Tariff Response: What You Need to Know

Read a transcript of the webinar below.

KAREN HARRIS: Welcome to the conversation we're having this morning about tariffs and responses, responses that we're seeing from the conversations we're having with clients around the world, and hopefully some useful context as how to address a rapidly changing world. My name is Karen Harris. I am the director of Bain and Company's Macro Trends Group. I'm here today with my friend and colleague Hernan Saenz, who is our global practice lead for performance improvement, and we're going to have a two-part conversation.

I'm going to provide some of the context around how we ended up in the situation we are today and what we might expect going forward, and Hernan is going to help us navigate what we can do about it in the near and long term. For those of you—we hope you have questions, and if you do, please feel free to put them into the Q&A. We'll do our best to address them at the end of our talk, but if we don't have time, we'll do our best to get back to you one on one after our conversation today.

I want to kick off by starting with some history, and I think to understand what the Trump administration is trying to accomplish, what their strategic intent is, we need to look at how we ended up in the world as it's structured today. If we go back, if we think about the period after World War II, the Cold War, there was a justification for globalization that really sat in politics and, from the West point of view, containing communism. After the fall of the Soviet Union, that justification for free trade, for globalization, became economic.

And if we look on this timeline, we can see in the middle of the '90s the implementation of NAFTA—now USMCA—in the early 2000, the accession of China to the WTO. And it's important to note that this system, while globalizing, wasn't free trade in the way we think about it in an economics classroom or in the textbook sense. The strategy that worked so well for China's growth during this time, that was copied from Japan and the Asian Tigers, was export-led growth.

And very simply speaking, this is suppressing domestic demand and wages, using targeted investment to create industries that were aimed at export versus domestic demand, and recycling that capital into external capital markets to manage exchange rates. So this system relied both on managing exchange rates and the domestic economy quite tightly and also on the existence of a market willing to absorb goods and capital from the world. If we look at this line chart on the left, this is the net goods export.

And for every dollar of the current account deficit, we have a capital account surplus. In other words, for every dollar of goods that are imported into the US, there's equally a dollar of capital that's being absorbed. And this created a system that was quite imbalanced, as you can see.

Germany, most of their exports are within the eurozone, and they arguably acceded to the eurozone, and the exchange rates were set with Germany's a bit too low and Italy's a bit too high. And we've seen that drag on productivity. But if we think about the whole world, this system was fantastically successful for the globe.

China lifted 800 million people out of poverty. There are more people who are technically middle class versus subsistence for the first time in modern history. But it was not fantastically successful for the United States, and in fact, the majority in the US since 2000 have actually seen their standard of living, their prospects, worsen.

And so we have the Trump administration entering with an America first philosophy. So this is not about improving the globe as a whole. It's about improving the circumstances for the majority of voters in the United States. If we look at this data differently, so we take the left hand side of exports and look at the right hand side, we can see that crudely speaking, we've turned into a world of buyers and sellers, a world of exporters and importers.

Now, not all of China's exports go to the United States, nor do Germany's. But the US became the demand sink for the world. Now, what the Trump administration has done is invert a narrative that was essentially the US has become dependent on China in particular for its imports into one that says the world is dependent on the US buyer.

And if you want access to that demand sink, to that US buyer, we're going to tax that access. And a tariff is nothing more than a form of taxation. And so the question—in theory, it's no different than a carbon border adjustment mechanism, where you say, if the exporters are managing wages, managing capital costs, subsidizing capital, managing exchange rate, that will be levelized when it comes to the border.

Now, obviously, this is a very complicated calculation, and the charts that Trump showed on liberation day were not necessarily reflective of those cost differentials. But it is interesting to note that he flipped the dialogue from one where a country needed to take a case to the WTO to prove that another nation was circumventing the rules-based international order to saying, effectively, if you have a surplus with the US, you are presumed to be cheating unless you can prove otherwise. And so that is just a very different dialogue.

I think it's also important to notice that in this blue chunk of consumption in the United States, more than half of that is being done by the affluent. And we're defining affluent as the top 20% of households. So if we think about the US as roughly three types of households, we have the bottom 50% that spend based on their income, the middle 30% who are the classic middle class, who spend, whose primary asset is their home, and the top 20%, who own equities.

And why does this matter? Well, it's not surprising when we see that spend concentration in that top half, when we look at who the beneficiaries were of globalization and particularly globalization post-Soviet Union, while there was a pop in the early '90s, if we look at the 2000, around the time that China acceded to the WTO and became integrated into global trade, the highest earners got almost all of the increase in income. In fact, for about 70% of the US population, real income was flat during this period up until the first Trump administration.

And so we see that while globalization benefited most of the planet, it did not benefit most of the US population. And that looks equally interesting when we look at US equity ownership. If we look at the top 10%, they own 72% of equities.

But if we take defined benefit pensions out of that, which are largely concentrated in the hands of boomers, that as an instrument began to be phased out in the 1970s, and we take out defined contribution pensions, which is a much smaller piece of this, than the top 10% own more than 90% of equities. And so if we think about some of the commentary we read in the media that when the stock market swoon, Trump will blink and so forth, we're not convinced by that because this group, A, is not Trump's voters and is also not the majority of Americans.

So if you poll these consumers and ask them how the economy is doing when the stock market is wobbling, they will say the outlook is not great. But we do our own proprietary polling within the Macro Trends Group, and we just ask about income and intent to spend, intent to borrow. Then we see a much different picture where the bottom 50% of households is actually pretty solid right now, and it's the intent to spend of that top group that is much more wobbly.

And that is the reason that, one, the equity markets are not a break or even a useful feedback loop for what the Trump administration is trying to accomplish, and two, why we expect there to be a recession or at least why that's our base case for this year, because that top 20%, equity markets wobble. They are more than half of spending. That's just going to likely create an air pocket in consumption over this near term.

But if we think about what the goals are of the Trump administration, we think it's important to realize that there are three interlocking and inseparable goals and that these goals are reinforcing. First, balanced and fair trade, and we've heard this discussion in the United States since Bill Clinton was president. This is not a new area of focus, but the amount of energy and the policy going behind it is vastly different in this administration, much more aggressive action, which is what we're seeing through tariffs.

We also need to see that rebalancing US manufacturing is a second and important goal because otherwise one could say, well, if we just sell us farm products and US LNG and US consulting services, then that would be sufficient to balance out trade. But that doesn't rebuild that manufacturing base. To be clear, this isn't manufacturing jobs.

There isn't the workforce, the number of people to rebuild manufacturing in a labor-intensive way at a reasonable price point. This is going to be automated manufacturing that will largely come back to, that is the hope to have restored.

And then finally, there is improved national security. So if we look at the actions of this administration through those lenses —and I should say that Bain, we don't work for the US federal government. This is what we're observing as outsiders. This isn't coming from inside sources.

But if we think about what the actions have been, there is a coherence to some of the sequencing. Trump comes into office, surprises everyone by going by addressing Canada and Mexico on his first day. Why would he do that?

Well, in order to have national security and control of US markets, the US is seeing that it doesn't do a great job of controlling its southern border and has a large, unarmed northern border and that goods that circumvent some of the policy have come through markets and both of those directions. So addressing creating a common yard within USMCA or some renegotiated form of that, where that trade policy is consistent from the northern border of Canada to the southern border of Mexico is a starting point. It's been referred to, I think, not incorrectly as a renewed Monroe Doctrine where we see —and that would explain Marco Rubio's first trip to Panama as well as part of that extended region.

Now, these are very difficult goals, and one can dispute the efficacy of the means that the administration is pursuing to achieve these goals. But I think it's important to flag that they are not not working, that they are not provably not working. And so again, when we see discussions of, well, Trump is blinking or they're going to move, I think that's a —we think that's a misinterpretation.

This is a president and an administration that has strategic aims. Normally, what we see is someone campaigns on a strategic platform. In this case, he was very clear about tariffs, about taxes, about several planks of his policy. We didn't want to hear —and deregulation.

We didn't want to hear anything other than taxes and deregulation, I think, early on. But tariffs were a clear piece of this in pursuit of these goals. If the policy he implements vectors away from these goals, normally a president will follow the policy. So it's close enough, and they'll proclaim success in passing policy.

This president will break that policy and try a different policy. And so we'll see these, one could argue, experimentation loops. One could argue that they're complete chaos and unpredictability.

But if the policy doesn't align with the hoped for outcome, we will see a lot of policy volatility. And that is just something that as business leaders, we'll need to get used to at least over the next few months because as I say, so far, it's not not working. And therefore, I don't think we can expect to see a major pivot.

If we look at these policies across different US sectors, if we start on the left, we can see these lenses of strategic intent, the sectors that —this is not exhaustive but some that fall most squarely into having the most attention and most restrictions around trade. We've seen this already with semiconductors, with advanced technologies like AI. Military has always been a separate and very controlled set of trade by most global actors, biotech, and space.

If we think about manufacturing diversity, we're looking at value add and more complex manufacturing machinery, vehicles, and metals. That's where steel comes in. And we hear from clients, and we understand that this is not a simple process, that to move your manufacturing back to the United States will require, in many cases, equipment that, if not made in China, has parts that come from China.

And therefore you're getting caught in cross border import tariffs that create a lot of complexity in the business, which is why we expect to see exceptions —volatility changes as some of this is communicated back and forth within the administration. But those are sectors that will have a lot of concentration. Less important will be low value added or labor-intensive trade like clothing, garment assembly, furniture, electronics and so forth, although I'll note that I think we sometimes underestimate the creativeness and flexibility of the US economy, we've seen that with COVID, and that there may be startups and companies, we've already seen some of them, that find other ways of creating —shoe wear through extrusion that may —it will not create, it will not rebalance that trade. But I wouldn't underestimate those ecosystems developing.

And then finally, hard commodities, soft commodities, oil, they come from where they come from and are likely to be the anchor of global trade going forward. What we hear from our discussions are really two major views of what's happening that set into four categories. The first half is if we hold our breath long enough, this chaos will go away, either because it's chaos for the sake of chaos or chaos without purpose or that this is the art of the deal maximalism and that when deals get done, we'll go back to normal.

And I will say, having spent time now in the last month in Latin America, in Saudi Arabia and the Middle East, in Europe, there's no going back. The trust has broken with the US, at least the dependence on it, as a predictable and consistent actor. And that is not going to be replaced if the Trump administration wakes up and says, just kidding. We're going back to where we were in January.

That's just not going to happen. And so we really need to think about what's going forward. There are two views of that.

One is that this is just about China, which I think underestimates the amount of friction that we could see between the US and European markets thanks to the trade imbalance there. We think this is a demolition. We call it a controlled demolition, others refute the control, of global markets, and that requires a different set of considerations and adaptability as we look forward over the next year and several years.

We have some areas of high conviction. One is that Mexico and Canada, that we will reach a trade agreement in North America with those two countries, given their dependence on US trade, that may not be a fully fleshed out, written USMCA, but there will be more flexibility there, that Southeast Asia is within —China is their most important trading partner, and they will continue to try to be open to both, and that there will be parts of the world like India, Saudi Arabia, that will benefit from being effectively third parties within this trading system.

Why is this not insane? Why is it not insane to tariff for the United States and do something that, if you read the papers, is inflationary, just adds costs, won't work? Well, I think it's important first to note that the US economy is much less trade-dependent than other large economies, and therefore, there is lower domestic downside risk.

What does that look like? Well, if we take 15% of US GDP, that's 100% of imports. Only 11% are goods. But let's say, for some reason, there's a tariff regime on all of them. We tax 100% of imports with a 30% tariff, and 100% of that goes into the hands of US consumers, which also won't happen.

We're seeing a one time price adjustment-- not inflation, but a price adjustment-- that is a quarter of what we saw during COVID. And we know that certainly during the last tariffs that much of that was absorbed in margin. Some will be absorbed in different parts of the supply chain. This will create recessionary pressure.

We are confused that there's so much conviction around this being inflationary when a tax is deflationary. Certainly, some sectors will see price inflation, but there isn't the consumer strength nor the elasticity that would say that some sectors won't see reduced demand. We may see some import substitution, some exchange rate adjustments, and so forth. So this isn't a torches and pitchforks to the White House event in terms of inflation.

So what do we do going forward? Well, I'm going to hand over to Hernan to address that, but I do think it's useful to think about a frame for that. There are short term actions that are very tactical, and we'll have more detail on those. But over the long term, I think the question for those of you who are feeling a bit frozen, and I don't blame you for that, I would say, do you believe the world looks like it did when you made these bets and deployed these assets 1, 3, 5 years ago?

And I think most of us would say no. And therefore, if you were an activist investor or a hedge fund, how would you look at how these assets are deployed? What is the fundamental worldview or prediction that's embedded in those deployments?

And if you looked at that, what options are out of the money that you might want to unwind from, and where do you want to create options and hedges that head towards a future, a 2040 future, where instead of manufacturing that's labor-driven and scale-driven in a concentrated, global way, is more diffuse, is more automated, therefore more energy-dependent, and is closer to end markets? And how do you start to navigate towards that future? But I will hand over to Hernan to talk about what we can do right now.

HERNAN SAENZ: Thank you, Karen, and I hope you find Karen's explanations and perspectives as helpful as I find them. I think it's easy to step back and say, look, there's an enormous amount of chaos. I don't know what's happening. Therefore, I can't act.

As you heard from Karen, actually, there's more intent and clarity in the intent than meets the eye. In addition to that, you can start making predictions with some conviction around what's going to happen in different sectors, what's going to happen across different countries. And that allows you to act. And while your competitors are standing by the sideline, it is good to act.

I wanted to actually go from where Karen was to literally what should you do, what should you be thinking about. And as we work with our clients, as we look at companies around the world, we are observing four actions that make sense to consider. The first one is you have to understand your exposure. And by the way, exposure is very difficult to model because supply chains in the world are global.

And so you have global dependencies. Your suppliers have global dependencies. Their suppliers have global dependencies. That creates a lot of complexity in understanding what the actual exposure is. We'll talk about that in a minute.

The second and probably the most interesting one is exposure is —your absolute exposure is interesting. Exposure relative to your competitors is more interesting. And to the extent that you are less exposed than your competitors, you can actually play offense. And playing offense at a time of turbulence usually has extraordinary benefits.

The third thing that we want to suggest is that we are going into a much more expensive world. Costs are going to go up. We're moving from a global world to a regional world. We're actually reducing our economies of scale.

In that world, structural cost reduction matters and the degrees of freedom of being a cost leader are ever more relevant. And the last thing, as Karen was saying, is today's supply chains no longer make sense. They are long, they are global, they are inflexible, they are opaque.

Those are not going to be the characteristics that win in the future. So the last thing that leading companies are doing is they're starting to rethink and reinvent what those footprints need to look like. Let me go through each of these in turn.

How do you think about modeling your exposure? How do you think about the levers that you have? On the top of the page are the two things you have to model. You have to model costs because one of the things that happens with tariffs, or taxes, is costs go up, but costs don't go up in any uniform way. They will depend on componentry. They will depend on flow.

They will depend on country. So each product is going to have a different resulting effect. And by the way, costs is one dimension. But ultimately, the question is, who's going to bear that cost?

Are you going to bear that cost as the manufacturer? Is your supplier going to bear the cost? Or in fact, will you be able to pass on the cost? And so a lot of product demand modeling is being done to understand what is the elasticity of demand of different customer segments. How are customers and competitors going to respond? And that gives you a sense of your full exposure.

The other thing that's quite interesting is there are far more available levers today than you would think. And so as we are working with our client base across sectors, we are seeing supply chain actions within current structures that are very much mitigating the effect of the tariffs. And we'll talk about all those things that you can do.

And of course, we are observing pricing actions in the market. The really smart companies are not using one size fits all. They are using incredibly surgical approaches to this.

Now, this is all very high level, and the devil is in the detail. So let me get into that detail. The first thing is, how do you actually model the exposure? And it's actually more complex than, again, meets the eye, more complex than where most companies are starting.

Companies, of course, are starting by saying, who are my international suppliers? Where are they located? Therefore, what tariff are my components going to have?

Where is my plant. Where do I do final assembly? And therefore, what is the cost that I'm going to bear for any given tariff structure?

The issue is that's not enough. All of us have global supply chains. So we have domestic suppliers that have international tier two exposure, again, by country.

We have domestic suppliers that have raw material exposure. By the way, we all have domestic suppliers who don't have exposure but will use the tariff regime to opportunistically raise prices. And all of this has to play out by supplier, by country.

And then, really, it comes into what is the product effect. And one of the things that we are noticing is different products for the same manufacturer have very different effects. The product flow matters, the componentry matters.

And for certain clients of ours who have two sources of supply for the same product, we are seeing the tariff regime create very different economics for the same products just because of different flows. And then where the rubber meets the road in some ways is what is happening at a customer level. In other words, once I look at every one of my products and what portfolio of products is being bought from me, you have this fundamental question of how much exposure do I have.

The exposure might be my margin because I can't raise price, or the exposure might be my sales because I'm going to raise price and demand will have some elasticity to it. When you have this, you do have a full vision of at least your exposure. Now, how do you build this model? Dynamically.

Why do you have to build it dynamically? Because there's going to be back and forth about the tariff regimes and whether the tariff regimes apply to final goods or components. Now, to the right of this page is an example, a live example, that we're working on this week of how big the exposure can be and how many levers are available to reduce the exposure.

And what I wanted to bring to life is there is significant, significant flexibility in existing supply chain structures. What levers are we observing? We are observing massive inventory adjustments.

Where do you have it? Both the work in process and the final goods. We're observing supplier shifts. Why? Because through COVID, through the tariffs of 2018, we did see a globalization and a regionalization of new suppliers.

Today, we do have the ability to move suppliers. The question is, do you have a long term agreement? Because if not, suppliers in favored countries are going to be raising prices very quickly.

We're also observing shifts in manufacturing. We're observing plants in certain parts of the world at a third shift, at a second and third shift. We're observing plants actually shutting down certain shifts. And we're observing the same in terms make versus buy decisions.

Now, there are things that may seem obvious but are incredibly important, and I do want to mention them. Right now, you could make all the right decisions in the world and have them not implemented correctly. Your border operations, your supplier operations, your logistics operations, and your inventory operations better move at the pace you expect them to move.

Literally, the question of where your containers are, on which side of the port, actually matters. And if you make a decision that they have to be inside, they have to be inside. That matters a lot.

The last thing is we have actually done product flow and classification management to actually minimize taxes. Today, there's another variable. It's called tariffs.

And therefore, your product flow and your classification management now has to embed both tariffs and taxes. And again, if you use all of those levers you might end up on the right hand side of this page with a much, much smaller remaining exposure. Now, more levers open up later. You can change the product engineering.

You will add new sources, new suppliers. You will change your make versus buy and whether you make stuff in the Americas versus Europe versus Asia. And one of the things we're observing is an acceleration of circular models. Circular models benefit tremendously from regional and local scale.

Once you actually understand the cost implication, you have the pricing question because once you understand how much the cost of your product went up, you have to ask the question, will I raise price? And will I raise price is not a monotone or binary question. It is a segmentation question. And again, I have an example from work this week with one of our clients where we're sort of literally going segment by segment, your most important customers, other top accounts, the long tail of customers.

Where is the revenue? How big is the exposure given what they buy? What is the price required to actually keep my margins?

What scenarios do I want to play out? Do I want to raise price in the same way for every segment? No?

Do I want to protect my top customers but actually move into the long tail? What can I do? How is my competitor going to respond? Playing defense requires both levers, the supply lever and the pricing lever.

But probably the biggest message I want to leave you today is don't just play defense. Play offense. Why?

We are in a period of massive turbulence, of uncertainty, of crises. And what happens during those periods? Well, when you compare periods of turbulence versus periods of crisis, versus stable periods, you have many more rising stars. You have many more sinking ships.

What do I mean? I mean companies that gain massive share or lose massive share. In fact, we have about 50% more rising stars and 90% more sinking ships during periods of turbulence, both because people make mistakes and because they tend to stand by the sidelines.

And the chart on the right is a chart we study every single time there's a period of turbulence. And what we see is that there are always a percent of companies that take action while the others are watching, and become the winners of that turbulent period. We believe this period will play out exactly in that way.

How do you play offense? Well, one of the things you're going to have to do is model your exposure relative to your competitors. So everything I talked about a couple of slides ago about what you need to do for your own supply chain? Same thing for direct competitors. Every competitor you have, what is the magnitude of exposure that you're going to have by supplier, by product, and to what extent do they have the ability to mitigate?

If you look at automotive, just to mention one industry in the US, and you compare all the players, the fundamental exposure is so different across players, you would not think they're in the same sector. And if you're in that world, if you're less exposed, and wherever you are less exposed, you have a very interesting opportunity to compete on price for price-sensitive segments and gain share. And for less sensitive segments, you might be able to just match industry pricing as it goes up and create a bucket of money for investment.

The other way to play offense is to take costs out now. We are in an environment where costs will matter. We've always known the industry leader in costs is often correlated with leading industry economics. This is going to be true again. It gives you degrees of freedom, and you're going to need every degree of freedom.

So, what are the leading companies doing? They're simplifying. We are going back, just like we did in the time of COVID, to focus on the customer value proposition while reducing complexity. We're reducing complexity not only in our product lineups but in processes and organizations.

And once you do that complexity reduction, the power of technology comes in. And so we are watching companies literally divert, disassociate, revenue and cost lines by doing automation, machine learning, traditional AI, and generative AI. On a simpler organization, the power of technology comes alive once you actually start simplifying the full set of levers in your organization.

What else is happening? Companies are using that technology to create visibility and transparency that allows them to make decisions that their competitors cannot make. There are also variablizing cost structures as a way to create resilience and flexibility.

One big watch out: in the past, companies have reduced costs by benchmarking and creating top down targets. That takes out costs, but it takes out costs for two years. Two years in, they're all back.

We are going into a structurally more expensive world. In that world, the work needs to come out for good. You're going to have to redesign the work from scratch using zero basing and also embed a cost discipline across the organization, both in the tools and in the culture.

And this takes me to the last and most strategic of recommendations, and in the world of operations, we have moved. We have shifted. We used to be in a world that was somewhat predictable and algorithmic.

In fact, we used EOQ, Economic Order Quantity, to decide where to put our inventories, and we press Return on our computer to do that. Of course, I'm oversimplifying, but think about a world where today, we have to invest in resilience, where we have to invest in flexibility, where we have to invest in traceability, where we have to invest in circularity, where we have to actually meet very, very complex demands from our customers. We cannot afford everything that the supply chain would like to have.

The right hand side of this world is strategic. As a business leader, you have to make the trade offs. The computer will not be able to make them for you.

And in that world, you're also going to have a dynamics. Everything is going to be changing, and you're going to have to be revisiting. So, what are leading companies doing? They are transforming their supply chains.

This started in 2018 and 2019. We have seen enormous movement in where plants are, where supplier networks are, and how they are set up. But most companies are telling us we're going further.

How do you do this? Well, you have to start with your go to market. You have to start with your customer who you're trying to target.

But what we're telling companies and what we're doing with our clients is saying, you can't be incremental anymore. So in fact, don't try to solve for the network today. Solve for what the network would look like unconstrained. And that creates a much bigger picture thinking of how you might set up networks.

What are you fighting? You're fighting the fact that we used to have a globalized world, and we were using global scale. And now you actually have to get scale and economics at a regional or local level.

So, what do you do once you have that unconstrained network? You put in constraints. You identify scenarios.

And all of that gives you the ability to create a portfolio of actions. There will be some no regret moves. Taking cost out is one of them.

There will be a number of options and hedges you will do. Those options and hedges that people took three years ago today are working, and they're being scaled. What are the next set of options and hedges that you will put forward?

When and how you scale them, the world will tell us. And there's big bets, and those big bets will be waiting for signposts. And as Karen said, how are we framing this?

How are we evaluating it? What can we predict? What signposts do we need? How quickly can we adapt? And in a world of a massive hit we didn't expect, will we survive?

In short, there is a lot you can do. There's more clarity than meets the eye. Karen gave us that. And there is a lot that our top clients are doing and companies are doing today modeling that exposure, modeling the relative exposure, playing defense, playing offense, starting to take costs out, and rethinking the nature of networks. With that, we have lots and lots of questions. And Karen, you've had a chance to read from some of them now.

HARRIS: I did. Yeah, thanks so much, Hernan. I think I will take down the presentation so you can see our great big faces instead, but I wanted to address a couple of them, and then, Hernan, there are a few for you as well.

I think a couple of rich veins of questions come in two places. One is what are the reactions of China in particular but other nations like Germany likely to a US recession, to US protectionism, to rebalancing. And I think this is a really important question to ask for companies that are operating within Europe, within Latin America, because one of the things that we've seen is the incredible nimbleness and flexibility of Chinese companies that from the first Trump administration already repotted ecosystems and manufacturing to Mexico, to Hungary, to be closer to end demand with very fast results.

And given the cost competitiveness of the Chinese market, when industries get subsidized in China, it's not picking winners the way sometimes westerners think of it. It is more like creating a Hunger Games arena where you only survive by being the most ruthless about taking out costs and being incredibly competitive. So you start with a few hundred EV companies, and you end up with a dozen, a few of whom are the greatest companies in the world in automobile manufacturing, like BYD or Great Wall.

And what that produces is —and add to that a lot of excess capacity because of very low domestic demand —well, China is pivoting a bit to try to stimulate that. But in the meantime, you're a very agile Chinese company with an excellent product. You're going to be eyeing markets in Europe, in Latin America, what's called the Global South, although it's not all south.

And those markets become much more competitive. So we may see retaliatory action. We may see Europe really struggling, European companies struggling. And it will depend largely on the actions of the governments to decide whether they want to protect those walled yards, adjust for cost and policy discrepancies at the border, or just allow open access to those markets.

But it will become much, much tougher globally to compete. Germany's trade is very anchored within the European Union, though its two other large markets are the US, which becomes more challenging, and China, which, frankly, they are in a product category where their products are not performing as well as Chinese products in the auto sector, which has implications for the Mittelstand. So that is one dynamic that we expect to see, just fierce competition for non-US markets from Chinese players and other global players, too.

The other question I wanted to address first and then let Hernan address some of his is essentially, if we're so reliant globally on affluent people in the US, how is that sustainable? And I love this question because there's so much packed into it. There is the question of whether this income inequality can continue and some of the frustrations that we've seen in politics.

I showed how income was effectively flat for a large portion, real income, of the US population. What needs to be overlaid on that is the fact that the costs of rent, of education, of health care all increased at far greater than inflation rates. And so the cost of being middle class became increasingly untenable.

And intergenerationally, families looked and said, my kids are going to be materially worse off than we are thanks to these factors, thanks to the difficulty of maintaining that standard of living. And add to that the opioid epidemic, and we see a lot of reasonable cause for frustration reflected in very thin outcomes in political races. How long is that sustainable? I think we've reached the end of that. That's what we're seeing in some of these polarizing swings.

Furthermore, I think there's an interesting question to ask. If we take what we, in Bain jargon, call a future back view, in 2040, manufacturing is going to be done by robots that are manufactured by other robots. It will be, as Hernan said, smaller scale, closer to end markets, more flexible in terms of consumer needs.

If the US wants to regain, maintain, use whatever word you want here, whether it's still great, great again, its competitiveness, then when is it too soon to start investing in the reshoring and automation rather than global scale that takes advantage of its relatively cheaper energy costs, innovation in technology, and its rich demand markets? And so I guess that would be the challenge I'd put out as we look forward and say we are wrecking the global system. We are ripping it out by the roots.

That is what this administration is doing. Is it too soon or too late to be doing that? And it's in service of what?

And we haven't seen a clear blueprint communicated on what we're rebuilding towards, but it is not incoherent to be taking the actions that the administration is taking now to get to what I think is a fairly high confidence future. And I just want to add one note. Somebody asked astutely if the US —shouldn't the US be the largest consumer on that Mekko, buying the most if they're the wealthiest country?

Yes, but that was net imports and net exports. In other words, global trade does not have to go down in balanced trade. But this is a move for the US to buy more domestically-produced goods and/or sell more goods abroad.

That would create more balanced trade. I don't know if it will succeed, but that is the aim. Hernan, over to you.

SAENZ: Yes, well, thank you to everyone who's putting in questions. Lots of rich questions also on response. Let me address a few of them. One of the questions is, are companies literally responding now, like the examples I was showing, and how are they building the teams to do that?

And the short answer is absolutely. What we are observing is we are observing companies run the numbers and, as soon as they see the numbers, say, we have to act and respond. What is the best practice out there in terms of the teams?

And I'll tell you, it's two things. Number one, they have to be cross-functional. Yes, being good at procurement matters because you need to find suppliers to do certain things for you that you didn't do in the past or make sure that you get preferential treatment at a very difficult time when supply is constrained.

But in order to create massive degrees of freedom in your value chain, and it is a chain, you need everyone. You need to understand what degrees of freedom can I get from my customer. And therefore, you need your marketing and sales teams.

Then, what types of degrees of freedom can I get on my entire supply chain, which looks at logistics, transportation, warehousing, manufacturing and supply, where the inventories are, where they're not, et cetera, et cetera, et cetera. So build cross-functional teams. The other one is separate immediate response to planning for the future.

There's act now teams and plan now teams, and it's very, very important to separate them. The folks that are going to be making sure that things move across a border in a way that they're classified very quickly are not the same folks that you need to actually be thinking about what are the bets that I can place, what are the signposts that I need to look at. There was a question of what's the best practice, and what I will tell you, the best practice is think offense.

A lot of folks just looked at the defensive posture. What is the cost that I'm going to have and can I mitigate it? That is an interesting question. That is a relevant question.

But if you somehow are advantaged, if you do that analysis and say, I don't see that much of a hit for me, or I can manage it, one of your competitors is looking at it and saying, I am hit, and that puts you in a competitive advantage at a time of turbulence when people are not acting and you can gain share. And I think that makes a big, big, big difference.

There is a question about what do you do if you're a SME, if you're a small or medium enterprise. Yes, that is the fundamental question facing not only SMEs, everyone, which is, we were all relying on global scale and the global scale that China provided for many of us as a way to have competitive economics. That is going to change.

We are moving to a world of regional scale. And for big and small companies, that means redefining the basis of competition. And so that is one of the most important things we're going to see. We're going to see which customers do I want to serve, what is the best way to serve them in a regional/local way, how can I create scale, and who do I end up serving because of that?

By the way, we're going to see many, many more of these small and medium sized firms operating as ecosystems. They're going to have to rely on others to scale. And that's actually a way to build options and hedges as a larger provider.

One last question: is tariffs the big hit and the way that we should be redefining our supply chains? Yes, it is the largest. Latest hit, no. We will continue to have hits.

The reality is, we have built incredibly long, incredibly inflexible, global, opaque, linear, carbon-rich supply chains. And as you think about every word I use to describe the supply chains, you probably know that that's not a way to have competitive advantages in the future. You want them shorter, more flexible, more visible, more circular, greener, more responsive, et cetera.

And so no, it is a complex multivariate equation that of course, includes tariffs. But no, we are solving for a very strategic issue. I think the area of operations is truly the area of strategy now. Karen, I don't know if there were any more questions that came your way.

HARRIS: Yeah, I think one of our colleagues, Caperton Flood, who runs our supply chain practice, puts it pretty straightforwardly when he says supply chains used to be a source of cash, and now they're a use of cash, which I like. I will say there's some comments that are quite worth elevating. This is chaotic. It's complicated. It's messy. It will add cost in the near term.

This is why we think —why our conviction around a near-term recession is relatively high. And what Hernan's describing is definitely a path forward. But as policy changes, the speed at which supply chains can adapt is probably being lapped by the speed of policy change right now.

And I know there's tremendous frustration from business leaders about that. I also think that may be part of the operating environment, which is why we'll see margin hits and challenges and unintended consequences. Our view is actually that the administration is probably underestimating the damage that all of this will cause in the near term, that this is likely to create a greater downturn than may be anticipated, but that we may be underestimating the resilience of the economy and how quickly it can adapt.

Not to say it will adapt in a year, but we saw in COVID the degree to which companies can shift and change when they understand what target they're running towards. And so that, I think, is worth highlighting and an important part of the conversation. The other question that I saw emerge is what is the impact on the US dollar. And this is a huge and important question.

A world of more balanced trade —what creates big pools of roving capital? While some of it was financialization and deregulation of financial engineering, some demographics, but really, imbalanced trade created huge pools of capital, either because some nations, like oil producers, sold much more than they could buy and accumulated wealth funds that way, or the export-led growth model, which meant you sold more than you consumed and accumulated large amounts of capital. This is why Japan and China are such large owners of US treasuries.

A more balanced trade world, it has less global capital. And so I think it's fairly clear that we're moving to a world where the US dollar will not be the anchor of trade with a massive absorption of capital account. There is no replacement for that right now. I don't believe Europe, whatever their talk, is willing to absorb both the goods and the capital that would be required to take that top of pyramid seat where the UK sat and then the US sat.

So that will be very apropos given the situation at the Vatican, a vacant seat as the global anchor of trade. Now, the value of the dollar is a different question because with fewer dollars circulating and potentially fewer dollars demanded, that supply-demand is unclear. So yes, we're seeing a weaker dollar now and urging of southeast Asian countries to rebalance. We saw a very interesting movement in Taiwan this week.

But does that necessarily mean that the dollar will be of less value? I don't think that's necessarily clear. And so as financial managers, I think for those of you who are in that space, I think the one thing that is clear is we will not have the financial growth that we've had.

1970, financial assets were three to four times the real economy. 1990, six and a half  times. Today, it's about double that. So the financial economy outgrowing the real economy by a factor of 4, that created cheap and mobile capital, that system is unwinding along with trade, which will be very different going forward.

And with that, I think respectful of your time, I just want to thank you all so much for attending. This recording will be available on bain.com for those of you who are interested, and please continue to reach out to us with questions and thoughts. We look forward to it.

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