The United States and China are approaching the $200 billion mark in threatened tariffs and retaliatory tariffs on one another as the two economies spar over global trade strategy. For the companies caught in the middle of it all, navigating these sweeping changes can create major operational and administrative headaches.
So far, in an effort to make good on his “America first” campaign promise, President Trump has imposed tariffs on imported solar panels and washing machines, steel and aluminum, and several other products, promising to introduce more.
China responded in kind with a list of tariffs of its own that would be imposed on 128 U.S. products, ranging from fresh fruit to pork chops to stainless steel pipes.
This rapidly escalating trade war has provoked a great deal of analysis among economists, political strategists, and think tanks. All have weighed in on the impact of these moves on everything from the economy to the cost of consumer goods to the president’s legacy as deal-maker extraordinaire.
For his part, the president welcomes the showdown, and shows no sign of backing down:
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” President Trump explained on Twitter.
What’s been less visible is the strain this kind of massive global trade uncertainty is putting on multinational corporations that must navigate these rapid-fire policy changes while continuing to run their businesses.
Imagine, for a moment, what it was like to sit in the C-suite of a U.S.-based steel distributor on March 1. That was the day the president announced a 25% tariff on foreign-made steel and a 10% tariff on foreign-made aluminum that would take effect in one week.
In that scenario, a company could have had tons of steel sitting on cargo ships in the middle of the ocean that was suddenly 25% more expensive.
Meanwhile, sales had already booked at pre-tariff prices, earnings and growth forecasts were predicated on cheaper supply costs, and the company now had to figure out the mechanics of reporting and paying these new fees.
Sound like a nightmare? That’s just one company in one industry. Versions of this phenomenon of overnight changes to the playbook have become the norm for virtually every business operating a global supply chain. Chaos, it seems, is the new normal.
Fortunately, there are some ways to get out in front of these kinds of unpredictable swings in global trade and tax regulations. The first way is by putting in place systems that are designed to adapt to geopolitical uncertainty, and the second is by building flexibility into the supply chain.
The first step can largely be addressed by technology. The key is to implement global trade management and corporate tax software that is updated in real-time as regulatory and policy changes take effect.
That takes a great deal of the guesswork out of the compliance side of the equation, because all customs and duties collection points will be automatically updated to contain the most recent information.
While this may not make the additional tax burden any easier to shoulder, it will ensure that the company stays in compliance at each link in the supply chain, regardless of what new changes may have been announced overnight.
The second step is harder, but essential in the current environment. Businesses with a heavy reliance on imported goods need to start designing their supply changes in ways that let them avoid supply shocks. Those can include the kinds of geopolitical standoffs we’re seeing now with the U.S. and China, or exogenous shocks, such as natural disasters.
That kind of of approach requires taking a global view of current supply chains to factor-in multiple target markets for the same product and to prepare for alternative sourcing and production in response to major changes in trade policy.
Long term, a flexible approach to global trade is going to be a requisite part of running a global enterprise. It goes far beyond a high-profile trade war between the United States and China. Other regions, notably the European Union, have also proposed retaliatory tariffs on U.S. goods. New trade routes are being developed to put new countries in play in the global economy that were never there before.
Though the U.S. just announced that it would postpone tariffs on the EU, the ruling was only delayed one month. The only certainty in the current economy is that everything is in a state of constant change. The more CFOs can do now to build systems and processes that acknowledge that change, the better they will be at maintaining stability regardless of what comes at them.
Brian Peccarelli is president of the tax & accounting business of Thomson Reuters.