'Improve preparations for trade wars and global instability'

05/08/19

The trade war between the United States and China, and the threat of a trade war between the US and the European Union, require a well-considered response from companies. In order to avoid any immediate pain from customs tariffs, companies will need to prepare for various scenarios of global instability. PwC tax partner Claudia Buysing Damsté, who is specialised in customs and international trade, shares her vision.

‘When people talk about a trade war, they mostly mean import duties that countries or regions deploy as a political instrument to thwart one another. Threats to raise customs duties work in a similar way, rather like war rhetoric. Such threats are already resulting in disquiet among companies. An import tariff rate of 25 per cent, like the US has implemented on Chinese products, and China's response to the tariff rate, immediately eat into company profit margins. Then there are other tensions that directly impact trade, such as the skirmishes in the Strait of Hormuz, which are making oil companies nervous about their logistics operations, and the trade restrictions against Iran since the US withdrew from the Iran nuclear deal.'

Which companies will be adversely affected by the trade war?

‘The conflict between the US and China affects all companies that produce in China and sell in the US, or vice versa. But the EU and the US have also since exchanged threats regarding tariffs. Brexit is another factor causing uncertainty: which customs tariffs will we be dealing with once the departure of the United Kingdom from the EU, be it soft or hard, has taken place? The unrest among these groups of countries spells uncertainty for a huge number of companies in the West. At the same time, however, there are also positive developments. In late June the EU concluded a trade agreement with Mercosur, the trading bloc comprising Argentina, Brazil, Paraguay and Uruguay. And before that, we reached a trade agreement with Japan.’

What problems will the trade war cause?

‘Recently, a major AEX fund referred to the trade war in their notes to the second quarterly figures as a reason to relocate factories. Without going into the details of this specific case, such a response is certainly understandable. The trend in the past few decades of relocating production to Asia has now resulted in high customs costs for companies. While relocating again is possible, in many cases doing so will result in accelerated write-downs on investments in material and people. This will lead to even higher costs, in addition to the higher customs tariffs. Incidentally, the effects of the trade war can already be felt strongly in China. Take Dongguan, for example, a city that is seeing many companies withdrawing their activities from the textile, electronic and furniture factories located there.’

Would it not be better for companies to wait until after the US presidential elections?

‘It is true that a different president could put an end to the levies. Furthermore, resumption of trade talks between the US and China could also bear fruit. But it is not just down to individuals. There is also a potential threat from the World Trade Organisation or WTO. Already in 2004 the US, on behalf of Boeing, asserted to it that European countries were illegally subsidising Airbus. And last year the WTO concluded that the US was correct in its assertion. As a sanction, the US has indicated its intention to levy additional customs tariffs on other product groups, such as European cheeses, olive oil and wine. Consequently, we are dealing with a maze of disquiet and uncertainty that companies have to navigate.’

What can companies do to deal with the disquiet?

‘By conducting impact analyses and scenario planning, in addition to building in flexibility. With regard to the first point, it is advisable to scrutinise all steps, from production through to delivery to the consumer or purchaser. Which elements are sensitive to trade tariffs or problems in the supply chain? Can we improve or monitor this? And can we plan what action we should take under the possible scenarios? You can never rule out the need for a company to take painful decisions, but it does make a difference if those decisions are well-considered decisions taken without panicking and which factor things in properly.’

What kinds of elements are sensitive to the customs tariffs?

‘Price is a typical example of an element that can be thought through: how much scope is there for absorbing tariffs in the current price? Or will the company suffer serious losses if faced with a tariff of ten per cent? And if that is the case, should the price go up or should there be a greater degree of spread across the various markets? Such considerations can be made in advance.’

You also mention building in flexibility.

‘Yes, it is fine when companies are able to respond flexibly to changes. Perhaps it would be better for a company to no longer aspire to having all factories in the one and same country where it also manages the entire supply chain. By conducting a supply chain analysis, companies can determine what they really want to have in their home country and where they can collaborate with other parties. That’s where our supply chain experts can help. For personnel, for example, this may mean a need for more quality control staff who are able to travel between locations. Our HR people can help businesses develop strategies for this.’

That desired flexibility therefore has an impact on many facets of operations.

‘Indeed, what starts with customs tariffs will go on to affect manifold facets as businesses make their preparations. Our PwC experts can identify the possible considerations facing a large number of companies in various sectors, in terms of customs, supply chain, HR and strategy. I specifically refer to flexibility because of course there is not only one road that leads to Rome. The world is unpredictable and the solutions are not of the one-size-fits-all variety. Each company needs to conduct its own analysis of what is needed to be better prepared for the effects of trade wars and global instability. A nice starting point for this is our Game of Trade.’

What is the Game of Trade?

‘It’s a game developed by PwC that provides insight into the effects of strategic decisions on the trademark rights and the value of the enterprise. Three teams made up of management members are required to make strategic choices under time-pressure in response to a number of consequential events. The competitive element makes it exciting to play and because three teams are making choices, the game provides deep insight into the possibilities and consequences.'

Read more about the Game of Trade

Contact

Claudia Buysing Damsté

Partner, PwC Netherlands

Tel: +31 (0)88 792 38 11

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