The non-direct costs of a trade war

Trade shipping
Chris Sheedy By Chris Sheedy, CA Today

28 August 2018

As the US and China beat their chests, what does a trade war mean for Australian businesses?

Is it possible to prepare for a trade war? If your business is a multinational conglomerate then yes, absolutely. Take the example of US firm General Electric whose CEO Jeff Immelt announced, two years ago, that it would localise its manufacturing in new factories around the globe.

Importantly, these production facilities would have the ability to take up each other’s slack to cope with shutdowns, natural disasters and, most importantly, trade tariffs.

“In the face of a protectionist global environment, companies must navigate the world on their own,” Immelt said.

“We used to have one site to make locomotives. Now we have multiple global sites that give us market access. A localisation strategy can’t be shut down by protectionist politics.”

Protectionist politics is exactly what we’re seeing in today’s market, and it’s not unique to the USA. But while it’s great that a business the size of GE can create a workaround, smaller companies are likely to have more of an issue with new tariffs.

Trade wars: Brave new world

What is a business to do? First up, it’s vital to understand that this is the new shape of things. History has been through periods where countries produced everything they required, eras where nations traded in an environment of heavy tariffs and, more recently, have enjoyed a free market model.

Now we’re trending back towards tariffs. Why? Because developed nations previously utilised technology to keep production costs down while developing nations used cheap labour. But developing nations now have both cheap labour and technology, meaning manufacturers in developed nations haven’t been able to compete.

Companies swimming in international waters require a risk-management strategy that takes into account the threats from trade wars.

This has led to Western businesses opening up production facilities in other territories, which has caused a decline in job numbers in specific industries. In the USA, the ‘industrial belt’ has become the ‘rust belt’, and a new President was voted in on a promise to bring those jobs back.

This is a simplification of an extremely complex issue, but even a simple understanding is vital for businesses to survive in this new, global business environment. Companies swimming in international waters require a risk-management strategy that takes into account the threats from trade wars.

The rise of ASEAN free trade

Mike Sewell, Director of Market Gap Investments, says accountants must provide businesses with a regularly reviewed risk management plan that takes the ever-changing tariff situation into account.

“For instance, there’s an excise list that came out of the USA not so long ago, a five-page document that some refer to as ‘The Trump List’,” said Mike.

“If you’re on this list, you’ve got a 25% tariff on your goods. Businesses need to look at that and other developments. They need to look at that type of list and ask, if the new tariff is 25% and you’re 15% better off in China, what are your real costs if you make a strategic shift?”

Businesses in Australia, and the broader ASEAN region, also have some positives on the horizon, says Professor Mahendhiran Nair, Vice-President, Research and Development, Monash University Malaysia and CEO of Monash Malaysia R&D Company.

There has recently been a lot more interest, particularly from Europe, the UK and China, to work with ASEAN as a countermeasure to the retreating US administration.

“ASEAN as a regional grouping has been around for a long time, close to 50 years,” he said. “They have become more progressive over the last few years with ASEAN free trade. The market here is over 650 million and the population is growing - it’s almost double the size of the US. So, you will begin seeing a lot more focus on ASEAN.”

Mahendhiran says there has recently been a lot more interest, particularly from Europe, the UK and China, to work with ASEAN as a countermeasure to the retreating US administration.

“This also heavily affects Australia,” he said. “Over the next three to five years, there will be a great ramp-up of ASEAN free trade with Australia, which will help to mitigate the effects of what’s happening in the US.”

How businesses survive trade wars

Mahendhiran and his colleagues at Monash University Malaysia have been researching what it is that companies are doing in order to thrive in a protectionist environment. Whether they are small, medium or large, he says, successful companies are utilising technology to diversify into new, foreign markets.

“They are diversifying into territories that are business-friendly,” he said. “Technology enables this, and it is going to be increasingly important. In the past, only bigger firms were capable of being part of a global supply network and of moving some of their supply networks for their business operations into different markets. But today’s digital economy enables even the small players to do it.

Advanced producers are seeking the very highest quality parts from various new markets around the globe

.“That requires businesses to have a robust strategy in terms of incorporating new technological development, particularly with Industry 4.0 that integrates the supply networks to the broader business operation. We’re seeing this happen today. Smaller businesses are able to plug in quite easily to the global supply network. These firms know that if they do not globalise their business they will be ‘gobble-ised’ by their competitors.”

Mike agrees, saying advanced producers are seeking the very highest quality parts from various new markets around the globe and are also taking advantage of such new technologies as 3D printing of parts.

In other words, businesses are following the GE lead by diversifying in order to avoid risk, just on a smaller scale.


About the author

Chris Sheedy is one of Australia’s busiest and most successful freelance writers. He has been published regularly in the Sydney Morning HeraldVirgin Australia VoyeurThe Australian MagazineGQIn The BlackCadillac, Management Today, Men’s Fitness and countless other big-brand publications. He is frequently commissioned to carry out copywriting and corporate writing projects for organisations, including banks, universities, television networks, restaurant chains and major charities, through his business The Hard Word.

Topics

  • Business
  • North America
  • Australia

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