Global Ties Buoy International Trade

Global Ties Buoy International Trade
by Denise A. Harrison

Many pundits predicted a retrenchment in international trade after the September 11th terrorist attacks - this forecast has proven to be incorrect. In 2002 we find a very different scenario, the growth in world trade has in fact slowed but not decreased. This deceleration resulted from a worldwide economic slow down that had started well before the terrorist attacks.

Historically attacks and wars have had a significant effect on international trade flows; the prime example is the impact, on trade, of the assassination of Archduke Ferdinand in Sarajevo in 1914 and the commencement of World War I. Prior to this shooting, inter-country and inter-continent trade had reached record heights due to advances in rail and shipping transportation. After this attack trade took almost half a century to recover to its pre-World War I levels.

During the 1990's many companies looked to global markets for expansion and looked to low cost global suppliers to lower costs, increasing global interdependence to a point where it is difficult to retract the steps made to this point.

The Wall Street Journal reports that Applica, a manufacturer of small appliances (irons, etc.) is looking to enhance its links to its offshore production facilities. Due to the cost advantages of offshore production it is linking its factories up to Wal-Mart sales data to determine manufacturing production level. President Harry Schulman, sees that the benefits of low cost offshore production far outweigh the disruption caused by the terrorist attacks.

In addition to continued investment in offshore manufacturing capabilities, other companies continued their investment in new international markets. Starbucks opened 70 new international locations between September and November of 2001. While the terrorist attacks brought to light potential weaknesses in some supply chain assumptions, companies are changing their inventory requirements and developing contingency plans rather than pulling back from selling, sourcing or manufacturing abroad.

Now economists argue as to whether or not 2001 really was a recession year or just on economic slowdown. Well, for most people it does not matter what the academics call it, it was a painful time. However, consider the shocks to the economy including:

The bursting of the speculative dot.com bubble in 2000.
The terrorist attacks of September 11th.
The Enron bankruptcy and the subsequent focus on corporate financial reporting.
The turbulence in Latin America: changing leadership and return of leadership in Venezuela, the bankrupt economy in Argentina.
The recent unrest in the Middle East.

In spite of these events, the economic rebound has been faster and stronger than originally expected. The manufacturing sector was in a slump before September 11th, however, the technological advances from the "new economy" allow companies (even "old economy" companies) to anticipate more quickly and make workforce and inventory adjustments more quickly. "Manufacturers' inventories peaked at 44 days worth of shipments in 2001, compared with 53 days worth in the 1991 recession." (Wall Street Journal).

Outside of manufacturing, the financial markets are more able to adapt to events than they had previously. Formerly credit crunches squeezed regional mortgage markets during an economic downturn. Now mortgages are packaged into securities and sold globally thus enhancing liquidity for consumers to buy / refinance houses when interest rates are low.

Some "new economy" companies found it more difficult to anticipate the cycle - Cisco wrote off $2.4 billion in inventory. Some industries were wrapped up in their own hype and will continue to work off or write-off inventories that were bloated beyond the demand for their goods and services. These industries, telecommunications and some sectors of technology will slow the recovery's pace as they scale back and lower their expectations concerning future market potential.

Corporate profits will be another damper on economic growth. As more and more companies need to restate their financial statements, corporate profits will become more realistic, but lower than original expectations. Financial statements that give a more realistic picture of corporate performance will replace the financial wizardry of the 1990's. The lower and restated earnings will hinder stock appreciation, dampening the wealth effect created at the end of the 20th century. The wealth effect will contribute to slowing consumer expenditures as debt burdens continue to rise for consumers.

The short-term outlook is mixed; pockets of industry stagnation and disappointing corporate earnings, due to more realistic accounting, will temper growth caused by increased demand due to renewed economic activity. Even with technology enhancements, companies will find demand difficult to predict as the economy takes some twists and turns before it returns to a stable growth period.

Long term
As was mentioned in last quarter's Compass Points article, the long-term outlook is good, as different industries capitalize on the technology advances in the late 1990's. As companies reorganize their work around these advances productivity will continue to increase.

Global Outlook
Companies will continue to source, manufacture and sell internationally, even as disruptions occur in the Middle East and other politically unstable regions. Emerging technologies and trends will develop in unusual regions, regions not seen as leaders, as knowledge becomes ubiquitous due to changing technology. The winners will be on the lookout for emerging trends, the laggards will assume that trends will be set by the historical leaders and miss out on new waves of growth.

Denise Harrison is a consultant with Center for Simplified Strategic Planning, Inc.
She can be reached via e-mail at harrison@cssp.com.

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