Trade Turmoil: Tariffs Create Unease Among Global Trading Partners
Despite years of fairly smooth trading, global markets were rocked last year by eruptive tariff policies, which have impacted a variety of markets, including steel, aluminum, food processing and agriculture. China has been a focus of the dispute after the U.S. government levied tariffs on the nation in response to unfair trade practices and theft of U.S. intellectual property.
As the situation continues to escalate, economists and business leaders worry about negative economic impacts, including the possibility of recession. More U.S. tariffs on China could result in retaliatory measures by China that would hurt U.S. companies operating in China. Another concern is that China might ban the exports of rare earth minerals to the U.S., resulting in a significant hit to U.S. electronics companies.
A close call with tariffs occurred between the U.S. and Mexico, which would have resulted in a 5% tariff on all imported goods from Mexico. Although the situation was averted, it raised questions about the reliability of trade between the two countries in the future. More recently, in retaliation for U.S. import duties on Indian steel and aluminum, India imposed tariffs on 28 American products, including apples—which will be hit with a 70% tariff.
The threat of a long-lasting trade war has put U.S. companies on edge. “Tariffs are having big impacts,” notes Robert A. Eisenbeis, vice chairman and chief monetary economist for Cumberland Advisors, a money management and investment firm. “It is generally accepted that trade makes all nations better off and that protective tariffs are wealth-reducing and harmful. Research also shows that incidence of tariffs falls mainly on the country restricting imports in the form of higher prices and welfare losses. The U.S. trade deficit is relatively small compared to the size of the U.S. economy. In addition, the idea that we should have a trade balance with each trading partner is an unrealistic concept.”
The economic impacts of the tariffs affect all industries, including metals, steel, chemicals and agriculture. An unwelcomed impact is domestic oversupply. “Meat and poultry production in the U.S. have been increasing over the past decade, in part to eet the demands of a growing global population,” says Tami Griffin, national practice leader for the food, agribusiness and beverage industry at Aon, a professional services firm that provides risk and retirement services. “Without international market availability, these producers are faced with a domestic oversupply.”
Industries Feel the Impact
In addition, food processing companies also suffer from tariffs on imported steel and aluminum prices. “We’ve seen profit warnings from multiple companies,” Griffin adds. “In fact, some companies have halted expansion plans due to the overall uncertainty associated with cost of goods and facilities.”
Most U.S. businesses were initially reluctant to abandon well-established supplier relationships with countries over a trade dispute that could be over in a matter of a few months. However, as the dispute now drags on into its second year, and involves more countries, a growing number of businesses are shifting supply chains away from China.
Despite concerns that it could trigger a recession, the U.S. tariff policy has so far not damaged the U.S. economy. Economic growth continues to be strong and unemployment recently hit a 50-year low. Even so, the barrage of tariffs has created uncertainty among companies that rely on international trade, making them reluctant to invest capital or expand their operations.
In fact, on June 13 more than 6oo American retailers, tech companies, manufacturers and trade associations including Walmart, Panasonic, Spectrum Brands and the American Association of Exporters and Importers appealed to the White House to lift the tariffs on imported Chinese materials and products:
“We know firsthand that the additional tariffs will have a significant, negative and long-term impact on American businesses,” they wrote. “Broadly applied tariffs are not an effective tool to change China’s unfair trade practices. Tariffs are taxes paid directly by U.S. companies. According to Trade Partnership Worldwide, 25% tariffs on an additional $300 billion in imports (combined with the impact of already implemented tariffs and retaliations) would result in the loss of more than two million U.S. jobs.”
Eisenbeis believes that the uncertainties created by the Trump administration’s tariff policy pose a greater risk to the U.S. economy than the financial impact of the tariffs themselves. “We don’t know from one day to the next how these policies or strategies will change, which creates a very risky climate for businesses,” he says
On the upside, however, forward-thinking companies will respond to this challenge by digging deeper into their business continuity planning. For example, in response to tariff disruptions, companies can explore new markets (countries) for importing supplies and exporting finished products that are more stable.
“Changes like this can be viewed as opportunity,” says John Minor, U.S director of crisis management and political risk for Aon. “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.”