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Tariffs

Trump's Trade War: Uncertainty and Inaction Dominate Global Supply Chains

Strategic Insights

— 2 min read

The UK was the first country to reach a trade agreement with the US in May, hailed as a blueprint for other US trading partners, but details of the accord are still unclear, unconfirmed, or subject to potential revision. Meanwhile, US tariff revenue surged almost fourfold to a record $24.2bn in May, while imports from China fell 43 per cent from the same month in 2018. The uncertainty caused by Trump's trade policy is making it challenging for businesses to make long-term decisions about supply chains, with relocating plants being an eight- to 10-year decision that is now fraught with unpredictability.

Key Takeaways:

  • The US trade war is causing significant uncertainty and altering business strategies, with companies resorting to holding strategies and stockpiling goods in bonded warehouses to mitigate the risks.
  • Importers are increasing their use of bonded warehouses, leading to higher storage costs, which are now up to four times the cost of non-bonded premises.
  • The uncertainty is not just limited to supply chains; investment decisions are on hold, and merger and acquisition volumes are also being affected, with a slowdown in dealmaking reported by PwC.
  • The weakness of deal activity is expected to have a greater chilling effect than holding fire on moving business behind the Trump tariff wall.
  • Companies are diversifying sourcing and exploring alternative sources of supply, but the dynamics of different products and industries are playing out differently.
  • Regulatory changes, such as the requirement for cars sold in the US to contain no Chinese software from 2027, can be bigger drivers of change than tariffs alone.
  • The pharmaceutical industry is stockpiling inventory in the US, but the uncertainty is leading to inertia in investment, and it is unclear if tariffs will be high enough to force manufacturing to shift to the US over time.

Statistics:

  • US tariff revenue surged to a record $24.2bn in May, a fourfold increase from the same month in 2018.
  • Imports from China fell 43 per cent from the same month in 2018.
  • The US's overall average effective tariff rate now stands at 15.8 per cent, the highest since 1936, and an increase of more than 13 percentage points since Trump returned to office.
  • 30 per cent of dealmakers were either pausing or revising deals because of the uncertainty caused by tariffs.
  • Private equity firms are holding about $1tn worth of assets that, absent the uncertainty, could have been redeployed.

Sources:

  • Capital Economics (no date), Neil Shearing
  • Sphera (no date), Heiko Schwarz
  • Proxima (no date), Simon Geale
  • Bain & Company (no date), Simon Geale
  • EY (no date), Mats Persson
  • McKinsey Global Institute (no date), Olivia Smith
  • PwC (no date), Josh Smigel
  • Yale Budget Lab (no date)
  • World Bank (no date)
  • OECD (no date)
  • Berenberg bank (no date), Atakan Bakiskan

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