How Businesses Can Navigate the Treacherous Waters of Trade Wars

How Businesses Can Navigate the Treacherous Waters of Trade Wars

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In July, world leaders agreed to impose extra import tariffs on Russia during the G7 Summit, but the impact has been felt in other countries, including the U.S., with trade reduced by an estimated 62%, according to an analysis of the economic consequences of war. Russia’s war with Ukraine, and the subsequent trade sanctions placed on Russia, have impacted many businesses that rely on overseas trade. Businesses with suppliers from overseas need to be prepared for trade tensions, tariffs, and embargos as the war escalates.

Just look at Shell. They felt the impact of Russian properties and partnerships being taken out of their operation and no longer used for oil production. Shell, as many other energy companies, had the task of filling the void created by their Russian energy relationship. This resulted in a rise of oil and gas prices around the globe. This isn’t something that only big businesses feel. Everyone deals with the effects of tariffs directly or indirectly. Here are some strategies to help you plan for the possible threat to your business from tariffs, trade sanctions, or the effects war.

Related: Shell to Stop Buying Russian Oil and Gas

Eat the cost of the tariff and take a profit hit

Up until June of this year, the U.S.’s whiskey industry experienced lean times while exporting to the U.K. and EU, as Trump-era disputes over steel and aluminum trade resulted in steep tariffs on American whiskey. The whiskey companies had the task of monitoring their profit margins as well as the amount of tariffs they could take.

International businesses that are subject to higher tariffs need to analyze what costs can be absorbed, and what cost-cutting and belt-tightening measures could be taken to reduce the impact of tariffs on your business. While cost cutting can improve profit margins, there are still negative effects from tariffs. However, consumers will not see a significant increase in the price of your product. It all depends on how much your business can lose in profit margin, and if it can be profitable both domestically and internationally.

Pass the cost onto the consumer

On the other hand, a business always has the option to raise its prices to offset the tariffs’ impact on its bottom line. With that, however, comes the risk that customers may no longer want to buy your product.

Harvard Business Review emphasized that risk can be offset, though, if your business has an honest approach to explaining why it’s raising its prices. Communication is key. Leveling with your customers and being honest regarding the realistic implications of a trade war go a long way.

Related: What the Invasion of Ukraine Really Means for Business

Insure against the risk of a trade war

Transferring the risk by insuring against it is another option. Risks from tariffs can, in many cases, be included in Business Interruption Due to Legislative insurance. Trade-related risks are complex and constantly evolving, making it costly and difficult to insure in third-party commercial insurance markets. Captive insurance is an option.

Captive insurance policies often have fewer exclusions than commercial policies. Captive insurance reduces the risk of having to pay insurance for a loss that doesn’t occur.

For example, insuring against tariff risk for 10 years without any losses to tariffs occurring over the course of those 10 years would equate to money out the door. The business has nothing to show the premiums it paid over the past decade, except the comfort of knowing they are insured.

Captive insurance allows your business to retain profits even if claims aren’t paid. This allows for cash reserves to build up and benefits your business’ balance sheet. Captive insurance is a great tool, especially in these difficult times.

Related: This Insurance Strategy Could Save You Thousands

Decide whether to exit a market or category completely or find a supplier not subject to tariffs

Tariffs cut both ways, even though they exist to operate as barriers to prevent competing foreign products and businesses from damaging domestic industries. Just look to the specific industry of washing machines as tariffs introduced by the U.S. during the Trump presidency resulted in washer prices rising by almost 12%, according to economists at the University of Chicago and Federal Reserve. This resulted in domestic businesses being forced to pay domestic tariffs to buy the products, rather than the import country. As you can imagine, this has implications for international business owners as well, especially in industries like agriculture where the World Trade Organization cites 100% of products as having a tariff.

Related: 2 Years Since Trade Deal with China, Tariffs Aren’t Working for American Businesses

For the businesses and consumers that needed those washers, they were left paying the increased price for them instead of China or other countries targeted by U.S. tariffs. According to UCLA Anderson Review, additional studies have also concluded that the trade war hurt U.S. consumers and companies more than it did China. This example shows why it is important to have an international supplier who isn’t subject to the tariffs or sanctions imposed on your company or products. This option is only available to businesses that have the financial resources to move large portions of their supply chains to other countries. Although it is possible to partner with a company in a country that does not have the same tariffs and sanctions, this option has many logistical challenges that few businesses are ready for. While there are immediate consequences to the sanctions against Russia, they can also impact a supply chain and cause disruption. It is important for businesses to remember that the long-term effects will be felt. Trade wars typically slow economic growth. Businesses should therefore start now to assess the risk of economic slowdown and sanctions. Even if your business isn’t affected now, it could in the future.

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