The first casualty of the trade war — business confidence

The first casualty of the trade war — business confidence

Fri, 05/10/2018 - 09:43

Risk assessment is becoming a priority for Australian businesses and investors as the US-China trade war continues to intensify. Photo: Reuters

The immediate cost to Australian businesses from the escalating trade war between America and China won’t be from direct tariffs — it will be inertia.

As businesses struggle to adjust to the new normal of a volatile trade environment, with both sides digging in on their trade positions, there are few signs that things are going to improve any time soon.

In fact, risk registers are now being revised in boardrooms around Australia based on the real possibility that things will get worse — much worse.

In recent weeks, with China appearing to lock in for the long haul, language has become more inflammatory between the two nations, with China likening Trump’s increased tariffs to a “knife to the neck”.

The trade war also appeared to be spilling over into military issues, with China denying a port call in Hong Kong that the U.S. Navy had planned for October and the recent run in between U.S and Chinese warships in the disputed waters of the South China Sea.

At the US end, things are as volatile as ever, with the President claiming no impact “whatsoever” on the economy from the trade tiff.

That’s not the story told by big businesses like Ford, which says the tariffs have already cost the company $US1 billion.  And with retailers like Walmart and Target talking about stockpiling goods to buffer against a 25 per cent increase in the price of some common goods that illusion can’t be held for long.

What we are hearing within our international network Baker Tilly is that the creeping dread of uncertainty is causing businesses to pause rather than spurring them to action.

Will China back down? Wil the US extend its tariffs? Will other countries respond or be caught up?

No one knows. The pace of change only gets faster and without immediate answers, businesses slow their pace of decision making and this has a chilling impact on their willingness to invest, extend or grow.

Take for example one case that has been seen in our North American network of tariffs on plastic water bottle lids. Overnight, the tariff increased from 2.5 per cent to 25 per cent and that would have been their business gone.

In this case, Baker Tilly was able to look at the product and establish that it had been misclassified in terms of customs tariff classification and if they were properly classified that would avoid the increase in tariff.

The case illustrates a couple of things:

Firstly, a decision that imposes abrupt tariffs on critical componentry can derail everything about a business’ strategy overnight. Everything you think is certain becomes uncertain.

Secondly, the types of decisions that can derail a business are actually pretty arbitrary. A tariff slapped on something unexpected like a bottle lid does nothing for the big picture of trade relations, but immediately hurts small to medium-sized businesses that have grown used to cross border trade.

Thirdly, things businesses used to consider unimportant, like exactly which tariff code applies to each part of the essentials of the business, have now become critically important. If you get the listing wrong, or if you can reclassify your componentry, it can be a matter of financial life or death.

For Australian businesses, now is the time to review your systems and to conduct a thorough audit of components and supply chains — even if you think you have escaped being caught up.

There are obviously advantages for businesses who can replace American suppliers for goods now on China's tariff lists, and moves by China to reduce some tariffs could be beneficial, though it is not yet clear to which supplying countries these moves might apply.

It’s likely that this will include sectors such as LNG producers, farmers, alcohol producers and makers of other goods previously provided to China from the US – but other businesses might find they benefit from being able to act when the rest of the market is sitting hypnotised, watching the trade war roll on.