The Expanding World of Trade Wars

Sea port with colorful storage containers, waterfront cranes, and a large ship being loaded with international exports.

Trade conflicts with China are at the forefront, but simmering European trade tensions with the U.S. may mean that trade conflicts could expand. And trade disputes affect businesses of all types, both those who deal internationally and those who do not.

Here’s how businesses can prepare for and stay informed on trade unrest in an economic environment where tariffs are the new normal.

Don't Panic

Talks of trade impasses can seem harrowing, but not every industry is affected in the same way. A company's exposure to the worst of tariffs and the ill-effects of trade wars may vary depending on what they sell and where they sell it. The first step every small business owner should take when it comes to trade war worries is to remain calm and assess how the trade situation will impact their business. Staying informed by reliable sources can help allay fears and avoid unnecessary panic, which leads to smarter business decisions in turn.

First, business owners should be selective in terms of which sources they go to for news. Trusted news sources are always preferable to unverified, unsubstantiated outlets or opinion pieces. And avoid links passed around on social media or via email, which can often make it harder to vet reliable reporting from false information.

Next, it's important to restrict one's news diet altogether. The era of the 24-hour news cycle lends itself to binge-watching and reading, which can do more harm than good. Trade talks often take a long time and are fraught with delays and setbacks. Business leaders should avoid getting mired in the small details of these talks, and instead focus on the consequential outcomes that could have more impact on their company.

Plan for the Long Term

Beyond staying informed, business owners should think about their long-term needs. Since most trade talks take months (if not years), executives should take a long view on whether their business is likely to be impacted by tariffs or trade barriers.

This kind of planning can take several forms. The most immediate is implementing long-term contracts with suppliers and clients. Long-term contracts with suppliers can help ensure that a business's supply chain can operate unimpeded, and that prices will remain steady even if market conditions fluctuate. Plus, long-term contracts may predispose businesses to lower prices as a trade-off for guaranteeing business with their vendors for an extended period of time.

Similarly, businesses that deal in B2B sales may want to pursue long-term relationships with clients in order to lock in consistent purchase orders. This is particularly helpful when both parties can accept terms that offer agreeable pricing and contract length. These efforts can help businesses secure a steady revenue stream that's less subject to the ebbs and flows of international trade and its more domestic implications.

Companies that engage in international business may also benefit from front-loading their contracts and deliverable goods or services. Should tariffs take shape in a country where a business has clients, getting goods into the country before they take effect can help save a significant amount of money. The same holds true for businesses that import goods from other countries that might be subject to tariffs. Stocking up on goods that may be tariff-eligible in the future can help avoid additional costs that could impact a company's profit margin on goods.

Conduct a Stress Test

Aside from staying informed and taking proactive steps with vendors, suppliers and clients, business owners should also take stock of their company's current financial picture. Subjecting one's business to a stress test—a series of potential scenarios that could impact a company's bottom line and operational finances—can identify weaknesses and vulnerabilities. Spotting these problems before they manifest themselves can help strengthen a business's positioning in a volatile market.

If a business is worried about fallout from tariffs and trade wars, stress tests should determine if their books can withstand the additional costs that might come as a result. Evaluate the company's current financials and simulate best- and worst-case scenarios to understand how tariffs will affect specific sectors of your revenue and spend. To get an accurate read-out, begin by adding the additional cost that tariffs would include in purchased goods. Since tariffs are reflected in percentages, it can be easy to determine how much a business stands to pay in extra fees.

Anticipate Changing Markets

Not every tariff affects a business in the same way. If tariffs are levied against a set of goods from one country, rather than a trading bloc (like the European Union), the overall effect may be larger or smaller. Tariffs that apply to trading blocs, by nature, include more countries and could therefore limit a business's capabilities to shop around internationally for better-priced products. Tariffs that apply to specific countries may pose more of a setback for exporters if their core market is centralized within the country in question.

Business owners who are concerned about the ramifications of tariffs and trade wars should evaluate how much trade they do in affected nations and tariff-free countries as well. When there is an opportunity to expand business in a non-tariff country, it may be best to pursue growth instead of relying on partners in countries subject to trade restrictions. Regardless, keeping an eye on changing markets can not only offset the impact of tariffs, but it can also broaden a business's portfolio of clients and global reach.

Look Before You Leap

Before a business leader makes any moves, they should make sure their decisions s are based on sturdy data, reasoned deliberation and plenty of forethought. Acting hastily can lead to costly mistakes. Waiting to be certain before making a decision may cost some time (and even capital), but not waiting can have much worse and longer-lasting effects.

As part of the decision-making progress, it's often smart to schedule calls with stakeholders and key business partners. This should also include conversations with suppliers, vendors and even clients when appropriate. Reaching out to peers and other industry leaders can also help business owners make more intelligent decisions.

Ultimately, every business leader has to act based on the data at hand. Taking one's time, reaching out to important parties in and outside of the business, and keeping a smart eye on the news can help many organizations weather the storm of trade turbulence. Of course, economic and political matters are rarely predictable and clear, but by taking calculated measures backed by iron-clad data, many business owners can prepare themselves for a range of likely scenarios.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association, or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.