Like many business owners, Lidia Yan is concerned about talk in the media about tariffs and trade disputes.
“Nobody wants a trade war, especially a company like ours," says Yan, the co-founder and CEO of Next Trucking, a trucking and shipping logistics company based out of Los Angeles.
She worries about consumers being squeezed due to higher prices on products, which would mean less freight to be shipped and trucked, and jobs lost. Exactly how it would affect her own company, other than fewer trucks and ships to connect to, and thus fewer profits, she doesn't want to hazard a guess.
Of course, nobody can predict what will happen in a trade war, although the advice nature experts often give people when they encounter an aggressive animal in the wild is probably useful to keep in mind: Keep calm, and don't make any sudden moves.
Past Trade Wars
Here's the good news: Most have ended quickly and without too much harm. However, the Tariff Act of 1930, better known as the Smoot-Hawley Tariff Act, made the Great Depression even worse. What became a global trade war eventually helped lead to a real one: World War II.
Since then, trade wars haven't had quite the same effects. In 1962, France and West Germany placed a tariff on chickens, and so the following year, in response, the United States wound up placing a 25 percent tariff on potato starch, dextrin, brandy and light trucks, all important products to European exporters (French cognac and Dutch potato products were particularly hurt). This became known as the “Chicken War," and it lasted into 1964 when a truce was finally declared between America and Europe. Businesses were hurt, for sure, but today, that trade war has all but been forgotten.
More recently, trade wars also been short-lived. In 2002, for instance, President George W. Bush placed steel tariffs on imports of steel products. Europe threatened to retaliate, American business owners complained and the World Trade Organized ruled that the tariffs were illegal. Many countries were exempted from the tariffs, which ended after 21 months.
What Might a New Trade War Look Like?
Many economists seem apprehensive about a trade war. The Wall Street Journal, for instance, surveyed 59 business, financial and academic economists in 2018 and 51 percent of them were worried about the economy taking a hit due to a trade war. CNBC also conducted a 2018 survey of 40 economists, fund managers and strategists and almost three-quarters of them were worried about a trade war.
Alexander Lowry is a professor of finance at Gordon College in Wenham, Massachusetts, and the director for the school's master of science in financial analysis program. He doesn't see a trade war helping American companies that want to expand their international reach.
—Andrea Thomas, professor, David Eccles School of Business at the University of Utah
“If your company is or may eventually be global, it's not a good idea to actively support policies that build up barriers to trade and capital flows, make people less mobile, and delegitimize the idea that companies can contribute to the well-being of people in more than one country," Lowry says.
If there is a trade war, "in the long run, everyone... will lose," says Michael Merrill, an economist and labor historian in the Rutgers School of Management and Labor Relations. Profits will shrink, even for the so-called winners in a trade war, Merrill adds.
But for those business owners who want more trade with countries and not less, you can take heart that Lowry doesn't think—even in a trade war—that globalization will diminish too much from what it is now.
"The last time a major trade war broke out, in the 1930s, it led to the largest reversal of globalization in history," he says. "But if global trade didn't screech to a halt in the 1930s, it's reasonably safe to say that it won't in the 2020s, either. In fact, we should assume much smaller declines in trade than occurred in the 1930s."
Trade War Strategies
If a trade war breaks out anytime soon, or far off in the future, you aren't completely out of options. You could try:
Talking to your legislators.
This may be an obvious point, but unless your representatives in Washington hear how you feel about a trade war—whether your feelings are positive or negative—they won't have as much incentive to keep pushing for one, or trying to stop one.
Finding a new market to sell in.
That is, sell in a market not affected by the trade war. As an example, Robin Lee Allen, a managing partner with the Esperance, a private equity firm with offices in San Francisco and New York City, says that his company had been planning to conduct venture capital and microfinance activity in Cuba.
“After changes in diplomatic policy made by the U.S. State Department, we abandoned that plan and found more beneficial arrangements in France and Saudi Arabia," he says.
Diversifying your supply chain.
Easier said than done, but if your company can do it, it's something you should do, even if there's no trade war going on, says Andrea Thomas, a professor at the David Eccles School of Business at the University of Utah.
“My experience is that it is always best to diversify your supply chain—if possible—so you have flexibility to move production if cost pressure comes from issues like trade sanctions or even weather delays," she says, conceding: “This isn't always possible if you don't have the scale."
Increasing costs.
Nobody wants to do this to their products or services, especially if it isn't a routine increase, but in a serious trade war, in which inflation is climbing, you may have no choice.
But if you do, “pay attention to what your competitors are doing so you don't lose market share," Thomas warns.
Preparing for the end of the trade war.
That is, a trade war won't last forever, and even if your industry seems to be winning it and profits are pouring in, when life goes back to normal, you need to be ready for that as well.
“Use the advantage gained to invest in re-tooling your process so that when peace returns you are globally competitive," Merrill advises. “Unfortunately, few protected industries act so rationally. Instead, most simply cash in the gains and remain uncompetitive. They may even become more so, which puts them in an even worse position, once peace returns, than they were before."
And that's the important thing to remember about trade wars: Nobody wants to see one start, but they do end.
