The Postwar Stakes for Business
For months, U.S. companies put off big decisions as they waited to see if America would go to war with Iraq. Now, with coalition forces securing Baghdad, execs are breathing a sigh of relief that the war has been mercifully quick. So they're ready to hike capital spending, rebuild inventories, and dust off expansion plans, right?
Not necessarily. While the war has gone better than many expected, the risks for business and the global economy have hardly disappeared. Indeed, how the U.S. handles the aftermath of the war will be every bit as crucial to the economy as it is to diplomacy.
EASING, OR RISING, TENSIONS?
The U.S. faces the difficult task of reconstructing Iraq and repairing the damage done to international institutions and relations with its Western allies while at the same time tamping down the fierce anti-Americanism that has sprung up around the globe. Succeeding at those tasks would go a long way toward lessening tensions in the Middle East and elsewhere around the globe and muting criticism of the U.S. for the unilateral approach it took to the war. But failure to do so would likely increase global tensions and further fuel anti-Americanism -- an outcome that poses huge risks for business.
Why? Multinationals depend on a multilateral world. A continued rise in tensions would be anathema to the open, international economic system on which growth and prosperity depends. Globalization, the driver of the 1990s boom, could suffer if trade talks break down in acrimony. "This postwar period is the real challenge for the world and globalization as we know it," says Morgan Stanley's Chief Economist Stephen S. Roach. He fears the world could soon slip into recession. "If we blow the postwar recovery, the stakes will be very large."
That, of course, is the pessimistic scenario -- and one that may well not come to pass. Many observers count on economic self-interest -- the realization that both the U.S. and Europe have much to lose -- to help feuding nations patch up their differences. In the short term, that will certainly help, as few see the end of the war bringing a quick economic rebound. The prospect of war in Iraq had a chilling effect on consumer and business sentiment during the first quarter, and that has held back growth.
Even with that cloud lifted, the U.S. economy is still suffering a hangover from the overcapacity built up in the 1990s boom. "The end of the conflict will help ease uncertainty," says Miles D. White, CEO of Abbott Laboratories (ABT ). "But it won't cure the economy." In a survey released on Apr. 10, the Business Roundtable, comprising CEOs of 150 top U.S. companies, predicts weak growth, in the 2.2% range, for the next six months.
With the economy struggling to regain steam, execs are only too aware that anything that weakens confidence could be damaging. That's why a continuation of international spats over Iraq and other issues could leave business vulnerable. Consumer brands may be particularly exposed. Execs at such well-known U.S. icons as McDonald's (MCD ) and Wal-Mart (WMT ) say so far, attempts to target their stores with protests have had little effect.
But risks remain. Starbucks (SBUX ) Chairman Howard Schultz is bracing for a consumer boycott that could hurt his European expansion, already hampered by slow growth. In Indonesia, Muslim radicals are calling for boycotts of U.S. products. "In the past, companies were unabashed about using their American brands -- it was the gold standard," says Bain & Co. consultant Eric Schwalm. Now, "building your base off a U.S. or British brand may no longer be the best way to go."
Another risk is that continued global tensions will set back free-trade negotiations. Some fear that the antipathy that has emerged over Iraq between the U.S. and its major trading partners could lead to tougher negotiating stances and less willingness to compromise. The U.S., which had been backing Russia's bid to join the World Trade Organization, may not push as hard because of Moscow's antiwar stance.
Acrimony also could infect September WTO talks in Cancun, Mexico, where trade ministers are supposed to make substantial progress on rules governing agriculture, copyright, and trade in services. "I can't think of a time when the U.S. has been more isolated," says Mark Weisbrot, co-director of the Center for Economic & Policy Research, a liberal think tank in Washington. "And that can't help when nations are trying to reach consensus in the WTO."
Moreover, if U.S. policies worsen tensions in the Middle East rather than make them better, an even greater danger is that the risks of more terrorist attacks could grow. That could hike uncertainty and the costs of running far-flung corporate empires.
Multinationals are already preparing for possible disruptions to their supply chains as the result of tightened security and the threat of more attacks. Others are considering moving their operations out of nations considered risky and factoring in rate hikes from shipping companies forced to spend more securing their fleets. Says Michael E. Marks, CEO of Flextronics International (FLEX ), a contract manufacturer with global operations: "The issue of security is going to slowly but surely raise logistics costs."
Immigration restrictions could also make it tough for U.S. universities and companies to lure top foreign talent. That would be a particular blow to tech companies that need fresh talent to help push the envelope of innovation.
Of course, if the U.S. manages the postwar period well, much of the tension could dissipate. Scenes of U.S. Marines toppling statues of Saddam to Iraqi cheers played on TV screens around the globe. Building on that euphoria will be the challenge. Says Richard R. Roscitt, CEO of ADC Telcommunications (ADCT ), a Minneapolis maker of telecom gear: "[Washington] has to do a good job of perception management."
Most persuasive, perhaps, is the notion that pragmatism will trump geopolitics. France, Germany, and other European opponents of the war are likely to offer cash and assistance to help rebuild Iraq. And with the war over, says C. Fred Bergsten, president of Washington's Institute for International Economics, the West "will lean over backwards to cooperate on economic issues." Trade ministers, he says, will "want to show they're back on track." That's a view everyone can agree on.
By Joseph Weber in Chicago, with Paul Magnusson and Rich Miller in Washington, Stanley Holmes in Seattle, Roger O. Crockett in Chicago, and bureau reports
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