Terrorism May Affect Your Business, Requiring You To Develop New Global Strategies

The terrorist attacks of September 11th and the possibility of additional acts here and abroad have exposed U.S. economic vulnerability. To regain economic strength and protect against future danger, U.S. companies must determine:

• If their existing global sources of supply are vulnerable to political and economic instability, and
• The pace at which their buyers are likely to continue ordering.

Since no one can predict if or where additional terrorist actions may occur, the implications of civil unrest abroad, and the level of world economic growth, obtaining answers to these questions is difficult at best. Consequently, it’s important for companies to prepare for possible disruptions in their supply chains.

Are Your Sources of Supply at Risk?

In 2000, the United States imported $38.9 billion in goods from the Middle East. This represented only 3.2% of all U.S. imports. Although this may appear to be minimal, the Middle East is a major supplier of oil-related products to the United States, Europe and Japan. In fact, Saudi Arabia alone possesses over one-fourth of the world’s proven crude oil reserves. Disruptions in this oil supply could have a significant impact on industry, especially in Japan.

U.S. imports from the entire Asian continent reached $484.7 billion last year. This represented 40% of all U.S. imports. Terrorist actions in Asia could affect your sources of raw materials, components, and finished products.

Certain Shipping Lanes at Greater Risk

Highly traveled Asian and Middle Eastern shipping lanes are especially vulnerable to terrorist attacks. Proximity to terrorist groups alleged to be associated with Osama Bin Laden in Indonesia, Malaysia, the Philippines, and throughout the Middle East present dangers to regional ports as well.

Indonesia, which has a population of over 200 million people and the world’s largest Muslim concentration, is currently on the U.S. State Department’s travel warning list. Radical groups have threatened to attack U.S. interests and expel American citizens. The Strait of Malacca, a narrow and highly trafficked shipping lane between Malaysia and Indonesia, presents a particularly vulnerable point.

U.S.-Southeast Asian Trade Vulnerable

In 2000, Singapore and Malaysia were ranked as the United States’ 10th and 12th largest suppliers. These two, combined with Indonesia, India, and the Philippines, the United States’ 5th largest production sharing partner, accounted for U.S. merchandise imports of $80 billion.

Importers that receive their goods by ship should prepare for possible disruptions in the supply chain. As a result, a larger “just in case” inventory may be wiser than a smaller “just in time” one. And the situation may also call for importers to place orders sooner, accounting for additional security measures. However, since much of the goods imported by the United States from these countries include computers and electronics which are primarily shipped via air, sea lane disruptions will have less impact.

Will Buyers Keep on Buying and Paying?

According to the World Trade Organization, growth in world merchandise trade is anticipated to slow from 12% in 2000 to 2% in 2001. A steep decline in information technology expenditures is believed to be a major factor. This drop in economic activity is likely to negatively impact companies’ global export projections. Importantly, more businesses will find greater difficulty in paying their bills. Consequently, open accounts may need to be reassessed in favor of letters of credit or other more secure methods of payment.

It’s also important to consider currency volatility, an important factor affecting international receivables. Currency volatility can have a negative impact on country risk which, in turn, can affect a company’s ability to collect payments. In addition, potential terrorist actions in Southeast Asia may further depress U.S. exports there. Singapore, a major importer, ranked as the 10th largest U.S. market in 2000, following France. Top exports to Singapore include electronic components, aircraft and parts, laboratory, scientific and testing equipment, industrial process controls, electric power systems, telecommunications, pollution control and construction equipment. U.S. exporters of these and other goods to the region may consider pursuing additional markets to compensate for a potential downshift in buying patterns.

Furthermore, don’t underestimate the need to reassess the short and long-term stability factors of countries in which you have foreign subsidiaries or investments.

Costs of Doing Business Are Rising

Transportation and insurance costs are anticipated to increase because of security surcharges on cargo in a riskier business environment. In fact, some reports indicate an increase in property and casualty premiums of 12% to 30%, or higher in various cases.

Some insurance companies have even increased the number of countries subject to “war risk” surcharges. This means shipping lines must notify marine underwriters before their vessels move into designated waters, as these vessels may be subject to significant additional insurance premiums. Customers will most likely assume the additional cost.

And with the added time needed to satisfy new airline security requirements, coupled with many travelers’ fear of flying, business people are seeking alternative forms of travel. To reduce overseas travel, more companies are considering the use of videoconferencing.

U.S.-Jordan FTA: A Good Start

The U.S. Congress recently passed the U.S.-Jordan free trade agreement that was initiated during the Clinton administration. This makes Jordan the fourth country after Canada, Mexico, and Israel to enter a free trade accord with the United States. U.S.-Jordan trade is small. In 2000, the United States exported $313 million and imported $73 million for total two-way trade of $386 million. However, it sends an important message that opportunities exist for other Middle Eastern countries interested in such an accord.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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