President Trump’s announcement that his administration plans to impose tariffs on foreign-imported steel and aluminum threatens to send the United States and its trading partners into a global trade war.

Steven Minsky

Steven Minsky

Prices of U.S. domestic steel are up approximately 20% since the beginning of 2018. This is due to expectations of “protectionist measures, which could prove a significant drag on steel consumers like the machinery, motor vehicle, and construction industries,” according to analysts at Capital Economics. “Ironically, the tariffs actually raise the incentives for manufacturers to offshore production to avoid the tariffs. And construction firms will have little choice but to pass higher costs onto final consumers.”

The biggest risk here is retaliation from the United States’ top trading partners, such as Canada, Mexico, the European Union, and China, on imports in unrelated industries.

Countries impacted by a U.S.-initiated trade war would likely retaliate by imposing tariffs on goods they import from the United States. Companies should be looking at the top global exporters of steel and aluminum to the U.S. and then at their respective top imports from the U.S. to get some indication of industry sectors that will be affected by retaliatory actions.

In a trade war, there will be predictable direct and indirect winners and losers. Proactive risk assessments are essential to landing on the right side of the fence. Enterprise risk programs would have surfaced this risk in January 2017. By identifying areas of potential concern in advance, companies can have contingency plans in place for mitigating risk fallout from a global trade war. Risk management will help navigate your business forward.

Direct and Indirect Impacts

The Trump administration’s aluminum and steel tariff impositions, if implemented, will have both direct and indirect impacts on American businesses.

Direct impact: The raw material import costs for U.S. producers of machinery and cars may rise. Therefore, foreign-manufactured may become cheaper for U.S. consumers. Consequently, manufacturing companies in the U.S. may see higher costs of goods sold and reductions in non-domestic sales.

Indirect impact: Production and price changes will require sourcing changes. 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. Operational risk assessments will help identify areas where change can have a positive or negative impact.

Indirect impact: It’s not just about manufacturing. The U.S. budget deficit relies on borrowing, considering the new tax cuts passed a few months ago, which may result in rising inflation and indirectly impact interest rates. This will create a shift from lower-return, large-cap stocks to small-cap stocks as investors seek higher returns and public small-cap stock supply becomes lower.

This will present an advantageous opportunity for investors that use risk management not only defensively, but also to improve their performance and achieve better returns. Operational risk assessments will help identify indirect impacts that are too complex to see in a traditional financial analysis.

Companies need to conduct risk assessments of their supply chains, as production and price changes will require sourcing changes that impact quality and availability. Sudden shifts that affect supply chains may impact quality, since some companies may encounter issues when scrambling to reduce production in some places and ramp it up in others.

Investors will be evaluating their portfolios to adjust for potential direct and indirect impacts. Stock-market volatility will present an advantageous opportunity for risk assessment-savvy investment institutions that use risk management not only defensively, but also to improve their performance and achieve better returns. Operational risk assessments will help identify indirect impacts that are too complex to see in a traditional financial analysis.

Risk Assessments Are Essential

Companies must proactively use risk assessments through the multiple layers of management to the front-line supervisor and across business groups. The mission is to identify areas of possible concern and create contingency plans accordingly.

This infrastructure must be able to connect the dots from what these assessments are identifying to the impact they may have. The largest impacts may not even be in the area that identifies the risk but in adjacent business areas. That’s the most effective way of managing the political risk outside of a company’s control.

Risk assessments conducted across locations and geographies will uncover the root cause of changes and prioritize relative impacts to help guide proactive decision making and preparation. Risk assessments and taxonomy connections to processes, products, suppliers, and customers help keep companies and investors several steps ahead.

Risk management is like a game of chess this way. Those who can think further ahead will win.

Steven Minsky is CEO of LogicManager, a risk-management software firm, and co-author of the RIMS Risk Maturity Model. Follow him on Twitter at @SteveMinsky.

This article was originally published on logicmanager.com. Reprinted here with permission.

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