This commentary discusses important economic causes and effects beginning in 1971 in the contexts of ongoing globalization, U.S. net trade deficits after 1970, and world trade. It includes resultant recommendations for business owners and their advisors.
A brief U.S. trade history lesson that begins in 1960 is included. It is a history:
- seldom highlighted or discussed by economists and central bankers.
- I think explains much of our current globalized business structure.
- I think of as a poster child – or symbol of a trend or circumstance – for globalization and world trade.
Why is globalization and world trade a big deal for business owners and their advisors?
Multiple international trade negotiations are certain to continue through 2018 and beyond. These negotiations will culminate in trade agreements that are likely to influence the world and individual country economies for years if not decades to come.
I believe issues around globalization and international trade:
- are highly likely to become an ever bigger deal for many business owners – and hence their advisors.
- should be seen by business owners and their advisors as:
- important business value influencers.
- promoters of near-term timing of business transition planning and execution.
Important economic causes and effects that contributed to getting us where we are today
I believe the following were and continue to be particularly important causes and effect events from and after mid-1971.
History of U.S. annual net trade surpluses and deficits
I believe understanding the history of U.S. trade before and after August 1971 goes some distance to explain the difficult – and perhaps in the end untenable – position the U.S. and its Federal Government currently find themselves in. This where I think a particularly important question is: does the U.S. have the ability to enforce significant trade protectionist policies without materially impacting its inflation rate and without progressively losing important world economic influence?
Data incorporated in the following three charts can be found at United States Balance of Trade: 1950-2017.
This first chart shows the annual U.S. net trade surplus for the eleven years ended 1970 leading up to President Nixon’s August 1971 proclamation that the gold price would float freely, and that resulted in the U.S.$ becoming the world reserve currency. In 1971 the U.S. experienced a net trade deficit of $1.3 billion, where the goods portion of that deficit was net deficit of $2.3 billion and the service portion was a net surplus of $958 million.
The second chart shows the post-1971 history of the U.S. net trade deficit. With the exceptions of 1973 and 1975 the U.S. has run a net trade deficit in every year since 1971. At December 2016 that cumulative net trade deficit exceeded $11 trillion (with a ‘t’).
Economic theory suggests that over time a country’s annual net trade surpluses and deficits will cancel each other out. Obviously in the case of the U.S. this theory has not held, and continues not to hold. Currently the U.S. typically experiences a further net trade deficit typically in a range of $40 – $50 billion (with a ‘b”) per month.
This third chart compares the U.S. cumulative net trade deficit to the U.S. national debt after 1971. There clearly are many influences on U.S. Federal Government deficits and its growing national debt beyond its trade deficits. However, suffice to say the parallelism – particularly after 2001 – shown in Chart 3 is interesting.
The United States as the world’s dominant economy
The United States continues to be the world’s largest economy. The following chart shows 2016 nominal (inflation included) gross domestic product, and puts the comparative size of the U.S. economy in perspective. The European Union is comprised of 28 countries that includes the United Kingdom and the 19 Eurozone countries. Canada, as shown in the chart, was the world’s 10th largest economy in 2016.
That said, it is easy to argue its continuing monthly net trade deficits means that every month the United States becomes ever more dependent on its foreign country trading partners. As we begin 2018 it is clear President Trump and his band of merry men:
- are more obvious in their stated U.S. centricities than has been the case with the last three administrations.
- are focused on renegotiating international trade agreements in favor of the U.S.
- seem to believe that tougher U.S. trade policies will result in repatriation of U.S. jobs lost to globalization and a stronger U.S. economy.
Consider these three things in the face of:
- ever increasing U.S. (and other countries) debt burdens – both accounted for and not accrued on its books.
- the easy to make argument that the low-priced retailed goods purchased by Americans has resulted – particularly after 1999 – in U.S. Main Streeters retaining a higher standard of living than would have been the case in a ‘made in America’ economic environment.
- arguably a likelihood that replacing low wage offshore jobs with U.S. higher wage jobs is likely to be inflationary, perhaps materially so.
- ongoing rapid technological advances that over time in many cases seem more likely than not to reduce jobs on a net basis.
- increasing wealth disparity in the United States and other democratically governed developed countries.
- seemingly increasing U.S. societal disruption and related incremental government and private sector costs.
Is commercial isolationism (i.e. de-globalization) dangerous?
Deglobalization is the reverse of globalization. It is the process of diminishing interdependence and integration between country-specific economies. In a deglobalization environment trade and investment between countries declines.
Stated differently, deglobalization promotes isolationism in a world that is rapidly becoming ever more complex economically, environmentally, and socially. It is easy to argue U.S. promotion of increased economic isolationism is a dangerous thing for all countries, including the U.S. itself.
If you are reading this you might also want to read Globalization Is the Only Answer https://goo.gl/JDx85e a 2016 Project Syndicate article produced by The World Bank. Written by a former Costa Rica trade minister in the after-math of the UK’s Brexit vote and the pre-November 2016 U.S. Presidential vote, the article states two simple propositions, being that:
- no country can deliver long-term prosperity to its people on its own.
- closer international cooperation and economic integration is the only way forward.
Consider whether those two propositions make sense to you.
The big questions: (1) Where from here? and (2) What should business owners do now and going forward?
Where from here?
Every thinking person needs to reach their own opinion on this question – and then continually rethink that opinion as ongoing events unfold and updated news – perhaps with the odd black swan event thrown into the mix – comes available.
For what it is worth, every day I look forward with curiosity, interest and concern to U.S. evening television news where I expect to learn about more of, and more about, Mr. Trump’s latest thoughts, plans, and the potential impacts of those things. And this where Mr. Trump is far from the only world stage player who might make the “news” on any given night by contributing their own ‘extra little bit of uncertainty’ to our world.
For me the only certainty is that we currently live in a state of great uncertainty – or perhaps better said ‘in interesting times’. This where may you live in interesting times is an English expression purported to be a translation of a traditional Chinese curse. While seemingly a blessing, the expression is always normally used ironically, with the clear implication that ‘uninteresting times’ of peace and tranquility are more life-enhancing than interesting ones, which from historical perspective usually include disorder and conflict (from Wikipedia).
What should business owners and their advisors do now and going forward?
Where from a high-level perspective the only certainty is uncertainty in an economic and business – or for that matter any – environment, I suggest:
- business owners need to plan for the best, but anticipate the worst.
- advisors to business owners need to do everything they can to assist business owners to do that.
I spend a great deal of my time focused on what I think business owners ought to do in what I see as our rapidly changing world and country-specific economic and business environment.
The best I currently can suggest business owners do is focus as they may never have done before on:
- forcing their intellectual intelligence to overrule their emotional intelligence when making important decisions that may impact the future prospects of their business.
- putting the interests of their business ahead of individual and collective business owner ego and perceived short-term financial needs.
- assessing the long-term viability of their business in the face of ongoing:
- business combinations in their and their supplier’s and customer’s industries.
- technological advances that may positively or negatively impact the free cash flow of their business.
- government changing and escalating societally driven spending programs and resultant increasing debt burdens- and how those things may directly and indirectly impact the future cost structure of their business.
- balance sheet and enhanced balance sheet strength.
- ongoing transition strategizing and execution where that almost certainly will enable maximization of future choices.
The best I currently can suggest advisors to business owners do is continually focus their business owner clients on business transition strategizing and execution – irrespective of the outcome such client transition planning and execution ‘done right’ might have on their own advisory practices.
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Ian R. Campbell FCPA FCBV
Ian R. Campbell is a Canadian business valuation and transition expert. He is the author of several Business Valuation texts and of 50 Hurdles: Business Transition Simplified. The Canadian Institute of Chartered Business Valuators recognizes his contribution to the Canadian Business Valuation Profession through the annual The Ian R. Campbell Research Initiative.
He writes The Business Transition and Valuation Review newsletter for business owners and their advisors.
You can reach him by email at firstname.lastname@example.org, or by telephone at 905 274 0610.