Trump’s tariffs are the latest chapter in a series of events that have impacted Europe’s economic outlook. The energy crises exacerbated by the Russia-Ukraine war, post-pandemic market adjustments, and the Red Sea blockade are now followed by an escalating trade war.
The Trump Administration’s tariff policies were met with controversy for multiple reasons, including the calculation method and the aggressive policy of imposing said tariffs. The European Union (EU) and the Trump Administration have yet to strike a trade deal, although the U.S. has most recently threatened to impose tariffs as high as 40% on the EU.
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Although the EU remains a powerful economic force, analysts warn that negotiations could go either way—the Trump Administration may agree to less aggressive tariffs, or else engage in an escalating trade war. As these developments continue to unfold, the market remains volatile, impacting supply chains, trade policies, consumer purchasing power, and ultimately, the cost of doing business.
"Nobody knows whether these (tariffs) are threats or whether they will become policy, so it seems like everyone has become desensitized to them," says Gregory Daco, EY Parthenon chief economist, to CBS MoneyWatch. He also stated that uncertainty over U.S. tariffs leaves businesses in "a very dense fog."
In this article, we cover:
- The trade war’s impact on business globally, including the effects of retaliatory tariffs and businesses recalibrating the markets they sell to.
- Practical steps to help businesses weather the storm, highlighting the importance of supply chain, cash flow, and workforce planning.
The Trade War: What Does It Mean for Businesses Globally?
The Trump Administration’s tariffs have fluctuated between on- and off-again, amid the imposition of new trade deadlines and ongoing negotiations. Before we cover the impact of the trade war, it’s prudent to cover the administration’s motives for imposing these tariffs. Here’s a summary of the Trump Administration’s trade agenda:
- Bring American manufacturing “back home.” A 2023 survey by the Boston Consulting Group revealed that over 90% of North American companies had relocated at least some of their production processes outside the U.S. over the prior five years, to countries such as Mexico, China, and India. Trump’s tariff policy aims to encourage North American businesses to move manufacturing back to the U.S. by increasing the cost of importing goods from the countries where they’ve moved production.
- Equalize the balance of trade. The U.S. has both an overall trade deficit and bilateral trade deficits with specific countries. The challenge with equalizing the balance of trade is that many of these bilateral deficits exist because smaller economies can’t export as much to the U.S. as they import from it.
- Pressure foreign countries into setting policies that benefit the United States.
While the immediate impact of trade tariffs is making importing goods to the U.S. more expensive, various other outcomes will follow this trade policy, including:
1. Retaliatory tariffs imposed by impacted countries
The Trump administration maintains that its imposed tariffs are “reciprocal,” aimed at bridging the trade deficit between the U.S. and allies. The White House confirmed that tariff calculation was based on two variables: “the U.S.'s trade deficit with a foreign country divided by that country's exports to the U.S.,” and Trump verified that these calculated rates would be halved.
However, the calculation method has been scrutinized by analysts, chiefly because trade deficits vary depending on the size and nature of different countries' economies. A smaller economy like Vietnam can’t feasibly import as many goods from the U.S. as it exports to it, resulting in a large trade deficit. Leading analysts believe the Trump Administration is using tariffs as an economic bargaining tool, explaining their on-again, off-again approach. China and the EU responded with their own retaliatory tariffs, which were later postponed in favour of pursuing negotiations.
Experts state that negotiations between the EU and the U.S. can go either way; perhaps they’ll find common ground with a mutually beneficial agreement, or else the situation may escalate. At present, negotiations remain inconclusive. What’s certain, though, is that the burden of tariffs is overwhelmingly borne by consumers in the form of increased prices, according to various bodies of research.
2. Supply chain recalibrations and increased regional competition
One argument in favor of reciprocal tariffs is that they’re advantageous for local businesses, as goods sold at home remain unaffected. While this is technically true, the impact of trade wars on inflation and the cost of living puts businesses under pressure to increase wages, consequently increasing operating costs.
A second, less direct problem also threatens local businesses: a trade war can increase competition, as foreign companies recalibrate their supply chains and target new markets. For example, consider China, the main economic rival of the U.S., which is subject to the highest tariffs. Amidst U.S. sanctions and high tariffs, China has steadily increased its exports across the Global South, Southeast Asia, and is increasingly expanding into Europe. The WorldTrade Organisation (WTO) forecasts a 6% increase in Chinese exports to Europe.
What does this mean for local European businesses? Likely an increase in competition, especially in sectors such as automotive and technology, which are of particular interest to China.
How to Manage Your Business in Volatile Times: Key Advice
As the outlook for the trade war remains uncertain, both SMBs and large enterprises are navigating volatile markets, economic shifts, and evolving supply chains. Here are three critical considerations for maintaining resiliency in these times.
1. Cash flow planning
Cash flow is aptly described as a business’s lifeblood, and volatile times demand more cautious cash flow planning and accurate forecasting. In general, companies approach cash flow management in one of two ways during volatile times:
- By prioritizing cash reserves. Most SMBs operate on thin margins and have limited cash reserves (in one study, over 80% of the surveyed SMBs had less than 5 months of working capital in reserves). Small businesses can increase their cash reserves by reducing operating expenses and eliminating wasteful expenditure. Beyond cutbacks, SMBs should evaluate the profitability of different products, projects, and clients to identify those that are resource-intensive yet offer minimal returns.
- By renegotiating external agreements and scrutinizing both daily operations and expansion plans. Many businesses entered the 2008 financial crisis with limited cash reserves because they prioritized the flow of money over maintaining working capital. While many of these companies struggled during the crisis, others weathered the storm and even captured market share. They:
- They asked suppliers to defer payments, encouraged customers to pay on time, and suspended discounts. They requested overdraft increases and new credit from banks, and sought tax relief and crisis allowances from the government.
- Looked for savings opportunities, including postponing asset acquisitions, reducing inventory levels, and not paying the variable part of salaries.
Similarly, in today’s volatile times, businesses with limited working capital may need to explore cost-saving opportunities, even at the cost of long-term growth. Alternatively, deferring supplier payments, increasing collections, and securing more credit can help companies sustain their growth and potentially capture market share from competitors.
- They asked suppliers to defer payments, encouraged customers to pay on time, and suspended discounts. They requested overdraft increases and new credit from banks, and sought tax relief and crisis allowances from the government.
2. Reevaluating your supply chain and updating target markets.
While lessons from previous financial crises are helpful, tariffs impact markets and suppliers specifically by region. Consequently, impacted businesses must look towards redesigning their supply chains, which may include seeking out new vendors. Here’s what European businesses should consider regarding their:
- Suppliers. If you export any goods from the U.S., check if they’re currently subject to retaliatory tariffs or if they may be in the future. Similarly, if any of the local suppliers you use import goods (or parts of them) from the U.S., their prices may be impacted by any retaliatory tariffs.
- Target markets. European businesses that export goods impacted by tariffs to the U.S. may need to explore alternative markets to sustain long-term growth. Since China’s growing focus on the European market may increase competition for local businesses. Thus, local European companies may need to expand their footprint to neighbouring regions, and perhaps Asian markets.
The trade war’s impact isn’t limited to businesses with physical products. Businesses that service companies that sell to the U.S.—e.g., contractors in the automotive industry—may be impacted by clients’ budget cuts and market recalibrations. Interestingly, services businesses that specialize in consulting may find opportunities in these volatile times by helping manufacturers navigate tariff implications, ensure compliance, and measure risk.
3. Workforce planning and organizational culture.
Where managing your workforce is concerned, there are two parts to maintaining resiliency in volatile times:
- Maximizing your revenue per employee. Revenue per employee is a useful metric for gauging the efficiency of your workforce. During volatile times, many businesses limit or freeze hiring to avoid increasing operating expenses. However, if your operations require you to continue with hiring, calculating your revenue per employee is useful for long-term cash flow projections.
Knowing how much revenue you stand to grow by adding another hire can help with forecasting income. The revenue per employee metric is also useful for guiding waste-reduction decisions. For example, maybe three out of ten employees working on a specific project are bringing in less revenue overall. Moving them to a project where they can bring more revenue for your business will increase working capital.
Read more: 🔎 Action plan to handle cash flow in a crisis | Caflou
- Securing your employees’ support. Succeeding in volatile times requires securing your workforce’s support in maintaining resiliency and in executing your updated strategy, such as targeting new markets, revamping supply chains, and sustaining growth while scaling back hiring initiatives.
Here, two-way communication is a crucial starting point—managers and senior leadership should communicate goals, solicit feedback, and address any concerns. Beyond communication, leaders must also drive cultural change in favour of the company’s updated goals and vision. For example, breaking into new markets may require changes in how your offering is communicated and sold to its target audience. Costing, logistics, and marketing channels may also vary.
Read more: Remote and Hybrid Team Communications: How to Ensure Success
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