Risk managers must review supply chains as US-China trade war hots up

Risk managers in the Asia-Pacific region and worldwide will need to step up their scenario-planning efforts and review supply chains, as their companies face up to ever-rising levels of political and macroeconomic risk on the back of the mounting US-led trade war with China, academics and political risk experts have warned. Speaking this week to China’s Xinhua news agency, Fu Xiaolan, founding director of the Technology and Management Centre for Development at Oxford University, said that “reckless” moves by the US Government to intervene in international trade have posed a great political risk to production related to global value chains (GVCs). Ms Fu added that what she described as the Washington-initiated trade frictions with China will profoundly hit international trade structure and the efficiency of GVCs, and also lead to a significant decline of international trade volume. When the latest round of tariff measures affecting US-China trade came into effect, the Organisation for Economic Cooperation and Development warned that G20 exports were down by 0.8% and imports by 2.7% compared to the third quarter of 2018. "The data shows that we have seen the impacts of US-China trade frictions on international trade volumes and structure. Considering that traders might rush for shipments before tariff measures take effect, there may be more apparent impacts in the future," Ms Fu told Xinhua. Normally, the country that levies tariffs on imports will actively seek alternative sources for those imports. Citing a study by the United Nations Conference on Trade and Development, Fu said EU exports are likely to benefit the most from US-China tensions, while Asian countries (excluding Japan) will benefit less. "That will lead to a change in the structure of international trade… not all the products can be replaced," she said. "Products imported from the EU are likely to cost more than those from China, while products from other developing countries don't always share the same quality as Chinese products," added Fu. The academic said she believes that the US Government's actions in international trade will trigger significant risks to GVC activities. But she pointed out that other countries will see this as an opportunity for manufacturing to return to their own countries. Speaking at the G20 meeting of finance ministers and central bank governors in Fukuoka, Japan, International Monetary Fund (IMF) managing director Christine Lagarde urged national governments to recognise the negative impact that trade wars, along with worrying levels of debt, are having on the prospects for global growth. “The IMF estimates that US-China tariffs, including those implemented last year, could reduce the level of global GDP by 0.5% in 2020, or about $455bn, which could make a significant dent in the projected pick-up in economic activity. A second risk is that, with interest rates very low, debt levels are rising in many advanced economies, and emerging markets remain vulnerable to a sudden shift in financial conditions. And all this at a moment when monetary and fiscal policy space is more limited than in the past,” she said. “To mitigate these risks, I emphasised that the first priority should be to resolve the current trade tensions – including eliminating existing tariffs and avoiding new ones – while we need to continue to work toward the modernisation of the international trade system. This would be the best way for policymakers to give more certainty and confidence to their economies and to help, not hinder, global growth,” continued Ms Lagarde. So how should risk managers advise their bosses to face up to such macro problems that are so out of their control? According to global broker Aon, businesses need to carefully analyse the exposure, work out how to mitigate their potential risks, and look for options. Aon points out that companies that have overseas operations, rely on supply chain partners in other countries, or sell to foreign markets can see their business seriously affected – even crippled – by international trade disputes. “There’s the tariffs themselves and the potential impact on contracts that can make projects or supply chains more expensive,” said John Minor, national practice leader, political risk, at Aon. “But it’s also the uncertainty of ‘where is this going?’ and ‘how is an escalation of these trade tensions going to affect my business?’.” Other concerns for US companies with operations in China are whether they might become targets for harsh regulation or whether local courts will protect their contracts and legal rights, pointed out Aon on its website. “Regardless of where tariffs originate and how long-term trade is affected, such situations can serve as a reminder to business leaders of the importance of diversification, to not necessarily rely on a single market,” said Aon’s Clay Sasse, managing director at Aon Trade Credit. Bernhard Steves, managing director of the crisis management practice at Aon, stressed that US–China trade tensions can spill over into other markets. “Market uncertainty is a concern, and business leaders might be shopping for new trading partners that offer more stability,” he said. One option is to identify new supply chain partners or markets, said Aon. “Whether business leaders decide to slow down expansion plans, rethink location strategy or pull investments from one market to another – all are paths forward as businesses continue to navigate through today’s uncertain geopolitical climate,” said Mr Minor.

Risk managers must review supply chains as US-China trade war hots up

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