Much of the attention right now is focussed on the macroeconomic effects of the trade shock,  or what the higher tariffs could do to the world trading system, economic growth, job creation  and inflation. However, if the world economy eventually settles into a new equilibrium with more protectionism—as it likely will—then it would also be useful to figure out what the impact  will be at the microeconomic level on the  factory floor, company balance sheets and  production costs.

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We may be in the early stages of a profound move from efficiency to insurance, from planning for a predictable world to planning for a world of disruptions. Much of this is captured in a single word—resilience. The essence of resilience is a focus on stocks rather than flows.

Consider a company in India that makes electric vehicles. It can no longer be guaranteed a steady supply of rare earths needed to roll out cars from its production facilities. So what can it do? 

One option is to always hold excess inventory of key inputs that come from outside the national borders—in case there are supply disruptions. Another option is to see whether it can diversify its supplier base beyond the cheapest one or seek alternatives to the rare earths it is using. Or, in the worst case, it could make its capital stock as well as labour force more flexible so that it can pivot to other products.

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None of these three options will be costless for the company. The need to hold higher inventories as insurance against supply disruptions will increase its working capital needs. The quest to build a diversified supplier base in anticipation  of sudden breaks in a supply chain would mean making peace with the fact that the company may decide to source from suppliers that do not provide inputs at the lowest cost. Pivoting to other forms  of production by repurposing men and machines  is a costly affair. In short, the tariff shock has implications for corporate productivity.

Building stocks for resilience or diversifying as insurance is not costless. The question is: Who pays for these risk buffers? The example of agricultural policy is a good illustration. A country that is hostage to erratic food production will build up stocks of food so as to stabilize prices and ensure that no citizen is left hungry if monsoon rains play truant. 

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The government would also provide price incentives to farmers to produce what the country needs for food security, rather than what would be most profitable if prices were determined in the market alone. Maintaining large stocks of food or subsidizing the production of certain types of food is usually funded through the government budget and in effect sucks up money that could perhaps have been used to build schools.

Another example is foreign exchange reserves. Countries build up foreign exchange reserves as insurance against unexpected global shocks, be it a sudden increase in energy prices or a drying up of capital flows, for example. Once again, this is not a costless operation. Holding foreign exchange reserves imposes fiscal costs on an economy, because the reserves are held in international  sovereign bonds that usually pay a very low rate  of return.

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The upshot: A new focus on national economic resilience will affect economic activity at various levels. In the case of food policy or foreign exchange reserves, the insurance costs are borne by the government. But that may not be the case when companies begin to maintain extra inventories, partially diversify away from the cheapest supplier, and factories are built to be adaptive rather than produce what they would be best at.  At least part of the burden of such risk-mitigation strategies may have to be borne by the private  sector.

However, and this is in the realm of speculation, governments may mandate rules for backup systems, supply chain concentration and stress tests for key industries, a bit like what happens in the financial system. That would pave the way for more government intervention in activities of the private sector.

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Finally, consumers may unknowingly be forced to bear a part of the burden for national economic resilience by paying higher prices. How the costs are shared between the government, the private sector and consumers will likely be a tricky regulatory and political choice.

As the world has become more uncertain, there may be no escape from hard decisions. Disruptions from trade shocks, geopolitical frictions, actual wars and erratic climate or pandemics have encouraged countries as well as companies to think about stockpiling resources, creating safety nets and designing backup plans. These shifts are unlikely to stop at the national level. It is quite likely that the requirements of resilience will force companies to get into the game as well.

The author is executive director at Artha India Research Advisors.