How Businesses Can Navigate the Treacherous Waters of Trade Wars War and international tensions have led to sanctions, tariffs, questions for business owners and not a lot of answers for how to mitigate the fallout. Here are some strategies to consider.
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In July, world leaders agreed to impose extra import tariffs on Russia during the G7 Summit, but the impact has been felt in other countries, including the U.S., with trade reduced by an estimated 62%, according to an analysis of the economic consequences of war. Russia's war with Ukraine, and the subsequent trade sanctions placed on Russia, have impacted many businesses that rely on overseas trade. Now, businesses with overseas suppliers need to prepare for the uncertainty of trade tensions, tariffs and even the potential for embargos as the war escalates.
Just look at Shell. When they ceased operation and use of any Russian properties or partnerships for their oil production, they certainly felt the impact. Shell, like many other energy companies, had to fill the void left after they their relationship ended with Russian energy. Ultimately, this led to a rise in oil and gas prices across the world. This isn't something felt only by big business, though, as everyone deals with the impact of tariffs either directly or indirectly.
If your business is facing tariffs, trade sanctions or the effects of war, here are some strategies to plan against the potential threat it could pose to your business internationally.
Eat the cost of the tariff and take a profit hit
Up until June of this year, the U.S.'s whiskey industry experienced lean times while exporting to the U.K. and EU, as Trump-era disputes over steel and aluminum trade resulted in steep tariffs on American whiskey. The whiskey companies had to monitor their profit margins and the number of tariffs their profits could take.
For international businesses experiencing periods of higher tariffs, it requires analyzing what costs can be absorbed and covered, and what sorts of belt-tightening and cost-cutting could help mitigate the impact of tariffs and to offset their cost on your business. While cutting costs can help improve profit margins, the negative effects of the tariff still exist, but at least consumers won't see a drastic increase in price of your product. It's all a matter of how much your business can stand to lose in profit margin and remain profitable domestically and abroad or if it can at all.
Pass the cost onto the consumer
On the other hand, a business always has the option to raise its prices to offset the tariffs' impact on its bottom line. With that, however, comes the risk that customers may no longer want to buy your product.
Harvard Business Review emphasized that risk can be offset, though, if your business has an honest approach to explaining why it's raising its prices. Communication is key. Leveling with your customers and being honest regarding the realistic implications of a trade war go a long way.
Insure against the risk of a trade war
Transferring the risk by insuring against it is another option. Risks from tariffs can, in many cases, be included in Business Interruption Due to Legislative insurance. However, the trade-related risk is ever-evolving and complex, which can make it difficult and costly to insure in the third-party commercial insurance market. This is where captive insurance can be an option.
Captive policies often have fewer policy exclusions than commercial insurance policies. Captive insurance also negates the perceived sunk cost of paying insurance for a risk that doesn't materialize.
For example, insuring against tariff risk for 10 years without any losses to tariffs occurring over the course of those 10 years would equate to money out the door. Outside of the comfort of knowing you're insured, the business really has nothing to show for the premiums paid over that decade.
With captive insurance, however, your business can retain profits when claims aren't paid. Thus, allowing for a build-up of cash reserves and benefiting the balance sheet of your business. This makes captive insurance a very effective tool especially in times like now where many businesses have been left scrambling after the sweeping sanctions against Russia and high inflation.
Decide whether to exit a market or category completely or find a supplier not subject to tariffs
Tariffs cut both ways, even though they exist to operate as barriers to prevent competing foreign products and businesses from damaging domestic industries. Just look to the specific industry of washing machines as tariffs introduced by the U.S. during the Trump presidency resulted in washer prices rising by almost 12%, according to economists at the University of Chicago and Federal Reserve.
This resulted in domestic business owners being left having to pay their own domestic government tariffs for buying the products instead of the country they imported them from. As you can imagine, this has implications for international business owners as well, especially in industries like agriculture where the World Trade Organization cites 100% of products as having a tariff.
For the businesses and consumers that needed those washers, they were left paying the increased price for them instead of China or other countries targeted by U.S. tariffs. According to UCLA Anderson Review, additional studies have also concluded that the trade war hurt U.S. consumers and companies more than it did China.
The example illustrates why having an international supplier that isn't affected by the sanctions or tariffs faced by your company or products from your country is very important. This option is, however, mostly reserved for businesses that can afford to move major portions of their supply chain to other countries — making this option limited to few businesses. Partnering with a business in a country without the same tariffs or sanctions is also an option, but again, has many logistical complexities few businesses are prepared for.
Although there are immediate implications concerning the sanctions against Russia that can potentially decimate a supply chain, it's crucial for businesses to keep in mind that the impact will also be felt long-term. Trade wars typically slow economic growth. Thus, it behooves businesses to start now and conduct a risk assessment in relation to both the sanctions and the potential for an economic slowdown. Even if your business isn't impacted now, it could be in the future.