Editor's Note: The following is a guest post by A.T. Kearney partner Jim Singer and Johan Gott, a principal in the consumer and retail practice. The views expressed here do not necessarily reflect those of Supply Chain Dive.
When Donald Trump took office two years ago, it became almost immediately clear it was not going to be "business as usual" for American companies. The complexities of global trade were reduced down to a basic economic arithmetic that argued any deal in which America bought more than it sold was bad, despite the consequences to U.S. producers or consumers. The president’s "tweet from the hip" approach to trade wars continues to raise questions about how companies that rely on import or export should prepare for an unpredictable future.
Even as the warning lights flashed, most companies chose to put their heads in the sand like an ostrich and practice denial of the things they couldn’t see — waiting to invest in anything that might mitigate a theoretical risk.
As Trump prepared to take the Oath of Office, a team of international trade experts here at A.T. Kearney began developing a framework we called Tradewargaming in recognition of the stark reality that companies needed to start seriously planning for a series of variable trade war scenarios. A major part of the initiative has been to separate rhetoric, tweets and offhand comments at press sprays from what actually happens — rarely an easy feat.
The president’s rhetoric on NAFTA suggested far more serious change than appeared in the USMCA agreement. On the other hand, 25% tariffs on half of the imports between the world’s two largest trading partners — the U.S. and China — is nothing less than historic and is problematic for companies as varied as Apple and Walmart.
Despite everything that’s unfolded on the trade front, many companies today still prefer the view from the ostrich hole, preferring to bet a deal with China and swift ratification of USMCA are imminent.
Why the view from the ostrich hole is the wrong view
Given the president’s unorthodox style and disregard for past treaties and policies, it’s understandable why some see the current trade war as a passing phenomenon. But at this point, it seems more likely than not this is the new normal — a new normal in which acting too fast can be an expensive mistake, and acting too slowly might prove fatal.
What we are witnessing is the hyper-politicization of global economic policy. The administration takes a position — often a strong position — waits to see how it plays to "the base" and the media and then walks it slowly back. Perhaps an understandable negotiating style on its face, but one that is not anchored in any predictable standards or policies.
Time is real money when your costs for a given product increases by 25% overnight.
Jim Singer and Johan Gott
It is simply unrealistic to assume supply chains can be modified overnight, only to be changed back the following day. Should companies stay in China or move their production to India? Will India become the president’s next target? Will our traditional trading partners in producer nations tire of the game and work out a new treaty between themselves as in the case of China finding alternative supply chains for soybeans?
These are all "bet the firm" questions.
Impact and response: It's a matter of industry
On an annualized basis, U.S. businesses are currently paying nearly $70 billion in import tariffs alone, not counting the losses from retaliatory tariffs from trading partners. If the threats on the table — tariffs on the remainder of Chinese imports and automotive products — come to pass, we can double that number. And remember, USMCA has not been ratified by the three member countries’ legislatures, and the World Trade Organization is risking paralysis, setting the stage for economic chaos.
Companies in different industries are impacted by, and respond to, trade wars in different ways.
It is simply unrealistic to assume supply chains can be modified overnight, only to be changed back the following day.
Jim Singer and Johan Gott
Retailers importing a significant number of products — and their consumers — are highly price sensitive. Tariffs are likely to change their customers’ purchasing decisions and, if costs rise enough, depress overall revenue. On the upside, relative to many other industries, adjusting assortment to avoid tariffs is feasible without significant switching costs.
Chemicals and metals producers have inverse characteristics to retailers, trading a relatively limited set of products, and their customers are accustomed to price fluctuations. Given extreme CAPEX requirements, companies will need a high degree of certainty that the new environment will stay for years, even decades, before they adapt to tariffs.
Automotive OEMs are locked in with their tier one suppliers for the duration of a specific model. Their only real ability to change their supplier base is linked to planning for new models — a time horizon of two to five years. For them, it is all about longer term risk forecasting
What you should do — today
Successful companies have made critical changes in how they view trade risk. A strategic Tradewargaming approach responds to tariffs in real time. Here are the steps that ought to inform your approach:
- A governance and oversight structure is necessary to underpin the Tradewargaming approach and to ensure companies effectively respond to fluctuating political risk levels. Today, most companies lack a single responsible person to manage trade risk, and mitigation efforts are often not coordinated across the organization.
- Creating different scenarios and setting up a system for early warning supported by continuous intelligence gathering is the first step once oversight is in place. Scenarios to develop range from the immediate risk (at what point in time and at what tariff rates might the U.S. slap threatened tariffs on the remainder of Chinese imports?) to longer-term challenges (what will the global trading system look like in five years?)
- An end-to-end supply chain model is the foundation to gain immediate transparency of value at risk in different scenarios. If impact modeling requires mobilization of scarce resources to identify country of origin of inputs (including several steps down in the value chain, among the tier one and two suppliers), identify alternate supply sources and current inventory levels and understand switching costs. Organizations understandably hesitate to quickly develop value-at-risk scenarios as new risks emerge.
- Actions are triggered by changes in the risk level score, much like national security threat level color codes. At a given score, specific planned actions are triggered, the nature of which depends on the severity of the risk. Actions triggered by different risk levels vary from the simple — stockpiling inventory ahead of new tariffs — to working with suppliers to shift production to different countries or long-term supply change.
There is nothing magical about any of these actions, but they all take time to set in motion, and time is real money when your costs for a given product increases by 25% overnight.