By Chris Kuehl, managing director, Armada Corporate Intelligence
The textbook definition of volatile says it all: “likely to change rapidly and unpredictably – especially for the worse.” It has been a volatile year, and so was last year. Business leaders are not unaccustomed to change; that is the norm, as competitors evolve and consumers remain notoriously fickle. However, when a series of essentially “man-made” issues are added to the mix, the landscape becomes very hard to navigate. Currently, three primary factors are driving today’s volatile climate.
Factor One: Middle East Tensions and Oil Disruptions
The most recent factor is the turmoil surrounding the war with Iran. The oil markets have been alarmed by disruptions to oil shipments from the Middle East. By now, many in the United States are familiar with the Straits of Hormuz and now understand that the bulk of the oil produced in this region has to travel through that narrow waterway. Although the US is the world’s largest crude oil producer and shipper, disruptions in the Middle East still matter. It is simply that oil is a globally traded commodity, and the price per barrel is set by the markets. That price affects US output and all producers. This dynamic has pushed per-barrel oil prices above $100, after they had been between $50 and $60 a few months earlier. Beyond oil, the region produces a whole host of products required by any number of industries, including fertilizers, helium, bromine and an alphabet soup of petrochemicals.
As a result, the disruption becomes a broader supply chain issue and, for the time being, the supply chain is in total disarray. This means inflation spikes and widespread uncertainty about when a given supply item will be available. During the development of this article, there was the announcement of a “breakthrough” as a ceasefire was established between Israel, Iran and Hezbollah in Lebanon. The oil markets celebrated wildly, and the price per barrel decreased, dropping to approximately $84 at the time of writing. Will it stay there, or will it go back up or further down? That is a complete unknown as it depends on the mercurial moods and decisions of leaders in the US, Iran, Israel and globally.
Factor Two: Tariffs and Trade Uncertainty
The second major factor and motivator of volatility is tariffs – an issue the US has been familiar with for more than a year. The decision on the part of the Supreme Court to back up the previous court rulings on the use of the International Emergency Economic Powers Act (IEEPA) to impose blanket tariffs on the world returned the conversation back to its origin: What system will be deployed to replace it, and how long will it last? The replacement system, Section 122, is limited in duration and expires on July 24. It likely will be replaced by Section 301, which requires investigations. Under Section 301, if a country is found to be violating the provisions prohibiting structural excess capacity, it can face high tariffs. The question when examining structural excess capacity is whether a nation is deliberately overproducing. This may be done to protect jobs or to gain a trade advantage, as extra production is offloaded to the
global market.
China has been one of the most aggressive overproducers, but it is a common practice. However, proving deliberate overproduction is challenging. Countries also can be hit with tariffs if accused of using forced labor to produce a product – another difficult claim to prove. Even the US is subject to this, as prison labor is used to produce goods, which some countries classify as forced labor, even if framed domestically as rehabilitation efforts.
Working out these new tariff systems will be time-consuming and confusing. The majority of US companies hold mixed views on tariffs. The companies know that other countries cheat and compete unfairly. They enjoy the potential for some protection but also import material and do not appreciate the added costs. Most of the criticism revolves around the uncertainty, as tariff policies
constantly change.
Factor Three: China and Taiwan
The third and final issue is starting to emerge, but has not had a profound impact on markets – though likely will. China has been actively pressuring Taiwan and now has declared a “no-fly” zone that prohibits air traffic between Taiwan and trading partners such as South Korea and Japan. This makes the business very costly and has affected the US supply chain. The Beijing leadership has engaged with opposition parties in Taiwan to increase pressure on the Taiwanese government. The US has been on alert as far as these moves are concerned, but reacting could be costly, as it would mean withdrawing ships from the Middle East.
The most immediate impact is a supply chain crisis involving what the US obtains from Taiwan – the world’s largest manufacturer of chips. There already is a chip shortage due to the disruptions in the Middle East, and further strains related to Taiwan make the issue more urgent. A further complication, as far as chip production is concerned, is allocation. The chipmakers are focused on producing high-value chips in demand from data centers and the military. This means reduced availability for consumer products and electronics, as well as for vehicles.
Thus far, Chinese threats have been contained, but recently, there have been many high-level purges instituted by Xi Jinping. This included high-ranking military officers, which may signal a shift in strategy. These had been advocates of an outright invasion, and those who have replaced them seem to favor economic pressure through a combination of blockades.
Navigating the Volatility
These developments are the direct result of political decisions, making them unpredictable. They came out of nowhere in most cases, and the duration of the
crisis depends on political calculations rather than economic considerations.
For business leaders, this unpredictability offers a significant challenge. Companies study their customers to determine what their motivations are and can study their competitors, too. In addition, companies can gather facts to understand economic trends, but predicting the actions of political leaders with their own unique agenda remains difficult.
Chris Kuehl is managing director of Armada Corporate Intelligence. Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations.
More information: www.armada-intel.com