Tariffs, the new norm in global trade
Risk and thoughts!
The COVID-19 (oh no, the C word again!) pandemic fundamentally reshaped business operations and work models worldwide. Are tariffs (too early to give it a T word) poised to start a similar transformation in international trade dynamics?
Now, you can come up with a number of reasons why countries might go down the tariff route: it may be patriotism, addressing internal debt and deficits, implementing strategic business policies, reducing reliance on external supply chains, enhancing national resilience, Big power politics, or exerting geopolitical influence. But, I feel, in coming days, we will hear more of this word! It may become a potential paradigm shift in global politics and commerce.
It's also plausible that the United States won't be the sole or last nation employing tariffs as a strategic tool. Initially, we might witness reciprocal tariffs, but this approach could evolve, with countries leveraging tariffs to achieve various objectives mentioned earlier.
For companies, this is a pivotal moment for introspection. Rather than perceiving tariffs as a challenge exclusive to U.S. relations, businesses should anticipate which nations might adopt similar measures and for what purposes.
Consider this: What if, for Australia, the next tariff imposition comes from one of our top trading partners? According to the Department of Foreign Affairs and Trade, Australia's top trading partners?
Some may argue that tariffs are nothing more than another supply chain risk ! I will dis-agree. Addressing this issue isn't solely about supply chain risk. Tariffs can impact various facets of a business. Therefore, it's important to re-evaluate both strategic and operational risks in light of this evolving global order.
We have to start somewhere: so let's start here. Here are some of the risk aspects to consider. Companies should assess these in the context of their industry, dependence on external supply chains, risk appetite, maturity, resilience, and overall strategic positioning:
Higher Import Costs (Immediate Impact): Tariffs can lead to sudden increases in the prices of imported raw materials and goods, directly affecting cash flow and operational budgets.
Market Instability (Immediate Impact): The imposition of tariffs may cause immediate market uncertainty, potentially impacting company share prices, order volumes, and customer confidence.
Operational Disruption (Immediate Impact): Businesses may need to swiftly adjust pricing, inventory, and supply chain strategies to accommodate new tariff structures.
Competitive Disadvantage (Short-term Impact): Increased costs due to tariffs can render a company's products less competitive compared to those from local manufacturers or countries not subject to such tariffs - have you read about washing machine scenario in first Trump presidency?
Profit Pressure (Short-term Impact): With rising costs and the potential inability to pass these onto customers, profit margins may be squeezed. In an environment where many are already struggling, transferring the cost may not be feasible.
Exchange Rate Volatility (Short-term Impact): Tariff announcements and ensuing trade tensions can lead to fluctuations in currency exchange rates, complicating financial planning. Notably, the Australian dollar has experienced significant declines, reaching a five-year low of 60.5 US cents.
Complex Supply Chains (Long-term Impact): There may be a need to restructure and diversify supply chains, adding complexity and potential costs to operations.
Reduced Market Access (Long-term Impact): Sustained tariffs could lead to a permanent loss of market share in affected regions, necessitating a search for alternative markets.
Strategic Reorientation (Long-term Impact): Businesses might need to pivot towards new international markets or strengthen domestic and regional partnerships to mitigate the effects of tariffs.
Perfect Storm Scenario (Comprehensive Impact): When combined with rapid AI-driven technological shifts, persistent high inflation, and ongoing supply chain instability, tariffs could trigger a "perfect storm," severely challenging business resilience and strategic agility.
And one more:
11. The big eleven! I think, keeping with the theme of emerging and escalating risks, now may be the time that companies need to consider: "What happens if I can no longer get that critical material or component from overseas that's absolutely essential for my operations?" Whether it's a rare mineral, technology, specialised skill, or workforce, businesses should ask themselves—will this force me to fundamentally change my business model?
I will leave to you here to ponder!
Effective RM #risk #tariffs #theshift
