The U.S.-China trade war is escalating by the day and the U.S. relationship with NAFTA countries Canada and Mexico is increasingly tense. E.U. — U.S. trade is heating up with imminent E.U. tariffs on the horizon. In these wars, it's not only large multinational corporations but smaller businesses with supply chains extending into China and other countries that could incur increased tariffs, losses due to pre-contracted prices and investments overseas.
How is this impacting smaller businesses?
Putting Global ROI at Risk
For years, small business has been encouraged to do global business. This means investing in international markets and sourcing from international locations. These investments are now at risk. Of the nearly 73,000 manufacturing firms in the United States that exported in 2015, more than 70,000 (or 96.4 percent) were categorized as small or medium-sized manufacturers, of which more than 44,000 (or nearly 61 percent) were manufacturers with fewer than 100 employees.
Small businesses will have a harder time surviving trade wars because retaliatory tariffs may impact smaller companies to a larger extent. Often relying on one foreign market (58 percent of smaller manufacturers) and one product category, trade restrictions and tariffs can close the doors to some of these companies.
As an example, China has imposed tariffs on farm products and seafood, as well as autos; and the companies affected can be small food exporters, agricultural supply companies, or auto parts suppliers.
Higher cost of raw materials will have a severe impact on smaller businesses which often have fixed-price contracts with corporate customers and suppliers alike. Additionally, uncertainty hurts all businesses. This inserts one more variable into an already complex business environment. Supply chain pros know better than anyone about uncertainty.
A Newly Vulnerable Supply Chain
With about half of the U.S. production being exported, trade policies have a broad impact on virtually everyone in the supply chain.
Products in the pipeline are affected. It simply takes time to readjust the supply chain with lead times sometimes requiring up to several years. The sudden changes in tariffs make it hard to readjust in an orderly fashion. Supply chain professionals are abuzz with stories of inbound orders that were placed years ago now reaching U.S. shores and being hit with unanticipated tariffs. Other stories are from exporters such as automakers who anticipate experiencing three different levels of tariffs into China within a span of just one week.
Companies also ask whether this is posturing that is temporary, or it is a new, more permanent reality. Maybe it is time to redesign the supply chain to accommodate the new cost structure. However, with so many parameters in flux, it is hard to justify investments in moving plants and restructuring.
Trade disputes need resolution. It is important to realize that the trade wars have come about due to significant trade disputes that must be resolved. Among the many issues are intellectual property violations, regulations that serve to keep foreign competition out and distort trade balance, and biased taxation and bureaucracy. It requires substantially less documentation and processing cost to ship a $700 product from Canada to the U.S. than is required to ship a $7 product from the U.S. to Canada. This not very neighborly practice effectively cuts smaller ecommerce retailers out of competition in the Canadian market. Yet, there are also substantial trade issues that could be solved inside the U.S. and are self-inflicted. While 90 countries have export support, the Ex-Im Bank in the U.S. has been caught in political limbo for years, leaving exporters without crucial support.
To be fair, there are also opportunities for some in a “protected” domestic market. However, that requires that the tariffs become “permanent.” Only then will companies invest in new plants and new production as suppliers of products that are hit with tariffs. The type, size and time-delayed effect of investments needed do not lend themselves to meet a temporary situation. For instance, the time it takes to open a plant for domestic production can be one to three years.
The Threat of an Economic Downturn
The overarching concern in the business community is to avoid triggering an economic downturn and to avoid antagonizing our customers overseas. While costs have gone up over the last few years, the booming economy has helped the top line in many companies.
Compliance cost and risk management, for instance in regards to cybersecurity, have spiraled out of control. If the economy slows, the cost structure can prove fatal to many companies, and the downward drop can become very steep.
It is no wonder that CEOs are huddling with their supply chain and government relations staffs to figure out short and long game strategies on how to best handle the crisis. In the meantime, everyone can hope that this war has one or more winners and that small U.S. manufacturers with global supply chains will survive and not become victims. We can all have our doubts.
Hannah Kain is president and CEO of ALOM.
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