They may not realise it, but many corporates have a big risk blind spot. Most mitigate immediate threats and address more distant strategic challenges – but don’t pay enough attention to possible medium-term, high-impact events. In the past, their relatively low probability made them less of a priority. Not now.
Read also: Trump’s Proposed Tariffs Could Trigger Price Hikes and Supply Chain Disruptions
For while the impending Trump administration has created a sense of real optimism among executives, at least in America, regarding US domestic issues such as tax policy and deregulation, this optimism needs to be tempered by the real risks at play for multinationals with extensive commercial interests around the globe.
That’s because the Trump presidency looks set to make an increasingly volatile world even more volatile, as security and economic shocks once deemed unlikely are becoming more likely. Trump has spoken of limiting America’s role as a global policeman at time of conflict in Europe, the Middle East and Africa, and seems intent on pursuing protectionist policies that could further fuel instability.
Critically, unlike his initial term in office, the president-elect is surrounding himself with advisors and officials who will most probably not try to restrain him. This time around, their views very much accord with his. So, it would be unwise to dismiss, as some in corporate circles have, concerning Trump remarks on geopolitics and trade as echoes of his first administration, when rhetoric did not always translate into action.
Preparation for the kind of medium-term shocks, which in the past might have been considered improbable, requires those in companies making tactical and strategic decisions to work together to better anticipate possible disruptive events on the horizon. They should make plans to not only ensure their impact on operations is minimised but also be open to business opportunities that may arise.
One effective approach would be to follow the setting of corporate goals for the year ahead by essentially working backwards and identifying possible high-impact events that could reduce the prospects of goals being achieved. The conditions that might lead to such events should be tracked and mitigating actions formulated, then implemented in good time.
There are already suggestions that some potentially highly destabilising developments are more likely to occur with a Trump administration in place. Scenarios of concern include an Israeli strike against Iran’s nuclear facilities, an escalation in the US-China trade war, and a rapid deterioration in relations between the US and Mexico. Corporates should try to develop likelihood indicators and contingency plans for each.
The Biden administration clearly sought to restrain Israel’s retaliatory actions against Iran in 2024, fearing an upsurge in the Middle East crisis. But with its proxies, Hezbollah and Hamas, severely weakened, and its principal ally, the Assad regime, removed, Iran is more isolated than ever. That may account for the acceleration of its uranium enrichment programme. It needs a tool of deterrence. For Israel, this poses an existential threat. Trump, whose first administration saw the imposition of maximum pressure sanctions on Tehran, would probably not stand in Israel’s way if it sought to hit Iran’s nuclear facilities.
The signposts for an Israeli strike might include a resumption and escalation of the tit-for-tat bombing war between Israel and Iran, a sudden deterioration in relations between Washington and Tehran, and any Iranian attempt to obstruct shipping in the Gulf. In the event of an Israeli targeting of its nuclear facilities, Iran could spark an international energy crisis, similar to the Saudi-generated one following the Yom Kippur war in 1973. Tehran may hit Western-backed Gulf states’ energy infrastructure and close off the Straits of Hormuz. In terms of contingency planning, companies should as a priority map out where their business is most exposed to a spike energy prices, both geographically and in terms of the customers and input costs.
Trump’s protectionist mindset bodes ill for economic relations with Beijing. The president-elect seems set to deliver on campaign pledges to step up their longstanding trade war. In the worst-case scenario, he might impose tariffs of up to 60 per cent on all Chinese goods. The aim would be to reduce America’s reliance on China, undermine Chinese competitiveness and lure manufacturers back to the US. Beijing would probably retaliate with tariffs and non-tariff measures, such as export restrictions on critical inputs and goods and harsh regulatory enforcement. US and Chinese exporters would be severely affected, potentially resulting in a trade rupture.
As a tariff hike is expected to result in bad outcomes for both sides, corporates monitoring developments might not witness Trump going out all guns blazing. More probable would be a rise in anti-Beijing rhetoric to force concessions. China would look to calm matters through diplomacy. But relations are very fragile and combustible. A trigger for Trump carrying out his tariff threat could be a ratcheting up of tensions over other sources of conflict, such as the South China Sea, Taiwan, and China-linked cyberattacks.
Corporates should be alert to such scenario developments. At the same time, they should identify the parts of their business – like R&D and supply chains – that are most likely to be affected by a hardening of the new administration’s China policy. They should then develop actions that would alleviate any anticipated fallout. For supply chains, this might include shifting sourcing and manufacturing locations from China to South East Asia or nearer to western markets.
Closer to home, Trump’s preoccupation with illegal immigrants and drug smuggling will likely ensure that Mexico will be a focus of the new administration’s attention. He might initially put pressure on the Mexican authorities to do more to curb illegal migration by threatening to impose tariff on their exports to the US. If he doesn’t see the progress he wants, he could start deporting migrants to Mexico, which, in turn, may retaliate with its own tariffs and withdraw cooperation on immigration. That could prompt further retaliation from Trump, which might take the form of taxing of remittances, reneging on the renewal of the USMCA agreement in 2026, or even military strikes against drug cartels in Mexico.
Since we are talking about the possibility of a rapid worsening in relations between the two countries, corporates should closely monitor US actions and Mexican reactions – and examine how these spiralling measures will impact their operations in the region. Those most affected will be US companies with supply chain networks across Mexico. They may consider increasing supply chain redundancy and building inventory buffers as well as postponing foreign direct investment decisions.
The blind spot around low-probability, high-impact events clearly needs to be addressed, as some of these events are appreciably more probable amid the Trump presidency’s expected widening of political and security fault lines around the world. The economic tremors could well be substantial, so businesses should keep a close eye on developments that might generate these shocks and have contingencies. Forewarned is forearmed needs to be the watchword in 2025.
Antonio Martinez Castillo is the Managing Director for Americas and Global Economics at FrontierView
