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In July, world leaders agreed to impose additional import tariffs on Russia during the G7 summit, but the impact has been felt in other countries, including the US, with trade edging up by an estimated 62 percent, according to an economic impact analysis % declined war. Russia’s war with Ukraine and subsequent trade sanctions against Russia have hit many companies that rely on overseas trade. Now companies with foreign suppliers must prepare for the uncertainty of trade tensions, tariffs and even potential embargoes if the war escalates.
Just look at Shell. When they stopped operating and using Russian properties or partnerships for their oil production, they certainly felt the effects. Shell, like many other energy companies, needed to fill the void left after its relationship with Russian energy ended. Ultimately, this led to a rise in oil and gas prices worldwide. However, this is not only felt by large companies, as everyone is directly or indirectly involved in the effects of tariffs.
If your business faces tariffs, trade sanctions or the aftermath of war, here are some strategies to plan against the potential threat this could pose to your business internationally.
See also: Shell halts purchases of Russian oil and gas
Eat the cost of the tariff and take a profit hit
Up until June of this year, the US whiskey industry was enduring a soft patch in exports to the UK and EU, as Trump-era disputes over steel and aluminum trades led to high tariffs on American whiskey. The whiskey companies had to monitor their profit margins and the number of tariffs their profits could support.
For international companies experiencing periods of higher tariffs, there is a need to analyze what costs can be absorbed and covered, and what kind of belt buckles and cost cutting could help mitigate the impact of tariffs and offset their costs to your business. While cutting costs can help improve profit margins, the negative effects of the tariff still exist, but at least consumers won’t notice a drastic increase in the price of your product. It comes down to how much your business can lose in profit margin and remain profitable domestically and internationally, or if it can at all.
Pass the cost on to the consumer
On the other hand, a company always has the option to increase its prices to offset the impact of tariffs on its bottom line. However, this involves the risk that customers will no longer want to buy your product.
Harvard Business Review emphasized that risk can be offset if your company is honest about why it is increasing its prices. Communication is key. Staying on par with your customers and being honest about the realistic implications of a trade war goes a long way.
See Also: What the Invasion of Ukraine Really Means for Business
Insure yourself against the risk of a trade war
Another option is to transfer the risk through insurance. In many cases, risks from tariffs can be included in business interruption insurance. However, trade-related risk is evolving and complex, which can make it difficult and expensive to insure in the commercial liability insurance market. This is where self-insurance can be an option.
Captive policies often have fewer policy exclusions than commercial insurance policies. Proprietary insurance also negates the perceived sunk cost of paying insurance for a risk that doesn’t materialize.
For example, insuring against customs risks for 10 years with no customs losses over those 10 years would be tantamount to money out the door. Aside from letting you know you’re insured, the company really has nothing to show for the premiums paid over this decade.
However, with proprietary insurance, your business can withhold profits if claims are not paid. This enables the build-up of liquidity reserves and benefits your company’s balance sheet. This makes captive insurance a very effective tool, especially at a time like this when many companies are struggling following the sweeping sanctions against Russia and high inflation.
Related: This insurance strategy could save you thousands
Decide whether to exit a market or category entirely, or seek a non-duty supplier
Tariffs are lowered in both directions, although they serve as barriers to prevent competing foreign products and companies from damaging domestic industries. Just look at the specific washing machine industry, as tariffs imposed by the US during the Trump presidency caused washing machine prices to rise nearly 12%, according to economists at the University of Chicago and the Federal Reserve.
This resulted in domestic business owners having to pay their own domestic government tariffs for purchasing the products, rather than in the country from which they imported them. As you can imagine, this also has implications for international business owners, especially in industries like agriculture where the World Trade Organization declares 100% of products to be dutiable.
Related: 2 years since the trade deal with China, tariffs don’t work for American companies
For the businesses and consumers who needed these washers, they had to pay the increased price for them, rather than China or other countries targeted by US tariffs. According to the UCLA Anderson Review, more studies have concluded that the trade war has hurt US consumers and businesses more than China.
The example shows why it is very important to have an international supplier who is not affected by the sanctions or tariffs that your company or your products are subject to from your country. However, this option is mainly reserved for companies that can afford to move large parts of their supply chain to other countries, which limits this option to a few companies. Partnering with a company in a country without the same tariffs or sanctions is also an option, but again there are many logistical complexities that few companies are prepared for.
While there is an immediate impact on sanctions against Russia that can potentially decimate a supply chain, it is important for companies to keep in mind that the impact will be felt over the longer term. Trade wars usually slow economic growth. Therefore, companies should start now and carry out a risk assessment in relation to both the sanctions and the potential for an economic slowdown. Even if your business is not currently affected, it could be in the future.