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Donald Trump threatens to reshape the relationship between America’s government and its businesses — and even before he takes office, companies are adapting to this new political landscape.
In early January, Ford announced that it was abandoning plans to spend $1.6 billion on a new factory in Mexico, instead choosing to upgrade an existing Michigan facility. The move seems to have been at least partially motivated by political concerns.
On several occasions during his campaign for president, Trump had blasted Ford, in advance, over plans to expand in Mexico instead of the US. While Ford denied the announcement was part of any quid pro quo, Ford’s chair made sure to call Trump to inform him of the good news, and Ford CEO Mark Fields described the deal as “a vote of confidence for President-elect Trump and some of the policies he may be pursuing.” Naturally, after the deal had been announced, Trump took to Twitter to praise the company.
Trump also used Twitter to lash out at General Motors for building Chevy Cruzes in Mexico and then importing them to the US, threatening a “big border tax.” In this case, GM was able to point out that almost all Cruzes sold in the US are in fact manufactured in Ohio. Trump has since taken on other carmakers, including Toyota and BMW.
And it’s hardly just about cars. Boeing and Lockheed Martin saw their stocks briefly plunge after Trump tweeted that the companies might be earning too much profit from the federal government. Masayoshi Son, head of the Japanese firm SoftBank, showed up at Trump Tower in December to pay fealty to the president-elect, promising to create new jobs and investments in the US. And then, of course, there was the Carrier saga, where Trump and Vice President-elect Mike Pence hammered out a deal with the air conditioning company to keep hundreds of manufacturing jobs in Indiana, rather than relocate to Mexico. (Carrier may have been worried that the defense contracts of its parent company, United Technologies, could be at risk.)
This is not how American economic policy used to work. Indeed, former Treasury Secretary Lawrence Summers has argued that the Carrier deal alters “the operating assumptions of American capitalism” — away from clear rules and laws and toward “ad hoc or deals-based capitalism.”
These actions set a precedent that important government decisions affecting businesses might be made not through orderly bureaucratic and legal processes, but according to the impulses and urges of powerful political players.
How should companies prepare for the Trump era? As Summers notes, while such a situation represents a departure from recent American experience, it is not altogether unfamiliar in other contexts. Many emerging and developing countries have similar clientelist regimes where the rule of law is weak, political influence and corporate power are intermingled, and fortunes can flip on the whim of a political leader. Over decades of experience, multinational corporations investing in these countries have identified several strategies for dealing with these types of risks. Suddenly, the lessons that companies developed for dealing with quasi-kleptocratic and nepotistic governments have new relevance for doing business in the United States.
Lesson 1: Do your homework on the local political scene
One of the first lessons for any company looking to survive amid an unstable government is to bone up on the country’s political landscape and its key dramatis personae. This amounts to a lot more than scanning an entry in the CIA World Factbook — companies need local agents with sharp political instincts keeping their ears to the ground. Political risk firms — including Eurasia Group, the Economist Intelligence Unit, and Oxford Analytica — have long provided such analyses to help their clients navigate confusing political terrains abroad.
After the shock of Trump’s election, such organizations may find themselves in greater demand in the United States, applying similar anthropological expertise here. Firms may also choose to further invest in the teams of lobbyists and government relations officers that populate Washington’s K Street. Lee Drutman, a lobbying expert, has already noted that the Trump presidency promises to be a boon to the lobbying industry, given the uncertainty and chaos likely to permeate his administration. Those who can sell themselves as credible experts on how decisions are made in the Trump White House will likely be in high demand over the next four years.
Staying on top of the answers may not be easy. Trump has been known to set up opposing camps of advisers, whose relative influence waxes and wanes through a series of internal fights, and also at times simply takes the position of the last person he spoke to. Insights into which courtiers are currently favored, and in which direction the political winds are blowing, could help companies strategize to protect against threats — or spot opportunities.
Lesson 2: Make friends with political insiders...
A second key strategy for coping with political risk is cozying up to the government —making friends and earning goodwill that may help avert future political meddling. In a number of African countries, international mining companies often directly provide social services — including running schools and health clinics — in exchange for gaining secure access to natural resources from powerful politicos.
In Indonesia under Suharto, Western investors understood they’d be looked on more favorably if they partnered with companies run by the president’s children. (Like Trump, Suharto had little interest in managing the family fortune via a blind trust.) Over the past several years, American tech CEOs have made regular pilgrimages to Beijing, parading in front of the cameras with Chinese leaders. If you lend your prestige to influential politicians, they will be more likely to keep you around.
Since Trump’s surprise victory, we’ve already seen several firms seeking to make friends with the incoming administration. Whatever the business case for Ford’s decision to shift some investments from Mexico to the US, this month’s announcement could certainly be spun (and was spun) as a win for Trump; this means he may be less likely to turn on Ford tomorrow. Last month, after SoftBank’s head met with Trump and announced plans to invest $50 billion in the US, the financial analyst Atul Goyal explained the tactic to his clients: “With a smart move, Masa Son has positioned SoftBank on the right side of the new administration.” SoftBank’s stock rose 12 percent in the subsequent days.
The logic that drives foreign governments and conservative think tanks to book space at the Trump Hotel instead of rival luxury properties surely applies to big business as well. Given Trump’s worldwide business empire, there should be no shortage of ways to show some appreciation to the new ruling elite.
Lesson 3: ...But be careful who your friends are
While making friends with the regime can certainly pay off, it can also be risky if you choose the wrong protector. Ally yourself with someone who falls out of favor, and you may find yourself on the way out too. The American oil exploration company Kosmos Energy entered Ghana through a partnership with the local firm EO Group, which was closely linked to then-President John Kufuor. Alas for Kosmos, Kufuor’s party lost the next election, and the company’s political ties flipped from asset to liability. Suspicious that EO had helped Kosmos obtain a sweetheart deal, the new government disputed the American firm’s rights to sell its claim on oil exploration, ultimately scuppering a $4 billion deal.
Similarly in China, the recent anti-corruption push from President Xi Jinping has seen many high-ranking officials brought down in disgrace. Any foreign firms that had invested in relationships with those leaders are out of luck as well.
In the US context, getting close to Trump’s children will probably be a good strategy, as family ties aren’t easily ruptured. On the other hand, if you were hoping your company’s close relationship with Rudy Giuliani was finally going to pay off, you already know you backed the wrong horse. Who else might be out of favor next year, or the year after? And when Trump’s time in office runs out, businesses will face yet another new political landscape. Some companies that closely aligned themselves with the Trump regime may find themselves forced to answer for their past actions — yet another risk when the economic rules become overly personalized.
Lesson 4: Build a coalition that will have your back
To successfully manage political risk, firms need influence not just among political elites but also more broadly throughout the economy and society. If you have a coalition of allies who will come to your support in the event of any disagreement with the government, you’ll be in a much stronger negotiating position. One important way firms build these coalitions is by participating in extensive supply chains, which bind together the operations, and thus interests, of many different companies. One reason British Petroleum has thrived in the rough-and-tumble world of Azerbaijani oil extraction, even as other foreign companies have faced expropriations and contract disputes, is because the company relies on a dense network of local suppliers, all of which would be hurt by government pressure on BP.
American companies seeking to influence policy under the Trump administration are similarly appealing to the strength of their supply chains. Boeing recently signed an agreement to sell planes to Iran, which would be squashed if Trump follows through on his threats to rip up the Iran sanctions deal. But Boeing is already making the political case for allowing the sale to proceed, noting that doing so will support “nearly 100,000 U.S. jobs in the U.S. aerospace supply chain” — a powerful coalition. Supply-chain politics will likely also influence Trump’s signature trade promise, imposing harsh tariffs on China. American companies that rely on Chinese inputs are already coming out to explain how such a tariff would damage their businesses.
The economic problem arises when supply-chain decisions are made for reasons of political expediency, not efficiency.
Profitable for a few, costly for the nation
High political risk isn’t incompatible with high profits — as Rex Tillerson could tell you. Exxon Mobil has done very well for itself working in some of the riskiest environments around. Indeed, the US stock market has rallied since Trump’s election, seemingly expecting heady days of tax cuts, low regulation, and infrastructure investment. There is money to be made.
For American society as a whole, however, any shift toward increased political risk and arbitrary government interventions should be worrisome. The more that rent seekers ensconce themselves within a new Trump administration, the more difficult it will be to eliminate crony capitalism further down the road. Once companies are shaping business strategies to profit off their connections to government, they’ll have strong incentives to keep the racket going. Competition will slow, undercutting incentives for innovation and entrepreneurship.
While there will be a number of splashy high-profile deals to keep some jobs in the US, each of which President Trump will surely trumpet as proof of his economic prowess, there will be many other unseen investments that go unmade and prices that quietly increase. Although some shrewd companies that are well placed to cope with political risks will do well, the economy as a whole will be stifled.
Even before Trump has taken the oath of office, it appears many companies are already preparing for such a world, eager, like SoftBank, to position themselves on the “right side of the new administration.” Their preparations should be a warning to us all: Everyone who cares about a vigorous free market should call out such crony capitalism and defend America’s rules-based economic order.
Geoffrey Gertz is a postdoctoral fellow at the Brookings Institution, where he researches the political economy of foreign investment
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