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August 5, 2019 at 5:00 am ET
Trade volatility is here to stay. The uncertainty and unpredictability around current U.S. trade relations — with China, Mexico, Canada and other big trading partners — are not going away anytime soon.
Through tough conversations with business leaders across a variety of sectors, we can tell you that more than a few businesses are not prepared for, or, in some cases, willing to face this reality. Those that have taken steps are actively thinking through their own trade equations while others are sitting back and waiting, viewing the changing trade landscape as a short-term issue rather than strategy risk that needs to be addressed thoughtfully and creatively.
Still, we understand the conundrum. There’s a huge difference between developing contingencies with a “this, too, shall pass” attitude versus having a significant plan in place to begin making serious business decisions — especially in a world that can change overnight with a single social media post or a drone strike over a sanctioned airspace. Conversations around China, the U.S.-Mexico-Canada Agreement (USMCA), and tariffs around imported EU goods, coupled with a number of historical sanctions issues tied to Iran, North Korea, Syria, Venezuela and beyond, all make for a long-term view on these conversations.
President Trump’s recent decision to impose an additional 10 percent tariff on $300 billion of Chinese goods effective September 1 provides yet another example of this. From a U.S. perspective, we think it’s unlikely any current tariffs would be reduced or eliminated prior to proof of Chinese compliance with any brokered deal, even though the Chinese have asked for the removal of tariffs prior to making a deal.
Similarly, on the political front, our view is that even if there is a change in the White House come 2020, we wouldn’t rely on an incoming president altering course on trade-related matters, such as negotiations with China. Now, we’re in no way implying that a different administration would wholeheartedly embrace the tactics of the current administration, but stepping into the Oval Office only to bend on the demands of other countries likely isn’t in the cards either. Changes made will be undertaken diplomatically and politically, though not in haste. A new president will want to look tough on China just as much as she or he will seek to resolve any matters at hand, and any future president, Republican or Democrat, could be tempted to use tariff policy in the broad way it is being used now. We’re banking on future leaders using the current pieces in new and interesting ways.
Yet, amidst all the uncertainty, there is one thing we know for sure: it is past time to go on the offense. While there is no one-size-fits-all answer to managing your business through these times, defense isn’t the position you want to be playing in this game. As you begin, or hopefully continue to think through your trade equation, here are a few keys to achieving your desired result:
First, proactively do some no-regrets planning. Ask yourself the hard questions. How quickly could you move operations? At what point would tariffs cross a tipping point where it makes sense to make a change? How much of a price increase would my customers (or consumers) take? Where can I find the infrastructure and workforce with the skills I would need if I were to relocate? What implications would this have for other issues such as supplier and customer relationships, new product introductions, tax consequences and logistics? These answers, in partnership with a hard look at your industry’s competitors, will help you understand your exposures.
Second, work cross functionally. One of the most interesting macrotrends our trade and tariff discussions have exposed is that many businesses just aren’t equipped in a consolidated manner to address trade-related threats, whether that is a tariff or supply chain issue or a sanctions issue. Each of these matters is typically dealt with in different pockets of an organization, and we have yet to meet a “Chief Trade Officer” at any organization. Pull in all the right people who need to be a part of these discussions before you finalize a plan moving forward.
Third, don’t put all your cards in the rhetoric. We hear frequent discussions as to whether tariffs are causing a downturn in the economy and we hear them being used in the same conversations about the challenges businesses are facing. It is true that some sectors, such as agriculture and industrial products, are experiencing trade tensions more acutely than others, but overall consumer confidence and key indicators such as job and wage growth continue to pronounce that the patient is healthy. While it’s important to consider the narratives at play, don’t forget to monitor actual performance. It’s still a pretty strong economy.
Trade is a highly complex topic with lots of interrelationships and you won’t know what you may not know about how it impacts your organization until it does. Thinking through the entire life cycle of your sales, and all necessary touch points, will help you get on the right path toward certainty, no matter what the variable. Don’t just weather these storms; with the right planning, you can turn these into a relative advantage.
Brian Dunch is PwC’s Global Trade Services Leader, Scott McCandless is PwC’s Trade Policy Leader and Dan Tannebaum is PwC’s Global Sanctions Leader.