GeoLegal Weekly #45 - Protectionism of Mass Destruction

Globalization isn’t dead but the rules enabling it are on their way out. That means you’re potentially a soft target for PMD - Protectionism of Mass Destruction.

The world has been trending away from a sense of “global values” since the 2008 Global Financial Crisis shattered the hypothesis that the Western democratic capitalist model could be a universal one way bet for taming risk and unleashing growth.  

In the years since, China has built alternative economic infrastructure like the Asian Infrastructure Investment Bank and the Belt and Road Initiative. Other bets on convergence like the EU have seen the (Br)exit of once-critical members. And countries have grown increasingly comfortable using national security suspicion as a justification to protect industries -  Japan declaring  7/11 “core” to its national security is just one novel example. 

All of these trends point to a world that is fracturing as it evolves. As University of Pennsylvania professor Bill Burke-White reminds me in our insightful conversation (which you can watch here and below) regulations flow from deeply held values.  As the world has trended away from having a global set of values, it moves toward a set of regional values. Thus, we should expect the regulatory infrastructure that guided globalization to become regional as well. 

Trade flows will ultimately follow from the structures that guide them and the world will become one of regional trade clubs with fences between them. As countries trade with ideological and geographical neighbors, they will find themselves dependent on the core power in their region but trade will flow relatively freely within these clubs. This has all sorts of implications for companies with global footprints who may face strategic choices, as Bill outlines, between simplifying their life and restricting their market exposure or staying global and exposed to tremendous complexity. 

But what happens when you pile good old fashion protectionism—fence-building, as Bill calls it—on top? All that fracturing unfolds much faster and in a less orderly way.

Protectionism of Mass Destruction (PMD)

Donald Trump swept back to power in the US with a mandate to implement the central planks of his campaign which included sweeping trade tariffs that nearly 60% of voters support. Trump has pledged a 60% tariff on Chinese goods and 10-20% tariffs on all other goods entering the US. Some see this as a negotiating ploy and no doubt it creates leverage. But Trump also has a track record of following through on picking trade wars and forcefully renegotiating settled trade deals. Doubt him at your peril.

To the extent that tariffs are used as weapons, they become weapons of mass destruction. They are blunt instruments that reorder trading relationships and can challenge foreign policy relationships as well. Once the red line is crossed and a PMD is deployed, the recipient will almost certainly fight back. In the past, trade spats stuck to the trade channel. Today, I fear they will escalate out of it.

I am most focused on what Trump can do on trade policy through executive order rather than the legislature. And he can do a lot, largely by declaring emergencies. Gibson Dunn has an excellent backgrounder on the authorities he would claim and which parts of his trade manifesto he could implement on his own. While Republicans will hold Congress, the legislature is less likely to get on board with passing broad based tariffs. It is much easier for business interests to block policy than to get things through. Companies that depend on cheap imports as inputs or finished products (think retailers, manufacturers etc) will lean on their members of Congress to slow down such progress. They will have to do so quietly so that the Tweeter (Xer?) in Chief doesn’t try to publicly shame them, so this may be all through industry groups. Congress may pass a trade bill but it will bite less than what Trump has promised or than what he will do on his own. And Trump’s actions can happen quickly while Congress is slow and leaky, so we’ll have a handle on where its going.

The full suite of tariffs Trump is proposing would be seismic, costing nearly $3,000 annually for the average American family. But that’s not really the bar we should be measuring protectionism against. Instead, if we think about a world that was largely liberalizing trade, we’re likely to feel a pretty acute shock of that reversal in direction even if Trump only gets partway there. As Trump puts in place temporary tariffs of any material level, opposing countries will fight back. We will go from a world where most goods move close to freely into a world where fences go up almost over night. 

Now, Trump will offer some of those countries the ability to strike trade deals with the US in order to avoid some of this pain. But that will create its own challenges. For instance, the UK might be keen to deal with the US but American goods entering the UK freely will challenge UK trade commitments to Europe. And in some cases, Trump will request unrelated concessions. For instance, it’s rumored that Trump will ask Europe to go easy on US tech platforms in return for lower tariffs or to keep the US in NATO. 

If that’s the game the US is playing, I would expect other countries to fight back on foreign policy terms too. Or, rather, we’ll be lucky if that’s all they do because that will happen a few levels up from the business fray. Instead, countries could start erecting fences directly around US businesses–perhaps by raiding them or arresting executives to prove that the US can’t push them around (you can read my piece on how countries use expat citizens and staff as pawns here). 

Much of what Trump is proposing would violate US multilateral and bilateral trade agreements, which would further undercut the authority of those organizations and instruments. It will also permission other countries to take offensive positions on trade policy too, which can result in US companies in the cross-hairs. This is all setting aside the likely economic shock to the US economy from rising prices and subsequent Federal Reserve action to tame inflation through higher rates.

So what can you do to prepare?

First, look at the opportunities that could arise from some of the more likely tariffs. The US is not in a position to plug a gap with domestic production in the near-term. Figuring out how you can either jump-start domestic production for goods that may have efficient domestic substitutes and rethinking supply routes to get around the worst of the tariffs is worth doing today.

Second, you should begin to integrate this broader thinking about clubs and fences into how you think about the world going forward. Because Trump is an accelerant to this story but he’s far from the whole story of an evolving trading system. Bill’s study, written with White and Case, is here.

Third, you should evaluate the extent to which your company is a soft target for other types of retaliation and begin to put protections in place like enhanced insurance policies or even considering the removal of expats in favor of local staff to limit risk should tit-for-tat trade wars escalate out of the trading channel.

Finally, you should expect further weaponization of national security reviews as part of the politics of such a trade battle. If 7/11 is a someone’s national security treasure and TikTok is someone’s national security risk, then your company—which probably falls somewhere between selling hot dogs and designing algorithms—could be too. It may be worth reviewing my pieces on national security creep and national security reviews to start thinking about how you can position. You may also want to accelerate pending deals before such a trade war escalates or you may want to think about how you can characterize any deals as aligned with the national security goals of host countries.

In other news

I had a blast at The Berkeley Forum’s annual summit on corporate governance. I spoke on a panel about the implications of Trump’s win on regulation and I made the point that we are about to see a huge gutting of regulation, which may be net positive for business but will pile on to a “complexity shock” of everything changing all at once. Good news for our friends in private practice; late nights for our in-house colleagues! Check out media coverage of my comments and the broader summit via Corporate Counsel.

It was also great to meet IRL the inaugural cohort of Berkeley Law’s GC University, where I teach a module on geolegal risk. The breadth of industries recognizing the need to take geopolitics into account in their legal departments was fascinating. From higher ed to healthcare and e-commerce, it seems that everyone is being whipsawed around. Fortunately, I know someone building software to help you manage it….

—SW