Here’s how your business can prepare for the US-China trade war

 The US President promises to hit China with further trade tariffs on September 1st, targeting a further $111 billion worth of Chinese imports. In this article, we take a closer look at the heated US-China trade war and what your business can do to prepare for its consequences.

What challenges do businesses face as a result of the US-China trade war?

The tit-for-tat tariff battle between China and the US has had the world on its toes for more than a year. But what exactly do the effects of the US-China trade war mean for businesses around the world?

Right now, the trade war presents the following challenges for companies:

  • Higher Forex volatility: In August 2019, the Chinese Central Bank let the Yuan drop to an 11-year-low, a decision widely seen as a response to new US import tariffs. This raises concerns about the future of the global FX market, as these currency fluctuations obviously have a ripple effect on smaller, open economies. The Japanese Yen and South Korean Won, for example, both plummeted as a result of the dropping Yuan.
  • Inverse yield and recession: Finance experts have been talking a lot about “the inversion of the yield curve” and many fear what this may mean for US equities markets. Since March 2019, short-term investments have started offering higher yields than long-term investments, which has already started affecting regional American banks whose business is mainly focused on floating-rate loans. This inversion has shocked Wall Street as it has been a reliable indicator of recessions in the past.
  • Inflation: The trade tariffs applied so far by the US and China will increase costs for businesses importing into both markets. Those businesses will then have to decide whether they choose to absorb these costs themselves by lowering their profit margins or pass them on to the consumer, leading to inflation.
  • Production/manufacturing changes: Trade tariffs and other measures put in place by the US and China are affecting how and where companies do their business. Import tariffs on Chinese imports will increase operating costs for American businesses reliant on Chinese goods, while reciprocal Chinese measures may encourage US companies based in China to take their business elsewhere.

We are already seeing the effects of these challenges ripple through Chinese and US industries.

The US farming sector took a hard hit after China stopped importing US agricultural products like soybeans in response to the tariff war. Companies like Mid-Continent Nail Corporation, one of the leading nail manufacturers in the US, for example, are also struggling with increased costs brought on by new tariffs on imported steel. The American steel industry, on the other hand, has become more competitive as a result of these tariffs.

Soon, we may also see the consequences of the trade war in other industries. European car manufactures operating in the US (such as Volkswagen) may also soon be hit by tariffs, as will US tech companies relying on Chinese parts for their products.

How can your business deal with these challenges?

The above challenges have created an uncertain global economic climate. While you cannot predict the future of the trade war, your business can stay prepared using the right data and planning platforms.

If your business imports/exports goods, you need to find a way to prepare for currency fluctuations in response to higher Forex volatility. If you are a service provider that relies on imported goods, you will need to know how increasing import tariffs might affect the costs of running your business and how to adapt to these costs.

To help your business prepare for these challenges, your finance team needs reliable data and flexible planning solutions. Using malleable integrated financial planning systems, your finance team will be able to prepare for Forex volatility, inflation, recessions, and the effects these challenges have on your business.

Some of the elements you will want to look for in these kinds of FP&A suites include:

  • Driver-based planning to identify the key drivers of your business.
  • Activity-based budgeting for in-depth cost analysis of the different aspects of your operations.
  • Simulation/integration for flexible and reliable planning around changes to the fundamental dynamics of your business brought on by tariffs, inflation, location changes, and more.

The effects of the US-China trade war are far from predictable. However, with the right financial planning solutions, your finance team can prepare for the uncertainty, plan for potential threats or challenges, and even seize unique opportunities brought about by changes in the market.

Are you interested in learning more about driver-based planning? Check out our webinar!

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