War With Iraq: What It Means for Small Business

With an invasion looming and the economy teetering, you need to know what lies ahead and how to prepare your company. Get your information here.

By Joshua Kurlantzick

Opinions expressed by Entrepreneur contributors are their own.

As a U.S. invasion of Iraq likely looms in the near future,people in America, Europe and the Middle East have been ferventlydebating the subject. Massive antiwar protests have broken out inthe United States and Europe, and in response, American officialsand supporters of the war have mustered fiery rhetoric to justifyan invasion. The U.S. and Britain have begun a furious round ofdiplomacy talks at the United Nations, wooing formerly ignorednations like Cameroon and Guinea in an attempt to obtain a secondresolution authorizing force against Saddam Hussein'sregime.

But largely lost amid the clamor over Iraq is the fact that aconflict, which Pentagon sources say probably will begin in lateMarch, could have a major impact on the American economy, whichappears to be slowing down once again. For small businesses, whichgenerally operate with less of a margin for error and smallerreserves of capital and staff, a war could be devastating--orpotentially empowering.

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Tightening the PurseStrings
Some companies have expressed concerns about the potential impactof a conflict on shipping and supply lines, and many businessexecutives have postponed plans to travel in late March and earlyApril. Indeed, a recent survey of business leaders by theAssociation of Corporate Travel Executives showed that 82 percentof corporate travel managers said their firms would reduce travelin the event of war.

But overall, says John Satagaj, president of the Small Business LegislativeCouncil, a Washington, DC-based trade organization, few smallbusinesses fear that an Iraq war will make much difference tosupplies. "Supply chains are affected by unforeseenevents," Satagaj says. "The Iraq war is seen as basicallypredictable--when it's going to start and, probably, howit's going to go, so suppliers can incorporate it into theirplans." In fact, Satagaj adds, the aftermath of the West Coastport lockout actually has had more of an impact on supply chainmanagement, since these events were so much less predictable.

Although they are not overly concerned about their suppliers,small companies have other major worries about the ramifications ofwar. The last five American recessions have all been preceded bysharp rises in global oil prices, and the run-up to war has led tooil spikes. One year ago, oil cost less than $20 per barrel on theworld market; today, it is at nearly $37 per barrel, its highestlevel in two years, and economists have begun to worry aboutanother recession. (Economists normally estimate that every $10rise in the price of a barrel of oil cuts U.S. economic growth by0.5 percent.) "Rising oil prices increase costs for basicallyany small company that has vans or needs to make deliveries, whichis mostly everyone in the service industry," says Satagaj.Indeed, truckers are now adding fuel surcharges of up to 80 percentfor shipments.

Worse, higher oil prices, combined with government spending onthe war, could lead to massive federal deficits, boosting higherinterest rates and raising the cost of borrowing for smallbusinesses, which are often the first to find their loan conditionstrimmed by banks. William D. Nordhaus, a prominent Yale economist, hasestimated that a war with Iraq and a post-war reconstruction of thecountry could cost the U.S. government as much as $1 trillion.Unlike in the Gulf War, America is unlikely to be able to turn toallies after the war to foot much of the bill, since many Europeanand Asian countries oppose an invasion of Iraq.

The federal deficit, which has reached its highest level indecades, thus probably will rise even more in 2003 and 2004.Already, banks have begun to cut back on lending to entrepreneurs.In the Federal Reserve's most recent survey of loan officers,the net percentage of banks tightening loan standards for smallcompanies rose to 20 percent, from 6 percent in the previousperiod. "I had always been a good customer with the localbank," says Walter T. Towner, president of Thorsen Inc., a26-person metal works company in Avon, Massachusetts. "I wascash-positive up to the 2002 Christmas season, but they kepttightening the loan requirements, eventually even asking me to putmy house up as collateral for my business loans." In lateDecember, Thorsen filed for Chapter 11 bankruptcy, and since then,Towner has been negotiating with a court over the future of hisbusiness.

Even more than the impact of higher fuel prices, however, theuncertainty surrounding war, combined with the oil price shock, hasdepressed consumer spending and devastated small companies."There is this general mood of pervasive anxiety in the publicthat they don't want to buy any big items while the economy isstill overshadowed by the threat of conflict. They feel insecureand threatened by war, and this filters down and impacts smallcompanies," says Joel Marks, executive director of theAmerican SmallBusiness Alliance, a trade group in Washington, DC. "Noone wants to buy anything until they know what will happen in Iraq,so small retailers and other businesses are hurting, not hiringpeople, not making investments. ...Everybody is just freakingout." Indeed, last month the Conference Board's closelywatched index of American consumer confidence fell to its lowestlevel since October 1993.

Some entrepreneurs also have lost high-quality employees who aremilitary reservists--roughly 150,000 National Guard and Reservemembers have been activated in the buildup to a war. Among thesereserves are employees whom entrepreneurs can't replace becausethey know they will return from war, but whose jobs have to befilled in the short term. "Five or six months ago, Iwasn't hearing much about reservists leaving hurting smallbusinesses, but over the past month, I have started to hearcomplaints about lost reservists from many small companies,"says Satagaj.

Higher fuel prices also cut into consumer spending, as Americanshave to pay more to pump gas into their cars and heat their homesthrough an unusually cold winter in the Northeast and Midwest.What's more, rising oil prices have staggered investors'optimism and depressed the U.S. stock market, still a majorrepository of many Americans' wealth. The Dow Jones hasplummeted in recent weeks. (In a strange turn of events, theBaghdad stock market actually has soared in the past month, thoughas yet no one has figured out why.)

Entrepreneurs, in turn, have felt the impact of depressedconsumer spending. "Last spring, we were doing tons oftraffic," says Magda Halgash, owner of Angels in the Attic, anantiques store in Leesburg, Virginia. "We would clear as muchas several thousand dollars on one weekend day, but in recentmonths, it's just dead. No one has any money to spend becauseof layoffs in this area and their fear of the future. . Somedays now we only get one person coming into the store." Theeffects have been so devastating, in fact, that Angels in the Atticwill close on March 31. "I'm not even breaking evenanymore," says Halgash. "I am spending my savings andtaking out huge credit card debt, and only taking in $100 or $200on some weekend days--I just can't afford to stayopen."

Silver Linings?

The looming war is not causing gloom for all small companies,however. Some firms in the military-industrial sector stand tobenefit from war-related orders. In San Diego County, for instance,where military spending accounts for nearly 10 percent of thearea's domestic product, an Iraq conflict could goose alanguishing regional economy. Similarly, many of the smallermilitary contractors--such as Florida-based Talla-Tech, whichbuilds handheld computers used by Special Forces scouts tocoordinate air strikes--that design the latest generation ofhigh-tech weaponry, which will be showcased in Iraq, could receiveheightened Pentagon interest in their latest products.

Still, notes Warren Bailey, associate professor of finance atCornell'sJohnson School of Management, the impact of defense spending on theeconomy is far less than it used to be. "In previous wars,like Vietnam or World War II, spending on the war could be aconsiderable percentage of U.S. gross domestic product. Spending onIraq, even at the high-end estimates, would be nothing more than afraction of that," Bailey says. "We're not going tobe revving up Rosie the Riveter and sending millions of men to war,like we did in the 1940s."

What's more, some small companies believe a quick victorycould end the uncertainty that is plaguing consumer confidence,curtailing consumer spending, and accordingly forcing smallcompanies to be extremely cautious about new hires and capitalinvestments. "The benefit of a conflict would be that, once ithas begun, and as long as it goes OK, much of this pessimism anduncertainty probably will disappear," says Satagaj."Right now, the economy is in first gear, with the anxietykeeping it from shifting into second or third." Indeed, duringthe Gulf War, on the first day that the United States startedbombing Baghdad, the Dow Jones rose by 5 percent, and the S&P500 gained more than 50 percent in the three years after the GulfWar.

And as Grant Aldonas, Undersecretary of State at the U.S.Commerce Department, has noted, a short war, lasting four to sixweeks, leading to a collapse of Saddam's regime and notseriously damaging Iraq's oil fields, could sharply lower oilprices, helping small companies. "The effect may actually bepositive economically . because it will open up the spigot onIraqi oil," Aldonas told reporters.

A study by the Institute of Directors, a prominent London-basedeconomic think tank, backs Aldonas' assertion: It showed that abrief war would lead oil prices to fall to at least $20 per barrel.Such a prediction is not fanciful. On the first day of U.S. airstrikes during the Gulf War, global oil prices plummeted 33percent.

Joshua Kurlantzick is foreign editor of The New Republicand a frequent contributor to Entreprenuer.com.

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