4 ways to manage the risks of a U.S.-China trade war

Rising tensions, and tariffs, between the U.S. and China could affect U.S. businesses, especially if escalated to a full-scale trade war. Here’s how you can help protect your organization.

Tags: Trade, Tariffs, International banking
Published: June 27, 2018

The stage seems set for a potential trade war between the U.S. and China. As a result, many American businesses could bear a heavy burden.

In January 2018, President Trump announced tariffs on imported solar panels, a move with direct implications for Chinese manufacturers. In March he followed up with a 25 percent tariff on imported steel and a 10 percent tariff on aluminum. Then, a month later, the Trump administration planned tariffs on 1,300 additional Chinese imports worth $50 billion.

China countered with its own set of 15 to 25 percent tariffs on 128 key U.S. exports, including fruits, nuts and pork products in early April. A few days later, they announced another set of retaliatory tariffs: a 25 percent tax on 106 products, worth $50 billion. This in turn prompted President Trump to target an additional $100 billion in Chinese imports for potential tariffs.

On May 19, in a surprise announcement, both sides agreed to ease trade imbalances, although no specifics or dollar figures were given. U.S. Secretary of the Treasury, Steven Mnuchin, said that tariffs were no longer on the table, but they could be revisited if China didn’t live up to its commitments.

Then, just days later on May 29, the Trump Administration revived the threat of tariffs. He stated that by June 15 the U.S. will announce a final list of $50 billion of Chinese goods that would be subject to 25 percent tariffs. 

Given what has transpired, it’s difficult to predict a final outcome.

 

Geopolitics hit home

The tariffs are seen as a response to China’s trade-related activities, which have been viewed as unfair. Nonetheless, they open up the likelihood of pain on both sides.

The volumes involved are significant. The U.S. exported $130 billion of goods to China in 2017 while importing $505 billion. And in an all-out trade war, smaller companies could be at greatest risk because they lack the capital to withstand the financial pain of tariffs over long periods.

“Economists and trade experts are concerned about these tariffs and how they’ll impact the U.S. economy and global trade. Especially when you have the two giants of the global economy, the U.S. and China, fighting each other,” says Victor Chan, country manager for China in the International Banking Group at U.S. Bank.

In response to U.S. tariffs on steel, aluminum, aerospace and technology, China has targeted tariffs on American agricultural exports, including wines, fruit, pork, sorghum and, most notably, soybeans. In 2017, China imported more than 36 million metric tons of soybeans, or about one-third of the U.S. crop. Proposed tariffs could make American soybeans 25 percent more expensive in China.

What can U.S. business owners and managers do in the face of a potential trade war?

 

Four ways to reduce risks to your organization

You can’t stop a trade war, but there are steps you can take to help protect your business:

1. Speak up. If a tariff will have an impact on your bottom line, you can submit an appeal to the U.S. Secretary of Commerce to receive an exemption for your business. You can also contact your congressional representatives to voice your concerns.

2. Consider selling to or sourcing from another country. “For example, importers of Chinese goods could look to Vietnam, Indonesia or India as alternative suppliers,” Chan says. “Exporters may have more difficulty finding replacement markets, but they should start making arrangements for possible new buyers of their goods.”

3. Negotiate with suppliers. “You can ask suppliers to share tariff-related costs,” Chan says. “It’s one way to avoid passing higher costs on to your consumers.”

4. Diversify your products. This limits the risk of overconcentration. Although this is a longer-term goal (especially for agricultural businesses), now is a good time to consider it, particularly as interest rate hikes loom.

 

Consider trade-offs

If tariffs eat into your profits, you’re faced with a dilemma: Either pass on higher costs to your buyers and risk losing market share, or absorb the costs yourself.

“A key factor could be whether you expect the tariffs to be here for a long time,” Chan says. “Over a short period, perhaps you’re willing to bear some of the pain without passing it on.”
 

Seek guidance and support from your bank

At U.S. Bank, we can answer questions and offer guidance on international trade and export finance and provide tools to help mitigate risks associated with international trade. Contact your U.S. Bank representative for more information.