Doing Business in the Post-September 11th Environment Requires New Strategies

Prior to the September 11th terrorist attacks, the World Bank projected U.S. and other OECD country growth to reach 1.1% in 2001 and to 2.2% in 2002. However, since September 11th, the 2002 projection has been modified downward by .75-1.25 percentage points — and this is assuming business resumes to normal by mid 2002.

Projections for developing countries also were lowered. Original World Bank forecasts for 2001 and 2002 were 2.9% and 4.3%, respectively. Recent estimates for 2002 have been downgraded by half to three-quarters of 1%. Furthermore, the World Trade Organization forecasts growth in world merchandise trade to drop from 12% in 2000 to 2% in 2001. A major factor is the anticipated decline of information technology product expenditures. Overall, this is expected to result in fewer international sales and higher credit risks.

New Challenges to Trade and Globalization

Federal Reserve Chairman Alan Greenspan recently said “Terrorism poses a challenge to the remarkable record of globalization.” A global society, he noted, reflects a more open economic environment in which participants are free to engage in commerce and finance wherever the possibilities of increased value added arise.

“Fear of terrorist acts,” Greenspan said, “has the potential to induce disengagement from activities, both domestic and cross border.” If we allow terrorism to undermine our freedom of action, he commented, we could reverse some of the gains achieved by globalization.

The “Just-In-Case” Inventory Strategy

In addition to slower economic growth and reduced global trade flows, other terrorist activities, the war in Afghanistan, and civil unrest abroad all could affect your supply chain, disrupting your sources of raw materials, components, and finished goods.

This means if you’re using a “just-in-time” inventory system, you should consider increasing the inventory to cushion potential delays on inbound shipments. And it may be necessary to place overseas orders sooner, accounting for additional security measures.

Vulnerable Sources of Supply

In 2000, U.S. imports from Asia totaled $484.7 billion or 40% of all U.S. imports. Singapore and Malaysia ranked as the United States’ 10th and 12th largest suppliers. These two, combined with Indonesia, India, and the Philippines, accounted for U.S. merchandise imports of $80 billion. Major U.S. imports from these countries include computer equipment and parts, automated processing equipment, semiconductors, and other integrated circuit devices.

In 2000, U.S. imports from the Middle East totaled $38.9 billion or 3.2% of all U.S. imports. Although this may appear minimal, the Middle East is a major supplier of oil-related products to the United States, Europe and Japan. In fact, Saudi Arabia alone possesses over one-fourth of the world’s proven crude oil reserves. Disruptions in this oil supply could have a significant impact on industry, especially in Japan.

Proximity to terrorist groups alleged to be associated with Osama Bin Laden throughout Southeast Asia and the Middle East presents dangers to regional shipping lanes and ports. Indonesia, which has a population of over 200 million people and the world’s largest Muslim concentration, is currently on the U.S. State Department’s travel warning list. Radical groups there have threatened to attack U.S. interests and expel American citizens.

The Strait of Malacca, a narrow and highly trafficked shipping lane between Malaysia and Indonesia, also presents a particularly vulnerable point. However, since much of the high-tech goods imported by the United States from this region is primarily shipped via air, sea lane disruptions will have less of an impact.

Foreign Investors Are Proceeding with Caution

Decisions on foreign direct investment are generally guided by the ability to generate growth and profits. As a result of the terrorist attacks and related security threats, however, economic stability has become a major consideration. Consequently, investment destined for Indonesia, India and other countries in the region is projected to decrease in the short-term.

The recently passed U.S.-Jordan free trade agreement could affect this trend. U.S. trade with Jordan, the fourth country after Canada, Mexico, and Israel to enter a free trade accord with the U.S., is small. In 2000, the United States exported $313 million to and imported $73 million from Jordan for total two-way trade of $386 million.

The agreement will lead to greater bilateral trade. It also will increase incentives for foreign investors to set up facilities in Jordan in order to achieve greater access to the United States. Importantly, the free trade agreement sends a strong message that opportunities exist for other Middle Eastern countries interested in such an accord.

Insurance and Transportation Costs Are Rising

Preliminary estimates by the Conference Board, a global research organization, put the World Trade Center losses at $60 billion, twice as high as the 1992 losses attributed to Hurricane Andrew.

With reinsurers bearing the majority of the losses from the attack, insurance rates are expected to soar. But, even before the destruction of the World Trade Center, rates for most insurance lines were rising. As a result, rates for commercial property, catastrophe, aviation, workers compensation, personal accident, and marine insurance are likely to increase further.

Transportation costs also are anticipated to increase due to new cargo security surcharges and border delays. Some insurance companies have increased the number of countries subject to “war risk” surcharges. This means shipping lines must notify marine underwriters before their vessels move into designated waters, as these vessels may be subject to significant additional insurance premiums.

Europe Is Struggling Too

The 15-member European Union (EU), with a population of 375 million, has been negotiating with 13 countries over accession. However, recent evidence of terrorist cells throughout Europe may lead to restrictions on the free movement of labor and calls for stricter immigration policies. This could result in a change in the accession timetable.

Slowing economic growth in Europe, coupled with security issues and concerns — which will probably become more important — is likely to slow the EU’s pace of expansion. As always, the EU’s market size impacts U.S. trade and investment plans across the Atlantic.

Design New Strategies

In today’s volatile environment, many factors can impact your ability to keep your products steadily moving while absorbing additional costs. To accommodate these new realities and seize opportunities while minimizing risks, it’s necessary to reassess your global strategies.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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