CFOs must adjust the balance between macro and micro risk analysis in the fragile post-war environment.

It may be far easier to rebuild Baghdad and Basra than to repair the damage done to the global economy by the United States' unilateralist approach to the war against Iraq, which now worries many foreign governments and international investors. In April, the International Monetary Fund cut its 2003 world economic growth forecast to a "distinctly subnormal" 3.2 percent because of the war, terrorism and heightened political tensions; that's down substantially from the 3.7 percent predicted in September 2002.

Beyond the $100 billion in direct costs for the war and the first year of occupation, plus the estimated $50 billion lost in consumer and business spending during the period of uncertainty leading up to the war, the U.S. economy may suffer as a result of the growing budget deficit, lost trade and lower foreign investment. Although U.S. companies may face a relatively small increase in risks on a micro level, the macro-level risks are quite large.

Trade Fallout

Macro and micro risks converge most clearly in the realm of trade, where the ability to conduct business across borders is directly affected by political disputes. "The greatest near-term risk to business from the war in Iraq is spillover from damaged political relations between the United States and many members of the European Union," says Naotaka Matsukata, Ph.D., chair of strategic international business practice in the Washington, D.C., office of law firm Hunton & Williams. "The Bush Administration will probably not be able to mend fences quickly enough to prevent collateral damage from hitting the business sector."

Companies with trade or commercial disputes, or those seeking leverage with governments for new investments or regulatory breaks, will not be able to count on much assistance from the U.S. government. "The fact is that the administration has a limited amount of political capital, and it will not spend it pressing the business agenda in Europe," Matsukata argues. "Companies seeking relief should develop coalitions with similarly interested firms in target markets. Building ad hoc alliances will minimize their dependency on government support while preserving business influence overseas."

The aerospace industry, the sector of the U.S. economy with the largest net quantity of exports, built alliances long before the war hit but still faces uncertainties. "It is very unclear what the future will bring for trans-Atlantic trade for the U.S. aerospace industry -- or any other industry," according to Joel Johnson, vice president, international affairs, for the Aerospace Industries Association of America Inc., an Arlington, Va.-based trade association that represents 200 aerospace manufacturing companies.

Matsukata advises CFOs and corporate strategists to keep an eye on a few big-picture issues, including the determination of governments to proceed with liberalizing initiatives on global trade, such as the WTO's Doha agenda. "If trade ministers fail to secure tangible progress on negotiating deadlines, they will send a powerful signal to business that the global economy is retrenching toward protectionism," he explains.

A more direct confrontation may develop over the United States' position on Russia's application to join the WTO, according to Kent Jones, chair of the economics division at Babson College in Wellesley, Mass. The Russian accession process is in its late stages, but the United States still officially imposes Jackson-Vanik restrictions (which require an annual review of most-favored-nation or "normal" trade relation status) on U.S.-Russian trade. "If Congress decides to be grumpy about the Russian position on Iraq, it could decide to sit on Jackson-Vanik and thereby deny Russia the full benefits of WTO membership if and when it does join," Jones notes.

Additional trade tensions continue to grow out of the process of reconstruction in Iraq. "This leaves uncertainties for contract opportunities to rebuild Iraq and for contracts signed with the old Iraqi regime for a variety of items, including oil," says Larry Christensen, vice president of international trade content at Vastera Inc., a Dulles, Va.-based trade management company. "Syria presents other uncertainties for U.S. trade policy. Any increase in U.S. trade restrictions on Syria would likely be unilateral and might further strain the relations with allies in the export control regimes."

Business Is Business

Another macro/micro point of convergence occurs when anti-American protests arising from U.S. Middle East policies target American firms. However, says Robert Kopech, managing director and head, emerging markets practice, with Mercer Oliver Wyman, a New York City-based financial services strategy and risk management firm, "we see irritation and outright antagonism toward the U.S. in various corners around the world, but most people see business as business and separate it from political issues." He adds, "There may be some McDonald's that get nailed -- they are very visible and easy -- but I don't interpret that as widespread antagonism toward American businesses."

During the war, Mercer Oliver Wyman received 10 inquiries from potential new clients in the Middle East, including requests from Yemen, the United Arab Emirates, Bahrain and Saudi Arabia, Kopech reports. "The overall competitiveness of U.S. enterprises across the industrial spectrum is going to drive their success or failure far more than personal or political resentments," he notes.

Kopech believes progress on the Israeli-Palestinian conflict is more important to both regional and global stability and growth than the United States' actions in Iraq. "Within the Middle East region, the focal point never was Iraq," he says. "The Israeli-Palestinian conflict is the substantive problem. If you objectively prioritize the hot spots around the world and the issues that need to be dealt with, Iraq would be somewhere near the bottom half of the list." He advises CFOs to focus their attention on three areas of concern:

1. Global and U.S. economic outlook. The interconnected recoveries of the U.S. and world economies "are neck-and-neck for first position" in the list of global issues that deserve CFOs' attention, Kopech says. Consequently, "U.S. economic policy is going to have a larger impact on business than the war in Iraq and other political issues." New tax cuts on top of already huge budget deficits could prove disastrous, he suggests.

2. SARS. "If we can't find ways to contain SARS, it will become very worrisome," Kopech says. "China, which made considerable progress in its attempt to comply with World Trade Organization rules during the first half of 2003, could lose the last half of the year." The IMF announced in April that it will cut the 2003 GDP forecast for emerging Asia by 0.4 percentage point if the SARS epidemic continues longer than one quarter.

3. Geopolitical risks. A series of geopolitical issues threaten global stability and growth. In descending order of importance, Kopech says, the most significant threats are the Israeli-Palestinian conflict, the United States' standoff with North Korea, the Indian-Pakistani conflict, U.S. tensions with Iran, and the Iraqi endgame.

"All of these issues are simply useful reminders that risk management needs to be systematic and holistic," Kopech points out. "CFOs must integrate all of their risk management tools and analyses within a macroeconomic framework. This broader picture is often lost because executives focus too heavily on micro risks. The impact at the margin of that incremental micro-level insight is dwarfed by what happens at the macro level."

Although the fallout from the war may have only a limited direct impact on the majority of U.S. businesses, for CFOs "the events of the past six months should increase awareness of the importance of events at the macro level," Kopech says. "We live in a world of uncertainty. The relatively mellow period of the expansion of the 1990s and the rise of the U.S. as an unchallenged superpower was more an aberration than the norm."