Reordering International Trade with the United States
Speculation about a possible trade war from imposition of significant tariffs by the incoming U.S. Administration has become a regular feature of news reporting and opinion-page editorials. Whether this is largely a negotiating ploy or the harbinger of fundamental change in international trade and investment flows remains to be seen. In today’s commentary, CDI Global discusses the implications of potential tariff and currency shocks from the perspective of companies exporting goods and services to the U.S market. In a follow-on commentary, we will cover the strategic options for mitigating the impact on revenues and market share.
Preface by Jeff Schmidt, Executive Managing Director and Chief Executive Officer (United States)
The U.S. President-elect Donald Trump is committed to reshoring and bolstering the domestic manufacturing industry. To achieve this goal, Trump has proposed a 60% tariff on Chinese imports, a 25% tariff on all imports from Mexico and Canada, along with a 10-20% blanket tariff.
Tariffs raise the relative price of imported products versus domestic goods. Essentially an import tax, tariffs squeeze profits of the importer and their supplier if they cannot pass along the additional cost to customers through higher prices. If all or a significant percentage of the tariffs are added to product cost, the supplier risks losing sales volume and market share to product alternatives supplied by domestic manufacturers. Tariffs may also fuel higher inflation, especially in product-market segments with insufficient domestic supply relative to consumer demand.
The specific details of tariff policy will not be known until 2025. Some observers speculate large tariffs mentioned by Trump or others in his transition team may be a negotiating ploy to facilitate voluntary concessions from trade partners. That said, several targeted countries have already stated they will place off-setting tariffs on U.S. exports. Whether there is a trade war ahead or an orderly restructuring of trade agreements remains to be seen.
Bernard Yaros, lead economist at Oxford University, believes large tariff increases could lead to a “great reordering of trade flows”. That is, he adds if companies decide to take their manufacturing to other lower-cost countries like Southeast Asia rather than the United States. Still, in the case of a 10-20% blanket tariff, all international companies would be compelled to counteract the tariffs or risk losing business to U.S. manufacturers.
The Trump administration tariff policy may accelerate U.S. manufacturers reshoring their production. For reference, in 2022, capital spending on U.S. manufacturing facilities increased 40% year-over-year, and the $114.7 billion spent represented a 62% increase over the previous 5 years.
European companies with large American consumer bases such as Nestle, BMW, and BASF have been shifting manufacturing to the U.S. for a decade due to high transportation and logistics costs, geopolitical tensions, and existing tariffs on Chinese goods. With more tariffs looming, European manufacturers with significant market exposure and minimal or no U.S. manufacturing capabilities could face an existential threat to their export business, especially if the U.S. tariff increases are accompanied by a weak U.S. dollar relative to the Euro. The combination could effectively cause European manufactured goods to be priced out of the U.S. market. Notably, “93% of German companies, led by the construction, infrastructure, and industrial manufacturing sectors plan to increase their U.S. investments according to the German American Chambers of Commerce”.
Exporters will have several options to deal with the combined effects of tariffs and currency value differentials:
- Increase prices to counter the effects of tariffs and weather the impact on sales volume and revenues as well as market share for as long as economically feasible to do so
- Allow some portion of the tariffs to eat into profit margins on exported goods to the U.S. market in hopes of maintaining pricing competitiveness and market share
- Create a manufacturing alliance or joint venture with a U.S. manufacturer and shift from exports to domestic manufacturing through the strategic partner
- Build a greenfield manufacturing facility in the U.S. to circumvent the economic and competitive effects of tariffs and currency differentials
- Acquire a manufacturing company or manufacturing facility in the U.S. as a more expedient and quicker strategy as compared with building a greenfield facility
Building a greenfield manufacturing facility in the U.S. can take between 3-5 years, according to Deloitte. To remain competitive, an acquisition or an alliance/joint venture may be ideal for European companies to cope with tariffs and currency risks. Nonetheless, a business combination is not without risks. Finding the right target with management continuity is essential and may be challenging in those industry sectors experiencing significant consolidation over the past decade. How to prepare for and succeed with a cross-border acquisition search will be covered in our next blog.
By: Jake Trussler and Nico Biabani
