5 Steps to Navigate Around Tariffs
Flexibility is key in charting a company’s course through the uncertainties of a global trade war.
With tariffs now imposed on approximately 10,000 products traded around the world—with more added seemingly every day—it seems that the trade war is officially upon us. As of July 10, the U.S. has proposed tariffs on $200 billion in Chinese products, with threats to add $200 billion more. In the end, tariffs may impact close to 90 percent of products sent to the U.S. from China. Already China, Mexico, Canada, and the European Union (EU) have retaliated with tariffs on American goods.
The trade policy emanating from the Trump administration continues to be a fluid situation. President Trump has a tendency to act unilaterally, often staking out an extreme position as a means of jump-starting negotiations to allow him to move toward a desirable negotiated settlement. For instance, the imposition of steel and aluminum tariffs on key allies Canada, Mexico, and the EU was surprising, unless you consider the move in the context of a positioning strategy within ongoing negotiations around the North American Free Trade Agreement (NAFTA).
Navigating the Trade War
Although the intended effect of the tariffs is to protect U.S. trade interests, the measures have left many corporate treasury and finance professionals scrambling to assess how these new taxes will impact their supply chains and bottom lines. The future is impossible to predict, but there are concrete steps companies can take to respond to the increased risks from the current geopolitical situation.
1. Explore pricing options with suppliers. If possible, lock in fixed pricing with any overseas supply chain partners, to ensure a stable cost structure as the trade war runs its course. If suppliers agree, add a caveat so that prices fall if tariffs go away. These types of contract terms help ensure prices are based on something solid instead of changing constantly with every new policy announcement—which risks damaging business relationships. Companies that sell abroad should expect customers to make similar requests for pricing stability.
2. Consider sharing the pain. Finance professionals need to meet with their sales and procurement or purchasing teams to discuss sharing with suppliers and customers any pain caused by tariffs imposed by various regimes around the world. Helping trading partners maintain stable pricing amid geopolitical turmoil can not only preserve current relationships, but also provide a source of leverage in future negotiations.
3. Source alternative materials. Even as they work with suppliers to share the pain inflicted by tariffs, companies should also be looking to locate alternative sources of materials in regions not affected by ongoing trade conflicts. Switching suppliers is unlikely to be a panacea; it may impact lead times, quality of materials, and quantity available in a given time frame. Variances in quality and/or delivery capabilities may significantly affect the manufacturing process.
4. Define the worst-case scenario. Finance professionals should think through what will happen if the company cannot share any tariff-driven cost increases or production delays with its suppliers and customers. Important questions to consider: How will the tariffs affect cash flow and margins? Does the company need additional short-term financing until it can source cheaper materials? Would relocating the business be a smart move?
5. Exert political pressure. Companies can band together with industry groups to let the government know how the tariffs are affecting their sector. Larger businesses should also make their influence felt via their lobbyists or World Trade Organization (WTO) contacts.
Finance teams should take these five steps with two key goals in mind: First, to encourage finance professionals to remain flexible as they plan for the uncertain future, and second, to give the finance function tools that help them quantify the effects that trade policy changes may have on the company’s cost structure. Managerial accounting is key in identifying the added costs and calculating how they will affect cash flow. Procurement needs to be involved in sourcing cost-effective materials, and in determining the logistics, cost, and time frame that would be possible if the company decided to move to a new supplier.
The biggest mistake companies can make during this period is to continue business as usual without thinking through the implications of potential—or already imposed—tariffs. The trade war isn’t just a threat anymore. It’s happening, and there’s no predicting how far it will go or what the long-term effects will be. Remaining flexible and closely monitoring the effects trade negotiations have on supply chains are critical.