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Tariffs force businesses to work more closely together
PRIVATE business owners cannot wait on the sidelines for trade tensions to ebb. They are tackling trade discord today by collaborating, identifying enduring growth opportunities, and bringing production closer to customers, based on feedback from members of the UBS Industry Leader Network at a London event recently.
The catalysts for change are strengthening, as trade tensions hit both economic growth and confidence in financial markets.
Higher tariffs can force entrepreneurs to rethink how they operate. From where I sit as co-head of global wealth management at UBS, it is no small irony: threats in the form of tariffs are likely forcing businesses to work more closely together to find opportunities. The changes to global supply chains - or the way that businesses sell each other products and services - go far beyond tariff optimisation.
For example, members of the UBS Industry Leader Network reassessed the case for labour- intensive production in China months before additional tariffs took hold. Some opted to move manufacturing to locations such as Vietnam, Indonesia and India, where costs are lower. Others continued to produce in China because the benefits of high-quality local infrastructure and a skilled labour force outweighed the costs of paying higher wages.
More recently, these industry leaders discussed the impacts and opportunities triggered by these shifting global supply chains. Here is what we learnt.
Lesson 1: Entrepreneurs are working closer together as nations move farther apart
Members of the UBS Industry Leader Network concluded that managing trade tensions profitably demands greater flexibility and deeper cooperation across supply chains.
Working on case studies of how manufacturing companies could respond to higher steel tariffs, business owners favoured sharing higher costs. Entrepreneurs are optimising prices across their value chain, raising end costs for some clients, while renegotiating with suppliers and global buyers where possible. Small- and mid-size business owners are looking beyond near-term tariffs to adopt a long-term, cooperative approach.
In today's interconnected world, siting a factory depends on far more than labour-cost arbitrage, or moving labour-intensive manufacturing to lower-wage countries. Entrepreneurs in the Industry Leader Network reviewed their strategic manufacturing options well before the escalation in trade tensions became a market concern. Rather than change operations wholesale in response to tariffs, these business owners have accelerated their manufacturing location changes to take into account a broader range of factors such as quality of infrastructure, transport connections, and the ease of doing business.
Lesson 2: Entrepreneurs tend to focus on trends more than tariffs
Although tariffs command a lot of headlines, members of the Industry Leader Network reported that non-tariff factors often matter more to where they choose to operate, trade and expand.
International differences in access to technology, protection of intellectual property and safety regulations can hinder cross-border business. Entrepreneurs who adopt the strictest minimum standards may face higher short-term costs than competitors who "play by the local rules" in less-regulated jurisdictions.
But the business owners whom we spoke to took the long view. Non-tariff factors are part of a wider movement towards more standardised environmental, social and governance standards. By working in a more sustainable way today, entrepreneurs can better attract new business from socially-conscious consumers. By anticipating tougher regulation rather than scrambling to react, business owners can enjoy a first-mover advantage over larger, less agile competitors.
Lesson 3: Entrepreneurs move production back closer to clients
Industry leaders are moving from a "multinational" to a "multilocal" business model, producing goods and services close to clients wherever possible. Politicians have argued that they intended to drive this nearshoring trend when they deployed tariffs.
But business owners are on the move for different reasons. They cite three factors that favour producing closer to end-client markets. First, commoditisation and new technologies make local service provision more scalable and profitable. Examples of this include the shift from data centres to cloud computing, or increased use of artificial intelligence to replace high-wage, high-repetition clerical workers.
Second, the declining mobility of highly-skilled labour (due to visa restrictions, rising wages in lower-cost IT centres, or greater administrative burdens from mobile working) reduces the appeal of offshore service provision. Third, consumers increasingly demand customised products delivered just-in-time as opposed to the cheapest-available goods from low-cost production centers.
In an uncertain world, I believe investors' best response to trade policy divergence is to listen to some of the world's most successful entrepreneurs. Their key messages, for investors and wealth managers alike, are to focus on the long-term opportunities, collaborate and stay close to your end client.
- The writer is co-president, UBS Global Wealth Management