Talk of a global trade war is ramping up amid the current tariff-based trade war between the US and China – and this uncertainty is giving corporates an important reason to check the health of their supply chains. Here, we explore how a global trade war would impact global supply chains.
So, what’s been happening? In a nutshell, since the beginning of 2019 President Trump has announced trade tariffs on imports ranging from washing machines and solar panels to steel and aluminum. While much of the focus has been on China, the U.S. has recently announced that Europe, Canada and Mexico will also be subject to hefty steel and aluminum tariffs.
Of course, trade tariffs are not a one-way street. China and the EU have already drawn up lists of possible tariffs to be imposed on U.S. goods. With Mexico and Canada also likely to retaliate, how concerned should you be about the prospect of the US-China trade war continuing or a larger global trade war and the possible impact to your supply chain? And what can you do to make your supply chain more resilient in the face of any disruption that could follow?
What is the US-China trade war?
While it’s certainly not the only trade war that could affect supply chains, the ongoing dispute between China and the USA is particularly important to look at, as the countries involved make up the two largest economies in the world.
As part of a series of ‘America First’ policies, President Trump has imposed tariffs on over $350 billion worth of Chinese goods since 2018. China has struck back with retaliatory tariffs on U.S. products, covering more than $110 billion worth of U.S. exports.
Because of the importance of Chinese exports in the world economy and the sheer scale of the tariffs that have been imposed so far, the U.S.-China trade war has had rippling implications on supply chains.
The impact this trade war was having on supply chains has been measured in part through a survey that revealed 40% of American companies based in China were planning on moving at least a part of their production. Chinese exports to the U.S. have also been falling in general, but other countries like Vietnam have seen benefits from the trade war, with their exports rising by 21% year on year.
How to manage supply chains during a trade war
The first thing to know is that not everyone would be affected by a trade war in the same way. Domestic steel producers in the U.S may be able to charge higher prices than in the past – but other companies could struggle to stay competitive in the global market.
This could affect businesses in the countries directly affected by tariffs, but also those further afield. If you’re a U.S. farmer, for example, you could see a major impact if China goes ahead with proposed tariffs on soybean imports. Or if you’re a German carmaker headquartered in the U.S., your exports could become less profitable if relevant tariffs are adopted.
The complexities of global supply chains mean that companies will be affected in different ways, depending on their industry sectors and business models. So, you might use machines imported from China to manufacture products which are then exported to China – in which case you could see both higher costs and a negative impact to your competitive position as a result of higher tariffs.
If you’re a large buyer, it’s crucial to monitor these developments and weigh up the possible impact on your supply chain. In uncertain times, suppliers tend to need more liquidity as they struggle to achieve certainty and confidence in their business forecasts.
And any disruption experienced by suppliers could have a knock-on effect for their customers. If a key supplier fails and crucial components suddenly become unavailable, it may be difficult – or even impossible – to switch suppliers at short notice.
So, what can you do to protect your supply chain in the current market? First of all, it’s important to understand how your suppliers could be affected by future trade tariffs, either directly or indirectly. You can then consider what measures you can take to address any potential risks.
Supplier finance solutions, for example, enable you to improve your supply chain’s financial health. Large buyers usually have better access to capital and cash reserves, whereas suppliers tend to face higher funding costs. Supplier financing solutions take advantage of this mismatch by allowing your suppliers to get early payment for their invoices in return for a small discount.
The price of funding in this type of solution is often less than for other sources of capital, so suppliers can access funds at a price and on a timescale that suits them. This means your suppliers can plan ahead with confidence, despite the uncertainty brought by the prospect of a global trade war. Meanwhile, you can rest assured that your supply chain is protected from cash flow related disruptions.
Supplier financing can alleviate the impact of a trade war
In fact, we’ve found that many companies now adopting supplier financing are doing so because of uncertainties in the current market. In the past, companies have usually adopted this type of program to optimize their own working capital position or reduce the cost of goods purchased. But in the last few months we’ve seen a clear shift, with more companies choosing to adopt supplier finance specifically because they are worried about threats to their supply chains.