Scenario planning ‘can help businesses through trade wars’

Dr. Totis Kotsonis of Pinsent Masons was commenting after the US began imposing a 10% tariff on Chinese imports on Tuesday, prompting China to raise a complaint with the World Trade Organization (WTO) and pledge retaliatory measures.

The developments on Tuesday come after US president Donald Trump made an eleventh-hour decision to postpone the implementation of even more severe tariffs on imports from Mexico and Canada on Monday. Trump has also indicated his administration’s intention to impose tariffs on EU imports, with EU leaders promising that such a move would be met with EU tariffs on certain US imports. The developments reflect promises Trump made when he was elected and the contents of an executive order he signed on the date of his inauguration as president last month.

Kotsonis said the volatile situation means many businesses are in relative limbo as they seek to understand what increased tariffs in major markets might mean for their business. The measures could not only impact on the cross-border supply of finished products but also on the supply of components.

"President Trump's tariff rise decision has already rattled the markets, with businesses that are more likely to be affected by the new tariff policy, such as those in the automotive sector, being hit particularly hard,” Kotsonis said. “The question is whether the tariff rises will have the desired effect of incentivising businesses to move their operations to the US.  In reality, taking such a decision is not straightforward, with lower cost centres having been attractive to some, to-date. Moving operations into the US can take time and is likely to be costly, not only because of higher labour costs but also because of the tariff rises making it more expensive to import various components into the US.”  

“Challenges raised against tariff rises under WTO rules are more of a symbolic move than likely to achieve meaningful resolution, given that the WTO dispute procedures continue to be blocked as a result of the US decision – originally taken by the first Trump administration – not to agree to the appointment of new judges on the WTO appellate body. It has also been reported that Canada would consider challenging any US tariff rises under the United States-Mexico-Canada Agreement (USMCA). Also, at this point, we cannot exclude the possibility that there will be a challenge in the domestic courts on the basis of an argument that president Trump’s executive decision to impose the tariff rises is unconstitutional,” he said.

This level of uncertainty about what might happen next means businesses should not make hasty decisions, Kotsonis said.

“The best that businesses can do at this stage is to consider all possible scenarios that might arise, including the possibility that the new global trade war which the US tariff decision has ushered could escalade even further, and consider their options, for the short, medium and long-term,” Kotsonis said.

“For example, on a short-term basis they might decide to delay or even cancel further investment in markets where tariffs have been imposed or threatened until there is some greater clarity as to how long the higher tariffs are likely to remain and the extent of any retaliatory measures. On a medium-term basis, they might consider whether to service the US market through some other third country which is not the target of raised tariffs. However, choosing the right location takes time,” he said.

“Ultimately, what steps a business might be able to take would also depend on what they do and what resources they have – for example, if a company already has a presence in the US, they might find it easier to expand their operations there, assuming they consider that this is the right decision for them,” Kotsonis added, warning that there are likely to be few winners from the unstable and unpredictable global trading environment.

Public policy expert Mark Ferguson of Pinsent Masons said recent developments point to a fracturing of the global economic landscape and perhaps indicate an acceleration in deglobalisation. He said that businesses should look to the political drivers behind the trade tensions to best prepare for how the situations might evolve.

Ferguson said: “While the implementation of US tariffs on Canadian and Mexican products have been delayed, the EU is awaiting its fate after the US president said the bloc should definitely expect tariffs in due course. For its part, the European Commission has said it would respond ‘firmly’ to any unfair or arbitrarily imposed tariffs. However, the bloc’s leadership will be mindful of its ambitions to improve Europe’s competitiveness – a trade war will be time wasted in achieving this objective.”

“In the UK, Labour prime minister Keir Starmer will likely be pleased with the recent comments of president Trump, who has indicated that the UK may not be as impacted by US trade tariffs. However, the prime minister will be mindful that this tacit support of the US-UK relationship could be transactional and will require the UK government to tread carefully as it seeks to build positive relations with the EU, encourage investment from China, and maintain a strong working relationship with the US,” he said.

“The uncertainty in the geopolitical landscape will require businesses to pay close attention to the political developments that are driving these decisions. We largely know the policy platform of those leading governments in the UK, EU and US and as such businesses can overlay legislative and policy commitments with corporate objectives. This work will enable businesses to scenario plan for future events which can inform political engagement and ensure a speedier response to the changing political environment,” Ferguson added.