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Managing Uncertainty in International Trade Tariffs

By Karen Lynch

Companies today face heightened uncertainty about how international trade tariffs might affect their imports, exports, and global supply chains.

International trade tariffs, or customs duties, are charged on goods and services entering a country, giving a price advantage to locally produced products while raising revenue for the national government. An increasing number of tariffs have been announced or applied in 2018 by the U.S. and some of its trading partners.

 

“In the short to medium term, companies must assume that trade involving the U.S. will be subject to more friction,” notes an analysis from the Boston Consulting Group (BCG). “Whether this trend becomes truly global is less certain.”1

 

Business risks surrounding rising international trade tariffs include costlier imports, less competitive exports, fluctuating foreign exchange rates, shorter contracts, cancelled orders, reduced consumer demand, and slower customs procedures.2 Ultimately, profit margins can suffer erosion.

 

There can be winners and losers. For example, some domestic suppliers can benefit as customers redirect their orders locally to avoid paying international trade tariffs. On the other hand, a single company can face both import and export challenges, paying higher prices for components or raw materials in its global supply chain, but selling fewer exports because its final products are priced out of overseas markets.3

 

Change can be unpredictable. Observers have noted that even the prospect of increased international trade tariffs can quickly begin to alter the business landscape.4 For some companies, a competitor’s response in a changing environment may turn out to be the “X” – or unknown – factor.

 

Change can also be complex. For example, if components are subject to stringent certification processes, changing suppliers can take time. Another scenario: Imports from a country not subject to tariffs could rise, as those from a tariffed country plunge.5 And even as tariffs are being increased, some nations have been renegotiating rules of origin and other terms of trade. In global supply chains, this means that the percent of value added in a particular country could change the tariff status of a product, according to a second BCG analysis.6

 

Before Recent Trade Friction

 

In the history of international trade tariffs, the trend since World War II has been toward lower to no tariffs, though it has been a rocky path, with notable exceptions and isolated incidents providing lessons for future developments.

 

“Since the turn of the 21st century, U.S. average tariff rates have consistently been at or near their lowest levels in the nation’s history,” according to the Pew Research Center. “Today, they’re also among the lowest in the world.” Pew’s analysis shows that the European Union’s average was generally on par with the U.S. in 2016, for example; China’s was about two percentage points higher; and the average in many less developed countries was higher still.7

 

While about half of the merchandise imported into the United States has been entering duty free, the rest has been subject to an average international trade tariff of 2 percent, prior to recently announced tariffs, with variations due to attributes including country of origin and type of import.8 U.S. agricultural tariffs have averaged 3.8 percent.9 Under trade deals, such as the North American Free Trade Act (NAFTA) among the U.S., Canada, and Mexico, most trade has been duty free.

 

“For more than four decades, manufacturers have designed their global production, investment, and sourcing strategies around the assumption that the movement of goods across the world’s borders would continue to grow ever freer,” notes BCG. Rising tariffs are now challenging the complex, interwoven, cost-optimized supply chains they have built.

 

Managing Changing International Trade Tariffs

 

With tariff changes accelerating in 2018, impacts are expected to vary according to industries, business models, dependence on imports, product mix, and combination of on-shore and offshore production. “Companies must assess the risks and opportunities that the altered trade rules create in their global value chains [and] develop plans of action based on various potential outcomes,” BCG recommends.10

 

BCG suggests five steps to address uncertainty in international trade tariffs:

 

  • Assess exposure of the company’s entire value chain,
  • Understand the implications for the company and its product portfolio,
  • Identify ways to mitigate risk and seize competitive advantage,
  • Develop a playbook of actions addressing each scenario, and
  • Begin taking preventive and proactive actions.11

The myriad considerations for these five steps include analyzing potential price increases on customers, reconsidering the current mix of products, and prequalifying suppliers in new locations. Factors such as timing can be critical. Moving prematurely could undermine cost competitiveness, but waiting might whittle away available options.12

 

The impacts might be indirect as well as direct. For example, “sudden shifts that affect supply chains may impact quality and availability, since some companies may encounter issues when scrambling to reduce production in some places and ramp it up in others,” according to an opinion piece in CFO Magazine. “Operational risk assessments will help identify indirect impacts that are too complex to see in a traditional financial analysis.”13

 

According to an article in Risk Management Magazine, changes to sourcing and procurement practices could also affect everything from finance and tax strategies to operations. “Everyone is going to have to be more nimble and flexible as they try to figure out what truly impacts them and how to get around it,” says Jennifer Diaz, an international trade attorney.14

 

Over time, the trade winds may shift again, the article says. In the meantime, many businesses are also lobbying to preserve open trade. “We need an ambitious and positive agenda here, which ensures that we are prepared to avoid trade frictions that can lead to economic disruptions,” says Daniel Funes de Rioja, chair of the Business 20 (B20), an advocacy group to the G20.14

 

The

Takeaway:

International trade tariffs are on the rise in 2018, creating business uncertainty around imports, exports, and global supply chains. In this context, U.S. companies are reassessing risks in their operations and product lines, and identifying steps they may need to take to preserve profitability and growth.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. “What the Trump Tariffs Mean for Global Business,” Boston Consulting Group; https://www.bcg.com/publications/2018/what-trump-tariffs-mean-for-global-business.aspx
2. “Just the Fear of a Trade War is Straining the Global Economy,” New York Times; https://www.nytimes.com/2018/06/16/business/tariffs-trade-war.html
3. “What the Trump Tariffs Mean for Global Business,” Boston Consulting Group; https://www.bcg.com/publications/2018/what-trump-tariffs-mean-for-global-business.aspx
4. “Just the Fear of a Trade War is Straining the Global Economy,” New York Times; https://www.nytimes.com/2018/06/16/business/tariffs-trade-war.html
5. “What the Trump Tariffs Mean for Global Business,” Boston Consulting Group; https://www.bcg.com/publications/2018/what-trump-tariffs-mean-for-global-business.aspx
6. “How to Thrive in an Era of Shifting Trade Policy,” Boston Consulting Group; https://www.bcg.com/publications/2017/operations-supply-chain-management-how-thrive-era-shifting-trade-policy.aspx
7. “U.S. Tariffs Are Among the Lowest in the World – and in the Nation’s History,” Pew Research Center; http://www.pewresearch.org/fact-tank/2018/03/22/u-s-tariffs-are-among-the-lowest-in-the-world-and-in-the-nations-history/
8. “Industrial Tariffs,” Office of the United States Trade Representative; https://ustr.gov/issue-areas/industry-manufacturing/industrial-tariffs
9. World Tariff Profiles 2017, World Trade Organization; https://www.wto.org/english/res_e/booksp_e/tariff_profiles17_e.pdf
10. “What the Trump Tariffs Mean for Global Business,” Boston Consulting Group; https://www.bcg.com/publications/2018/what-trump-tariffs-mean-for-global-business.aspx
11. “How to Thrive in an Era of Shifting Trade Policy,” Boston Consulting Group; https://www.bcg.com/publications/2017/operations-supply-chain-management-how-thrive-era-shifting-trade-policy.aspx
12. Ibid.
13. “What Risks Would a Trade War Bring?” CFO Magazine; http://ww2.cfo.com/global-business/2018/03/risks-trade-war-bring/
14. “The Business Impact of Trump Tariffs,” Risk Management Magazine; http://www.rmmagazine.com/2018/06/01/the-business-impact-of-trump-tariffs/
15. “Business Leaders Express Support for the WTO and Call for Action on Priority Issues,” World Trade Organization; https://www.wto.org/english/news_e/news18_e/trdia_07jun18_e.htm

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