Tariffs and Trade Wars: Dealing With Uncertainty, Planning For The Future

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Overview

After years of relatively smooth sailing, global trade has entered some choppy waters in the past 12 months. Leading economies such as Canada, China, the EU and Mexico have been involved in various tariffs with the U.S. on goods including steel, aluminum, agriculture and food products, solar panels and even motorbikes.

China’s latest announcement of a 25 percent tariff on $16 billion worth of U.S. goods and the recent U.S sanctions on Iran further indicate uncertainty as it relates to the future of global trade. There have been several warnings about the possibility of a global “trade war” and the long-term impact on the world economy from the various new tariffs imposed by the U.S. and the uncertainty companies will likely face.

“The idea of ‘trade wars’ can be unsettling to business leaders,” said John Minor, U.S Director of Crisis Management and Political Risk, Aon. “Uncertainty about the future of trade relationships – how contracts will be affected, implications to supply chain and a business’s overall ability to market in certain geographies – makes business decisions much more difficult, creating potential downside exposures that companies must take into account.”

Whatever their long-term impact, the tariffs have cast doubt on profit margins, supply chains and expansion plans for many companies that rely on international trade.

In the face of uncertainty, businesses in affected industries will likely examine their long-term plans with an eye toward adjusting to changes in demand, identifying weak links in their supply chains and developing appropriate contingency plans and considering potential new markets.

In Depth

The escalating exchange of tariffs began with the U.S. government imposing new tariffs on imported washing machines and solar cells in January, followed later in the year by a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. In short order, Canada, China, the EU and Mexico levied retaliatory tariffs of their own, notably on various agricultural commodities and food products.

The tariff’s potential effect on sales or commodity pricing has prompted numerous companies to lower their earnings outlook, including Tyson Foods in late July. Furthermore, the possible impact to the U.S. agriculture industry prompted the White House’s plan to spend $12 billion to aid affected farmers.

A major concern for the agriculture industry – and others – is losing access to affected international markets even after the tariffs are eventually lifted. With past tariffs, history shows that once markets turn to other sources for needed products, those markets can be difficult to win back, said Tami Griffin, national practice leader, Food, Agribusiness & Beverage Industry at Aon.

“The effects on supply chains, business expansion and jobs can take years to resolve after the tariffs have expired,” Griffin said.

In addition to the direct impact of the tariffs, there’s also the possibility that U.S. companies, operating in countries targeted by the tariffs, will face new levels of government scrutiny and regulatory pressures. In all, the tariffs their fallout are a new source of risk for companies in many industries.

“Geopolitical risks can manifest in many ways,” Minor said. “An escalating trade war, for example, could increase the cost of completing a project or contract costs to the point of making it uneconomic, or force a company to rethink key elements of its supply chain. In the most extreme circumstances, a trade war could force some companies out of business.”

The effects on supply chains, business expansion and jobs can take years to resolve after the tariffs have expired.”
– Tami Griffin, national practice leader, Food, Agribusiness & Beverage Industry at Aon
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Agribusiness: Food Products In The Tariff Crosshairs

Recent focus on tariffs from countries reacting to U.S. actions have been aimed at agricultural commodities and food products. For example, a recent study by the University of Tennessee, forecast a drop of at least $4.5 billion in U.S. shipments if a 25 percent duty were imposed. And other markets such as Brazil, which is already the largest exporter of soybeans, could fill the gap left by the U.S.

The drop in international orders for U.S. meat products has processors scrambling to find room in cold storage facilities. While the example is specific, Griffin notes that the implications are cross-industry: “It’s supply and demand. Meat and poultry production in the United States has been increasing over the past decade, in part to meet the demands of a growing global population. Without international market availability we are faced with a domestic oversupply.”

In addition, some food companies, such as food and beverage companies that produce packaged goods such as soft drinks, beer, and other canned items, will feel the impact of tariffs on imported steel and aluminum prices. “We’ve seen profit warnings from multiple companies,” Griffin said. These types of tariffs can also impact an organization’s expansion plans, Griffin further explains, “we’ve seen various companies halt expansion plans due to the overall uncertainty associated with cost of goods and facilities.”

Addressing The Uncertainty

Faced with an uncertain trade future, businesses across industries affected by the new tariffs should think about their level of preparation for unplanned events, Griffin said. The tariff situation offers a lesson on rethinking long-term strategy, she said.

Griffin adds further, “The trade tariffs will expose global links and vulnerabilities, and companies can incorporate their learnings into their continuity plans.”

The uncertainty caused by the current tariff environment might be a man-made event, but it has much in common with the preparation and planning needed for natural events such as flooding or avian flu outbreaks. Companies faced with those events often consider methods for addressing exposure in the future.

The existing tariffs exchange might be a geopolitical risk rather than a natural crisis, but it’s a risk companies should consider as they plan for their future. Minor suggests that these types of geopolitical developments can offer general lessons in business continuity planning. In addition to evaluating supply chains, companies also can consider exploring new markets for products, and perhaps new product opportunities to offset sales losses – whether caused by tariffs or any other type of disruption that affects the overall business. He notes that some organizations might not realize risk mitigation strategies can also include specialty insurance such as Trade Disruption insurance or Political Risk insurance products. Such options can help cover additional costs incurred by trade barriers or government actions that can cancel contracts or large-scale projects.

“Changes like this can be viewed as opportunity,” Minor states. Finding a path forward amidst uncertainty can lead to improvements in the overall business: “Business leaders can move from reacting to an event, to proactively anticipating one and improving their product or delivery in advance of external forces prompting them to do so.”

Business leaders can move from reacting to an event, to proactively anticipating one and improving their product or delivery in advance of external forces prompting them to do so.”
– John Minor, U.S Director of Crisis Management and Political Risk, Aon
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