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How to survive a trade war

Scenario planning will enable a company to decide what proactive actions to take.

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Singapore companies are sure to get caught in the crossfire between China and the US. As much as 1% of Singapore's GDP finds its way into supply chains that move from China to the US.

IS it on? Is it off? Should I care? What can I do? Anyone in Singapore whose business relies in whole or in part on international trade in merchandise may be losing sleep over these questions. Rarely before has the topic of customs tariffs dominated the news headlines as it has over the past few months. This year has been all about punitive tariffs and trade wars.

US President Donald Trump's most recent tweets, after an apparent cooling down just before, suggest that such tariffs may still be imminent. It may be wise to prepare for either extreme: one where the good old times of increasing trade liberalisation return; and one where countries clamp up, erecting many barriers to the movement of products between them. Singapore companies are sure to get caught in the crossfire between China and the US. By some estimates, as much as one per cent of Singapore's gross domestic product (GDP) finds its way into supply chains that move from China to the US. So doing nothing is not really an option.

Yet doing nothing is exactly what many Singapore companies appear to be doing. Unfortunately, much of the focus of many reports has been on the rationale for tit-for-tat tariff threats, their impact on economic indicators such as GDP growth, whether they are likely to achieve the desired results, whether they are in compliance with international commitments, and so on. Much less is said about what companies could and should be doing to protect their business from the worst adverse effects of trade skirmishes.

So let us consider some obvious and not so obvious options for survival.

Analyse: It appears that many companies have become somewhat fatigued by the threats of new tariff barriers, or the opportunities of new trade agreements. Often, these threats and opportunities have not materialised - or at least they have not had anywhere near the negative or positive impact that was expected. Consequently, companies are waiting for new measures to be implemented before they consider taking any action. That is not wise. Simple "what-if" scenario planning tools are available to assess the impact of a range of future realities, preparing a company much better to prepare for them now, or deal with them as and when they arise.

The outcomes of scenario planning will put a company in a much better position to decide which of the following proactive actions to take to manage and survive any level of trade war.

Lobby: Often perceived as a dirty word, but at least clearly understood. Many of the tariff and other protectionist measures under consideration are not set in stone. Companies tend to underestimate how much can be achieved by engaging with the regulators to make sure that those regulators understand the impact of the actions that they are considering on a company, an industry or even a whole economy. Engagement can take many forms, from written submissions to attending hearings in person.

Ship: A product that is likely to be caught by increased tariffs and is ready for shipment should be shipped swiftly. Do not wait for tariffs to take effect. Do not hope that they will blow over. Arrange for early shipments where possible and lock in lower tariffs. Of course, conversely, where tariffs are slated to reduce, it would be wise to hold up shipments or store them under bond until such new lower tariffs take effect.

Reroute: This may be easier said than done. However, some changes in sourcing or destination markets may be achievable. For example, an additional 25 per cent import duty on a particular product being produced in China for the US market may be feasibly mitigated by swapping production of such a product with perhaps a facility in Vietnam that currently produces the same product destined for South-east Asian markets. Singapore companies would be well advised to consider the fast emerging market opportunities in neighbouring markets, which are often ignored in favour of more mature and richer markets such as the US.

Use free trade agreements (FTAs): Many companies do not use existing FTA benefits. The two most common reasons are that they do not know that they can, or that the benefit offered by a FTA is too low. Refuting the first reason may be possible through a quick and easy feasibility analysis. The second may be true when tariffs are 2 per cent or 3 per cent, but not when they are 25 per cent or 40 per cent. Now is the time to work it all out.

Reclassify: Import tariffs are typically determined based on the customs classification of goods. Classifying goods for customs purposes is a very technical task. We find that many companies cannot support the customs classification of a third to half of their products. This means that they may end up paying higher duties than necessary on some of their imports. A proper assessment of customs classifications may help ease the pain of impending higher tariffs.

Reduce values: Import tariffs typically take the form of an "ad valorem" charge, ie a certain percentage of the product's value. When tariffs are low, many companies are not so concerned about the value that they declare to Customs. However, when tariffs are high, it becomes more imperative that the import value declared to Customs is not unnecessarily high. Various options, which may differ by country, exist to lawfully reduce such values.

Strengthen compliance: Regardless of whether a company's products are subject to additional tariffs, when such new tariffs are introduced, the authorities in the affected countries are likely to up their level of compliance verifications. For example, Singapore exporters that ship their products to the US may well need to demonstrate to US Customs that their products did not "originate" in China. It is likely that few Singapore exporters are ready for such requirements.

There is no such thing as winning a trade war. Trade wars are bad, and easy to lose. But, as outlined in this article, there are many battles that can be fought and not lost. Ensuring survival would be a good starting point for any Singapore company engaged in international trade.

  • The writer is managing partner of PwC Worldtrade Management Services

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