Some say that the world is rushing headlong towards a trade war. With President Donald Trump threatening to impose even more tariffs on imports from China, others say we are already seeing one. Either way, tariffs have become a major concern for multinational businesses, especially those with long and complex supply chains.
What Is A Tariff & Why Are They Important?
A tariff is essentially an import tax. Governments tend to use them to inflate the price of foreign-made goods in the domestic market. They do this mainly to protect domestic industries from foreign competition, especially in cases where they believe that products from a certain country or countries are being "dumped" – being sold into their domestic market at a price below that of the exporter’s home market (typically contrary to WTO rules).
In the United States, President Trump believes that certain foreign producers are benefiting unfairly from government support to the detriment of US manufacturers. Therefore, he has ordered new and additional tariffs on imports from several economic competitors. Initially, these tariffs were largely concentrated on steel products, mainly sourced from China. However, the US has also placed tariffs on steel imports from the EU, Canada and Mexico. And, worryingly, the conflict escalated with retaliatory tariffs introduced by these states on a broad range of US goods.
The Problem For Businesses
Given the potential for tariffs to add significantly to a business’s costs, this issue has quickly become a priority for business executives and senior managers. According to a recent survey by the American Institute of CPAs, 40% of CEOs, CFOs, controllers and other senior-level CPAs said that their business would be impacted by US tariffs, or by potential retaliation from trading partners. More than half (57%) of the respondents said that new tariffs imposed by the US or its trading partners would moderately impact their business, with 22% saying the effect would be significant.
Indeed, companies with operations and supply chains straddling territories subject to new tariffs are now rethinking their structures altogether, with Harley-Davidson announcing in June a long-term plan to shift some production from the US to the EU to avoid retaliatory EU tariffs on motorcycles imported to Europe from America.
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Harley-Davidson’s announcement suggests that the company believes higher tariffs will remain a feature of the international trading environment for some years to come. However, the recent agreement between the US and the EU to work towards "zero tariffs" offers hope that the world’s major powers are pulling back from the brink.
It remains to the seen whether Washington and Brussels can reach a deal that substantially reduces or even eliminates tariffs on transatlantic trade, and whether the US can work towards similar commitments with its other major trading partners, and notably China and Canada. In the meantime, legislation is pending in the US Congress for the legislature to have a greater say on future tariff designations by the US Government which could limit the President’s ability to use this policy. The WTO may also get involved by arbitrating tariff-based disputes and issuing rulings, although such proceedings are normally lengthy and complex.
Nevertheless, if higher tariffs remain a major concern for multinational businesses in the years ahead, we could see more companies follow in Harley-Davidson’s tracks and restructure their operations to mitigate their impact to these trade taxes.