Strategies to Mitigate Trade-War Risk

On Friday, the trade war shifted into yet another gear. China announced retaliatory 5-percent to 10-percent tariffs on US$75 billion worth of U.S. imports. Later in the day, President Donald Trump responded by pledging that the tariff on $250 billion worth of Chinese-made goods already being taxed will increase to 30 percent from 25 percent beginning October 1.

“Everybody keeps thinking they're going to come to an agreement, thinking, ‘We’ll just wait and see.’ So far, it just keeps escalating,” says Kamala Raman, senior director, supply chain research and advisory at Gartner, the Stamford, Connecticut-based global research and advisory firm. “It doesn't help that the global economy is slowing a bit, so companies that were already hesitant to take any sort of capital-related decisions are probably even more hesitant now.”

However, supply management organizations can’t afford to wait any longer to at least analyze the risk to their supply chains. Raman cites three strategies to consider when doing so.

Quantification. Quantify the scope of your risk exposure, for example, by key materials and country of origin, Raman recommends. While China is more obvious, there could be another country you source from that wouldn’t make the news if retaliatory tariffs occurred, she says. So, depending on your situation, also ask:

●What's the impact from the additional inventory you'll have to hold if you are building up some safety stock?

●What cash-flow impact does transshipment have? “Effectively, you're paying the duties for multiple weeks for sales that are going outside of the U.S. before you can start getting that money back,” Raman says. “What is the cash-flow impact if the duty-drawback process is taking multiple more weeks?”

Define tipping points for action. Companies must determine the costs they are willing to absorb, as well as what can be passed on to customers. Questions to ask, Raman says, include: Are 10-percent tariffs something we can absorb? What about a 25-percent tariff? When do you move from stockpiling inventory as a stopgap measure to doing something more drastic? When do the tradeoff calculations basically no longer make sense?

Also, determine what actions you will take when you reach the tipping point. “Can you pass costs on to customers? That may be doable if you are dominant,” Raman says. But it might not be doable, depending on your customers, she notes: “Regarding a company I've worked with recently, their largest competitors are European and don’t have any exposure to China. So, the company really couldn't pass the costs on.”

Define what resilience means to you. This strategy looks at the longer term, Raman says: “When you look at different scenarios, how do you even define resilience? How important is it? Does it mean no single sourcing? Or do you treat your single-sourcing arrangements with care? What do you do if China is a large growth market for you?” (See “Strategizing the Next Trade-War Moves” for more information about scenario analysis.)

Raman says there is a “tricky balance” to determining the best strategy. “You may think the tipping point is 10 percent, but if China devalues the currency or something else happens that changes the dynamic of that impact, the tipping point can change,” she says. “The point is that if we try to get too specific, we're almost certainly going to be wrong, because nobody can predict all possible set of factors in a situation.”

Nevertheless, Raman adds, “estimate the thresholds up to which this is a cost you can absorb reluctantly so you can provide visibility to management on critical action points.”