Prophylaxis

As you might expect, in the wake of the election I have been getting a lot of inquiries. Most of them ask what the incoming president will do on trade, particularly tariffs; how could he do it; and what the impacts might be. These are all good questions, and I will continue to comment on them. On the second one in particular, CSIS published a commentary whose principal author is Warren Murayama, former general counsel at the office of the U.S. Trade Representative, listing most of the options. (We forgot one related to Chinausing Section 307 of the Trade Act of 1974, which permits additional retaliation under Section 301 if the president determines that China has not lived up to its phase one commitments.)

A question I have not gotten very often is what companies are doing to get ready. That is important because they will be the primary beneficiariesor victimsof whatever trade actions the incoming president takes. Not only that, but what they do in response will in many ways determine the success or failure of the new administration’s trade policies. People often assume that when the president orders something, everybody falls in line. In truth, some do, and some don’t. When it comes to making decisions that will affect a company’s future, the latter usually outnumber the former.

For example, the president-elect has said the purpose of his tariffs is to force foreign companies to move to the United States and manufacture here, but a decision to do that involves many more variables than a tariff, including assessments of labor costs, permitting and zoning requirements for factory location, market potential, ability to raise funds for investment, and so on. Corporate executives will do what they believe is good for their company, not what the president of the United States wants them to do.

These decisions also play out over a longer timeline than you might think. The idea that an imposition of tariffs today will persuade companies to move to the United States next week is absurd. Analyzing the variables listed above takes months, if not years, and actual implementationaspects such as selecting a site, resolving zoning and permitting issues, and assembling financingcan take years.

The smart company hopes for the best but prepares for the worst. That means planning aheadto consider what to do in anticipation of tariffs being imposed. So far, several strategies have appeared.

The most popular one is delaying new investment. The president-elect thrives on chaos and unpredictability. Business does not. When faced with uncertainty, corporate executives hold on to their wallets and wait to see what happens. One might argue that the better response is to take a risk and act boldly, gambling on what will come next. Some will do that, but executives of large, publicly traded companies mostly will not.

A second strategy directly related to expectations of tariffs is stockpiling. There was a sharp rise in imports in September, and while it is often a big month as retailers get ready for the holidays, this year’s increase was higher than usual, leading to expectations that part of it was due to companies undertaking advance purchases of parts and components in order to avoid future tariffs. That makes sense, particularly if a company has Chinese components in its supply chain since Trump is most likely to focus on China first. Advance purchasing, of course, means inventory build-up and a continuation of the Covid-19-inspired move away from “just-in-time” deliveries. It will also mean more peaks and valleys in procurement, as companies stock up in anticipation of tariffs, don’t buy when tariffs are imposed but eventually resume purchasing as they run out of what they need. This is the kind of thing that drives supply chain managers and suppliers crazy, so expect to hear complaints.

A third strategy is planning for price increases. While Trump believes foreigners pay the tariffs, nobody else does, and companies that importeither end products for retailers or parts and components for manufacturersknow that they will be passing at least part of the increased cost on to consumers. Planning for how and when to do that is already beginning. It is unlikely anyone will dare raise prices before tariffs are actually imposed, but once they are, companies will move quickly.

New tariffs will also mean moving, as companies shift suppliers to avoid targeted tariffs (on China or Mexico, for example), though that is also a slow process.

Finally, tariffs are not the only factor to take into account in business planning decisions. During the campaign, the president-elect made many promises about tax cuts and deregulation, but it remains to be seen which of them will actually be implemented. Those decisions, some of which will require congressional action, will also have a big impact on company planning.

All this means businesses will face significant challenges in the next administration, and not all of them will be good news. The smart company will certainly plan for a variety of outcomes, and many will delay new investments while they wait to see what will happen.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Image
William Alan Reinsch
Senior Adviser, Economics Program and Scholl Chair in International Business