Dec 17th 2016

2017 Promises to be a Year of Unprecedented Risk

by Daniel Wagner

Daniel Wagner is CEO of Country Risk Solutions, a Connecticut-based cross-border risk advisory firm and author of the book Managing Country Risk. CRS provides a range of services related to the management of cross-border risk. He is also Senior Advisor with Gnarus Advisors.

There is no denying that 2016 was a year filled with significant and tangible unanticipated events in the political, economic and security realms. Whether considering Trump’s election, the first OPEC output cut in 8 years, or the resurgence of lone wolf terrorist attacks – most of us were caught by surprise on a routine basis, and wondered what could possibly be coming next. 2017 will see dramatic acceleration of unforeseen change, which will present unprecedented risk to businesses – both domestic and international – as well as ushering in what should prove to be significant changes in the regulatory and risk management landscape in the U.S., which should once again prove that it retains the unique ability to impact trade and investment climates throughout the world.

The Trump Administration will clearly not be able to implement every legislative initiative it may wish to pursue – even with Republican majorities in the House and Senate. Apart from the fact that legislators don’t tend to spend all that much time actually ‘legislating’ in Congress, Trump’s ambitions are too grandiose for a lackluster Congress, unaccustomed to being highly productive, and which will continue to be ruled by pork barrel politics and institutionalized corruption – despite Trump’s claims that he will be tackling this head on. Trump will in his first 100 days be forced to prioritize his objectives, and will no doubt place heightened investment in infrastructure, building the wall along the border with Mexico, and ramping up the fight against ISIS at the top of his wish list.

Given that so many of Trump’s cabinet and other appointments have proven to be Wall Street veterans, I do not foresee much in the way of financial service reform occurring during his Administration, but I do expect him to proceed apace with penalizing firms who move jobs out of the U.S. So, time-tested maquiladoras and outsource-oriented businesses may need to quickly rethink their own priorities. As was swiftly illustrated in the Carrier base, having spent millions of dollars to nearly complete its new plant in Mexico did not stop Trump from aggressively pursuing the company. Even though it appears that Carrier was offered ample tax incentives to rethink its position, the near-term financial hit it will take will hurt. Trump clearly wanted to make a high-profile example of the company to send a strong message. We should expect much more of that.

Foreign investors will clearly need to think twice about simply plopping down tens or hundreds of millions of dollars, and robotically investing in the U.S. during the Trump Administration, as so many have done for so long. There is a new sheriff in town and he won’t be shy about grabbing his regulatory gun from its holster when it comes to ensuring that foreign investors pay their fair share of taxes, play by U.S. rules, and that American companies are treated fairly when investing overseas. There is also a very real risk that bilateral trade conflicts (I hesitate to use the word “wars”) will erupt in due course, as the propensity for tit-for-tat sanctions rises along with Trump’s rhetoric and executive actions. While full-fledged trade conflicts will remain a background risk with America’s largest trading partners, it seems highly unlikely that the U.S. and China (for instance) will start destroying what is a mutually beneficial trading relationship.

Politically, the greatest risk will clearly be the rise of the right globally, along with the implications of shifting geopolitical alliances. The right is on the march in Europe and Asia, and along with grave concern for the sanctity of America’s bilateral relationship with some of its staunchest post-war allies across the pond, countries such as the Philippines and Malaysia have already put the U.S. on notice that they stands ready to embrace China (and Russia) as the sands continue to move beyond the Middle East. Even though many may not realize it, we witnessing a paradigm shift not seen since the fall of the Soviet Union in terms of changing alliances and allegiances. China and Russia both stand to gain as a result of the changes under way. The U.S. will be contributing to that process in a major way.

Economically, the U.S. and other parts of the world are well overdue for a recession, and it would not be all that surprising if it were to begin in 2017. Despite the booming stock market and rising commodity prices, underlying fundamental weaknesses in the global economy have yet to be meaningfully addressed. Trade imbalances, rising inequality, and currency weaknesses are among the variables bubbling beneath the surface. Given the right set of conditions (such as a new war or currency collapse in a major country), the global economy could appear to be a house of cards rather than a fortress with a seemingly sturdy foundation.

From a security perspective, Trump’s desire to ramp up the fight against ISIS implies a heightened risk of retaliatory terrorist attacks in the U.S. and West. While hardly a new phenomenon, the increasing frequency of successful lone wolf attacks in the U.S. and Europe during 2016 should be seen as a trend rather than an anomaly. Businesses are going to need to devote ever more resources toward ensuring that they, and their employees, are protected. Cyber risk will continue to command the attention of risk managers and decision makers globally, highlighting not only the growing nature of the risk, but our collective vulnerability with each successful attack.

Yet of all the looming risks in 2017, one of the most significant will probably prove to be the slow death of multilateralism. Trump has promised to kill the Trans-Pacific Partnership, and has threatened to revise the North American Free Trade Agreement and other multilateral trade agreements the U.S. is already either party to, or in the process of becoming a member. Given that U.S. leadership in the global trade and investment regime is critical, and that so many other countries depend on U.S participation to justify their own participation in such agreements, there is a very real chance that multilateralism -- particularly for trade, but also for investment -- may begin to unravel. This is an ominous and potentially very damaging prospect, which not only prevents the U.S. from being able to influence the global trade and investment architecture in the future, but implies a complicated and unpredictable environment in which global businesses will be forced to operate in the short to medium-term.

Clearly, 2017 is not going to be a year in which people in the risk management business can rest on their laurels, adopt or maintain a reactive approach to managing risk, or pursue conventional solutions to what have already become cutting edge problems. Regardless of who is sitting in the White House -- or the Great Hall of the People in Beijing -- our multipolar world implies that we need to adopt multidimensional approaches to managing risk and making decisions. Regulatory risk, climate change, cyber risk, terrorism and trade policy are examples of risks that lay well beyond the domain of a single decision maker in business or government. Now, more than ever, risk managers need to be sitting at the table with decision makers, heavily involved in the planning process. Failure to do so will surely have profound implications for businesses of all sizes in the coming year.

This article first appeared in the International Risk Management Institute.


Daniel Wagner can be reached at: dwagner@riskcooperative.com or 1-203-570-1005.




 


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