Proactive planning can go a long way toward mitigating your international risk
Talk of tariffs and trade wars has dominated the headlines recently as political leaders posture in the name of protecting their own country’s economic prosperity. As trade tensions continue to escalate, rhetoric has turned into action as steel and aluminum tariffs have taken effect. While those in the metals industries have a mostly positive view of these developments, what does the rise in implementation of new tariffs mean for other types of business?
Companies that rely on international trade must assess their risk management strategies and keep a close eye on currency movement and volatility, taking steps to help protect their interests and preparing for scenarios that may impact their ability to provide products to their customers.
Importers vs. exporters
Importers are facing higher costs from tariffs and potential supply delays associated with stress on global supply chains. According to a United Nations report, 80 percent of all global GDP involves supply chains with more than one country, which causes considerable uncertainty and creates risk with the introduction of tariffs and other protectionist measures.
For exporters, there isn’t necessarily a cost consequence associated with tariffs. Instead, they suffer a hit to global competitiveness, particularly if they have foreign competitors that are not impacted by the same tariffs.
Global trade uncertainty affects everyone. The pace of globalization continues to accelerate, a result of technological advances in logistics and supply chain management. While larger companies have more access to the global marketplace, middle-market and smaller businesses are also finding international opportunities. Regardless of size, all companies rely on certainty when it comes to moving product, collecting payments and growing their businesses. When this activity becomes less reliable and the perceived risks grow, it creates a trickle-down effect.
Companies typically plan and budget the current year and, in some cases, a portion of the following year. Trade uncertainty creates a challenge to making informed strategic decisions with a long-term perspective. Does a company keep all its manufacturing in the U.S.? Or does it need to consider other alternatives to protect its business and its customers?
Gauging the future
Implied volatility is a term that describes the market’s effort to predict where certain volatility will occur. Implied volatility is increasing, but it’s nothing close to where it was during the financial crisis that began in 2008. Now is the time to increase risk mitigation, to approach your suppliers and ensure relationships are solid. Don’t get overly optimistic based on headlines that rhetoric will remain rhetoric and miss a major issue that is lurking out there. Trade wars are similar to a real war in that they pit two countries against each other. One country will eventually win and along the way, there will be casualties, which unfortunately, are going to be businesses and consumers. Don’t get complacent.
The impact on currency
Trade uncertainty puts pressure on current accounts with different countries, which leads to the possibility of currency controls, particularly when it relates to emerging markets. If a company is selling into emerging markets, it needs to be aware of this risk. For example, if a business is working with a company in Brazil, the Brazilian government could impose currency control because of uncertainties. If this occurs, the U.S. business is not getting paid because it is unable to move currency out of the country. Businesses operating in such an environment must have a plan to mitigate that risk, such as identifying optimal hedging instruments. Before taking an advantage of an opportunity, understand the risk and create a plan so your business is able to respond—and survive—in the event of a worst-case scenario.