Uncertainty
Submitted by Atlas Indicators Investment Advisors on October 28th, 2021
We live in an uncertain world. Everyday tasks like commuting to a familiar destination or frequenting a well-known merchant have small amounts of risk associated with them. These levels of risk are so finite, however, that they do not tend to interfere with our decisions to participate in life’s daily activities. But not all uncertainties are too small to ignore.
Tariffs are one example of uncertainty which impacts firms’ willingness to work with or within a given country. Even after the post-WWII creation of the General Agreement on Tariffs and Trade (GATT), America was a relatively closed economy until the late 1970s. Nevertheless, this implemented a certain level of predictability within cross-border trade, thus taking some of the bite out of tariffs (which, according to this paper from the National Bureau of Economic Research, remains a source of uncertainty in global trade), thereby allowing such commerce to heat up and become a larger part of the world’s output. After a few more decades, the World Trade Organization was formed, helping further establish formal rules of engagement. This framework not only assisted smaller countries trade with larger partners with less fear of being pushed around too much, but it also continued lessening the influence of tariffs. As a result of diminished uncertainty, trade’s percentage of global output continued growing.
This is not to say there haven’t been consequences of freer trade. Arguing that it has left many American workers behind, politicians on both sides of the aisle in America have campaigned against this trading set up. It eventually morphed into a delicate supply chain referred to as “just in time inventory,” an approach which continues experiencing disruptions that weren’t evident in the pre-pandemic world.
Uncertainty is not helpful to the economy. Our world continues grappling with how to fix a broken supply chain which was a symbol of efficiency just two years ago. Whether we knew it then or not, fragility was tied to this efficiency and is now a source of uncertainty. Some believe less trade and a more closed economy here at home is a solution, contending, among other things, that it is in the interest of both our nation’s workers and environment as well as creating a more consistent supply chain. If a more inward-facing course is taken, we’ll hardly be alone, but recent results haven’t been stellar. For example, Brexit has created a shortage of truck drivers in the U.K.
Uncertainty is ahead no matter how things unfold. Pre-covid ways of doing business are unlikely to prevail fully. Things might look similar, but firms are already making progress toward bolstering their supply chain. That won’t come without some sort of costs. If nations continue turning more inward, there will be a period of transition and rebalancing which could take decades to settle. However the current supply chain challenge is resolved, uncertainty is sure to reign for some time into the future.