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The Trump administration's announcement of new tariffs on steel and aluminium have triggered worries of a global trade war, as other countries look to reciprocate. Erika Morphy looks at ways in which investing companies can minimise the impact such a dispute will have on their balance sheets.

In 2017, Samsung Electronics and LG Electronics announced plans to develop home appliance factories in the US states of South Carolina and Tennessee. One year later, those carefully laid plans went awry when the Trump administration announced that it would impose tariffs of up to 50% on imports of washing machines and key components.

It is the worst of all possible scenarios for the two companies, whose factories are not yet operational, as well as their suppliers. Among other adjustments, LG Electronics is reportedly planning to move production for some of its parts in house, according to Reuters, causing some of the suppliers of these component parts to lose lucrative contracts.  

Some months after the washing machine tariffs were spelled out, the Trump administration announced tariffs on steel and aluminium and a sweeping array of tariffs on $60bn in goods from China. This is a story still in progress with countries angling for – and receiving, albeit temporarily – exemptions to the tariffs, and China preparing its response.

Collateral damage

Even though these events are still unfolding, some things are already clear. First, when a trade war breaks out, as it appears may be happening, the winners tend to be few while the losers are widespread. This is an important point to emphasise, according to Larry Harding, president of the consultancy solutions division at professional services firm TMF Group, as it has been so long since there has been an actual trade war. “The current iteration of pundits and executives don’t necessarily know this world all that well,” he adds.

Second, the fallout of these events is not limited to the US, or its supply chains. To give an example, Indian trade association Assocham warned that the country's exports may be impacted if the tariff war escalates into a full-scale global trade war. “It would have collateral damage for the Indian economy, with the country's exports taking a hit, the current account deficit facing pressure and the GDP taking a setback," it said in a statement.

Third, in such an environment, companies are well advised to consider how they can realign their supply chains to minimise rising prices.

“Companies that depend on steel – whether the steel that they purchase is from domestic suppliers or imports – can expect to see their costs increase,” says Don Cameron, partner with law firm Morris, Manning & Martin's international trade group. “Furthermore, those same suppliers can expect to find themselves increasingly uncompetitive with imports of their production – or their exports increasingly become uncompetitive – to the extent that steel is a significant cost component. This is because their international competition will be purchasing steel at a far lower cost on the international market.”

What happens next?

It appears unlikely that the US will backtrack on its decision to levy tariffs, although many companies, policymakers and pundits fervently hope that somehow that will happen. “Every economic report I’ve read, every statistic I’ve seen, tells me this is not a good thing for the US,” says Joanne Sonenshine, an economist and the CEO of strategic advisory firm Connective Impact.

Such sentiments notwithstanding, affected companies have little choice but to plan as though the worst of the tariffs will come into effect – along with the levy of retaliatory tariffs. This could leave many companies with few options in the short term and only a few more in the longer run.

Companies that have the luxury of perfect timing – that is, they have not made an investment yet – are likely to hold back until they have a clear understanding of what is happening. That is what Swedish home appliance manufacturer Electrolux is believed to have done when it decided to delay a $250m investment in Springfield, Tennessee, shortly after the metals tariffs were first announced. 

However, Electrolux is continuing its expansion of its plant in Anderson, North Carolina. That is probably because the investment money is fully committed, according to Paul Vandevert, principal of Ochim Trade Law. “Even if the tariffs on steel cause price increases, which they certainly will, it still makes far more sense for Electrolux to finish this expansion and attempt to recoup its investment with output from the expanded plant, which is largely replacing a closed plant in Minnesota,” he says.

Optimising assets

Those companies that already have assets that they have invested in have little choice but to optimise them as much as possible, according to Tom Derry, CEO of the Arizona-based Institute for Supply Management, as it makes little sense to let a factory idle or close especially if the customer demand that originally caused the factory or plant to be established in the first place still exists. More to the point, opening and closing a manufacturing facility is a years-long process that cannot be done on a whim or haphazardly.

For these companies there is little that can be done about the tariffs except absorb them. “Companies will find it difficult to pass along any part of the increased costs to consumers,” says Mr Derry. “The history of the US economy over the past 10 years has shown us that.”

Here it should be noted that not all companies will be affected by the tariffs, at least in their current iteration. When the tariffs on steel and aluminium were first announced, Travis Hollman, CEO of Hollman, a manufacturer of wood and laminate lockers, remained calm even though Hollman imports 100% of his steel for these products. But as he understands it, the tariffs are to be applied only to raw metals. Hollman only uses finished steel products in production and those imports are expected to remain tariff free.  

Long-term calculations

After a period of three to five years – assuming the tariffs have stayed in place – companies affected by the tariffs will have had the time and opportunity to evaluate if they should open a plant elsewhere and shut down their US operations. “From a pure economic standpoint it would make sense for manufacturers to relocate or move to ramp up production in other facilities at the expense of facilities that are in the US,” says Mr Derry.

That, of course, is an entirely different – and highly complex – subject that takes into account any number of factors, including the desirability of a US presence. That said, the existence of tariffs will in all likelihood play a role in any decision. “I would have to say that tariffs and taxes are the two primary considerations when designing supply chains,” says Mr Derry.

This article is sourced from fDi Magazine
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