
THE WHAT: Variables Impacting International Business Outlook
With uncertain policy prescriptions, some within the business community are concerned about growth and corporate profits while others see the forecast as an opportunity for increased returns. In the wake of the election, it is important to consider and forecast for the uncertainties, volatilities, and potential policy changes that may impact your international business ventures in 2017.
A. Greater Uncertainty in International Business…
…Due to Regulatory Policy Changes
President-elect Trump has proposed a Pro-Growth Tax plan:
- The plan lowers the business tax rate to 15%. The current business 35% rate is one of the highest in the world, making domestic investment unattractive. It includes a 10% tax on repatriation, instantly bringing trillions of dollars back into the U.S. economy now parked overseas
as well as, a Modern Regulatory Framework:
- A complete regulatory overhaul that will level the playing field for American workers and add trillions in new wealth to our economy, with an intention to keep companies in the US, expand hiring and investment, and bring thousands of new companies to the US.
A recent report by Reuters finds that post-election investors have already turned their attention to Trump’s priorities, with particular attention on his plan to increase infrastructure and defense spending, provide tax cuts, and focus on bank deregulation. There is some concern that such expansionary policies may lead to inflation. Although the rating agency S&P Global confirmed a AA+ rating for the United States, it has also noted uncertainty about a future upgrade due to an unclear future path of government debt.
…Due to Trade Policy Changes
In Donald J. Trump’s 7 Point Plan To Rebuild the American Economy by Fighting for Free Trade, the President-elect lays out seven protectionist policy prescriptions. Most notable for the international business outlook are:
- A withdraw from the Trans-Pacific Partnership
- The renegotiation of NAFTA
- Plan of action for China, which will include: labeling China a currency manipulator, bringing trade cases against China in the US and at the WTO, and the use of every lawful presidential power to remedy trade disputes if China does not stop its illegal activities
Uncertainty exists among investors and economists who believe that such policy actions may result in a global trade war. In regards to the rest of Asia and Europe, each are hoping that their historically close ties with the U.S. economy will help them to sustain in the current climate.
…Due to Immigration Policy Changes
One of the most contentious topics in US politics, immigration is expected to become more difficult. In Donald J. Trump’s 10 Point Plan to Put America First, he lays out his intended policy actions. While unclear how such policies will be implemented, they are certain to have a direct impact on the international business outlook. The technology sector may be particularly impacted if tighter restrictions are imposed to gain access to the H-1B immigration visas.
B. Volatility In International Business
Although the election has caused market gyration/volatility in the major world stock markets, in the wake of election day, the market made gains. On Wednesday, stocks on Wall Street jumped, as investors and companies anticipate reflationary policies. Trading value and of particular interest, Gold soared to the highest since Brexit, as well as other industrial metals. While the volatility is certain to continue, there is belief among investors that at least in the short-term, Trump’s policies may further economic growth.
U.S. banking shares also fared well for a fourth straight session. In Europe, stocks initially made strong gains, however, have since turned negative. Asia-Pacific markets have also shown some volatility but rebounded. In India, Motilal Oswal Financial Services remarked that “While this global market volatility may continue for some time, fundamentals of the Indian economy are only getting better. We think this volatility only gives an opportunity for long-term investors to commit more money to their equity investment.”
Currencies throughout most of the emerging markets have experienced volatility in the wake of the election. Of particular interest:
- Mexican peso fell more than 9 % against the U.S. dollar
- South Korea won was down 1.7 %
- South African rand fell 2.3% against the U.S. dollar
- Russia ruble has strengthened against the U.S. dollar
Best Practices Moving Forward
While the future policy landscape is uncertain, there is no need for hysteria. Much like the economy during Brexit, while there was some volatility, the question to ask yourself is, “Can I afford to sit out of the global economy for four years”?
1. Understand Your Geographic, Cultural, and Psychic Distance
Given the political and economic landscape, it is increasingly important to consider the following when making your entry plan:
- Geographic distance
- Cultural distance
- Psychic distance
In order to ensure your competitive edge over your competition and to ensure no lost opportunity, the consideration of the above-mentioned distance factors, market attractiveness, and network relationships, as well as local human presence on the ground are vital.
2. Keep a light footprint
As we continue to hear more nationalistic rhetoric and policy prescriptions, the notion of investing in hard assets abroad just became significantly riskier.
As a result of this uncertain environment, it is best to keep the lightest footprint possible until the policy landscape has settled; this will ensure your ability to pivot and/or exit. Note that we are not suggesting you should pull back on your international strategy, but rather keep agile in your approach.
3. Use Lean & Global principles
- Test your market before jumping feet first
- Challenge your assumptions
- Create meaningful feedback loops and track your findings to ensure you understand and can act on the best opportunities
The Key: Utilizing an International PEO or Foreign Subsidiary as a Service (FSaaS) provides you access to an inherently adaptable service-oriented structure. This structure provides you with the ability to keep a human presence on the ground to identify opportunities and create feedback loops, while simultaneously ensuring your ability to leave at any time if the situation deteriorates.