Finance Managers: How to End Increased Protectionism
Globalisation is no longer the buzzword that it was about 10-15 years ago. Domestic country politics and geopolitical tensions are pushing the world back into the protectionist cocoon of previous centuries.
In the United States for example, President-elect Donald Trump, has been calling for massive tariffs to be imposed on imports from China and Mexico.
The Trans Pacific Partnership Agreement between twelve Asian countries has hit troubled waters as well. Across the pond in the UK it seems that a hard Brexit is likely to increase trade costs in Europe.
The impact of all these events on the international trade in goods and services is easy to see. However, in the background there is also a significant impact on international trade finance and capital movement. With higher trade costs in the form of tariffs, import quotas or anti-dumping duty, it becomes harder for finance managers, procurement teams and even export dependent sales teams to effectively compete in the global marketplace.
The cost of doing business
If you look at protectionism from the point of view of an international company or a domestic company with an international supply chain, you can spot the areas of maximum impact. International Trade ebbs and flows based solely on minor cost differences in acquiring raw materials from a particular country or selling at a slightly higher price point somewhere in the world. Not only do additional tariffs mean higher costs and more paperwork but they also force managers to uproot and re-establish significant portions of their supply chains.
For example, an American construction company may be importing steel from China and heavy equipment from Germany to build a power plant in the Philippines and financing it all with bonds issued by a British bank in London. Well, this company should now be prepared for a lot more paperwork and additional costs. This is a rather simple example, however. Many large companies may have hundreds of vendors and thousands of distributors spread across the world. Free Trade agreements are designed to make it easy and cheaper to do business across borders and using Comparative Advantage (where each country produces what it is best at producing), all the member countries benefit a little bit from the reduced costs.
So why pull the brakes on free trade?
As efficient as free trade is, it is a bit hard to see its effects for the common citizen. This is because the positive effects are usually spread out over large parts of an economy whereas the negative impact hits small groups of individuals. For example, a free trade agreement between let’s say Germany and Egypt might mean cheaper Egyptian oranges for every German (which might be hardly noticeable to individuals) but if a single auto-component plant moves from Germany to Egypt the impact on the German plant employees is immediate and apparent.
So what can a finance manager expect in this new world paradigm of ever increasing protectionism? Well, the costs are going to go up – that much is certain. If the increase is moderate, it might be absorbed or passed on to the consumers. However, if the cost increase is higher then supply chain networks will need to be recalibrated at considerable costs. It’s always difficult to switch a long-time supplier. A new supplier means additional trade financing costs and possibly issues with quality or streamlined supplies in the first few months or even years.
For most people it is difficult to understand how countries can decide to become more isolationist in the kind of interconnected world we see today. But the truth is that trade has often been used as a propaganda tool and a pressure tactic on competitors. Ultimately, it is the people who bear its cost.
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