Tariffs and Economic Uncertainty
The world economy has been on quite a roller coaster in the last month. With the diversity of our clients and our partners in the market, we have had a catbird’s seat to how this uncertainty is impacting various industries and some possible signs of what is to come. And most importantly, I would like to share some insights on actions you can take well before all the dust settles.
First as to what is happening. You may be relying on imports somewhere in your supply chain or to operate your business. It is really a China versus everyone else conversation at the moment. Suppliers in markets like India, Bangladesh, Vietnam and others in southeast Asia have confirmed that their countries are actively in negotiations with Washington.
At present course, the big loser here is China, as so many other countries are rushing to cut deals with the US, establishing their future trade status. It may well be a race to cut in line ahead of China. And importantly, the Chinese economy, which was already experiencing slowing growth, is critically dependent on foreign buyers of products. China may have foreseen a trade war coming, as Chinese companies have been setting up manufacturing in southeast Asia for example. China itself is getting out of China.
What China does have is infrastructure. It will take time to build the transportation infrastructure elsewhere. We have seen firsthand goods with delivery lead times twice as long as those previously coming out of China.
What is not talked about much in conjunction with this is the pending tax legislation. Both houses have agreed on a framework, but the devil is in the details. A tax bill will in all likelihood extend the business tax cuts like the QBO deduction, but could include additional cuts on businesses and incentivize additional capital investment. This could blunt some of the negative impact of tariffs.
Lenders are asking questions, but have not yet pulled back in mass or are relooking at credit policies. How will they view mass tariffs vis a vis inventory values that they lend on – that is unknown. We have seen the uncertainty put transaction activity on hold. We know of multiple pending M&A transactions placed on hold. Construction projects are also in limbo as suppliers are refusing to guarantee pricing.
What actions should you take right now?
- In any period of uncertainty, it is critical to understand your margin for error. If you have tighter margins already, consider holding off on key hires, making that capital investment and stockpile more cash. Do you know how much margin for error you have? You need to answer that question.
- You should be running multiple what-if scenarios right now – with outputs of both profit and cash. That will give you the clearest picture of your business. Contemplate multiple situations – what does the worst case look like? How high of a tariff could you absorb? What if sales decline, and how much of a drop-off is too much? Can you afford to stock up on some inventory during the tariff pause? Looking at what could happen ahead of time will allow you to respond faster as events unfold.
- Evaluate your inventory on hand – how much time do you have before you run out of unaffected product. From what we are seeing and hearing, there is some consensus that a good bit of dust will settle in the next 60 days. How much time can you buy?
- What are your customers saying? We are seeing the whole spectrum from clearly accepting the current reality to refusing any increase in price due to tariffs. How much leverage do your customers have? Can they provide any competitive insights? Could a competitor undercut you?
- How far out is your pricing committed to customers? Can you add a tariff fee or surcharge versus just changing pricing? It adds transparency in pricing and allows for flexibility.
- Talk to your lender – what are they saying about your business? What insights are they hearing that may be valuable?
A full blown trade war does not seem likely. Multiple leading economists do not foresee a recession. This will pass. Asking questions within and outside your business could help you make the key decision that your competition can’t. Disruption can lead to great opportunity. Can you seize it?
