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In July, world leaders agreed to impose additional tariffs on Russia at the G7 summit, but the impact has been felt in other countries, including the US, where trade has been cut by an estimated 62%, according to the report. an analysis of the economic consequences of war. Russia’s war with Ukraine and subsequent trade sanctions against Russia have impacted many companies that rely on overseas trade. Now, companies with foreign suppliers must prepare for the uncertainty of trade tensions, tariffs and even the potential for embargoes as 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 impact. Shell, like many other energy companies, had to fill the void left after their relationship with Russian energy ended. This eventually led to a rise in oil and gas prices over the world. However, this is not something that is only felt by large companies as everyone is directly or indirectly affected by the impact of tariffs.
If your business is dealing with tariffs, trade sanctions, or the effects of war, here are some strategies to plan against the potential threat it could pose to your business internationally.
Related: Shell to stop buying Russian oil and gas
Eat the cost of the fare and make a profit
Until June of this year, the US whiskey industry experienced lean times on exports to the UK and the EU, as Trump-era disputes over the steel and aluminum trade resulted in high tariffs on US whiskey. The whiskey companies had to keep an eye on their profit margins and the number of tariffs their profits could incur.
For global businesses experiencing periods of higher rates, it is necessary to analyze what costs can be captured and covered, and what types of tightening and cost savings can help reduce the impact of rates and offset their costs to your business. While cost savings can help improve profit margins, the negative effects of the tariff still exist, but at least consumers won’t see a drastic increase in the price of your product. It’s all a matter of how much your company can lose in profit margin and remain profitable at home and abroad, if at all.
Pass the costs on to the consumer
On the other hand, a company always has the option to increase its prices to offset the impact of the rates on its bottom line. However, there is also the risk that customers will no longer want to buy your product.
Harvard Business Review stressed, however, that risks can be offset if your company honestly explains why it is raising its prices. Communication is key. Equality with your customers and being honest about the realistic implications of a trade war goes a long way.
Insuring against the risk of a trade war
Transferring the risk by insuring against it is another option. Tariff risks can in many cases be included in the Insurance Business Interruption by Legislature. However, trade-related risk is constantly evolving and complex, which can make it difficult and costly to insure in the third-party commercial insurance market. This is where captive insurance can be an option.
Captive policies often have fewer policy exclusions than commercial insurance policies. Captive insurance also denies the alleged sunk costs of paying insurance for a risk that does not materialize.
For example, if you insure yourself against rate risk for 10 years without incurring rate losses over the course of those 10 years, that would be equivalent to money out the door. Other than knowing you’re insured, the company really has nothing to show for the premiums paid over that decade.
However, with captive insurance, your business can withhold profits when claims are not paid. This way you can build up cash reserves and benefit the balance sheet of your company. This makes captive insurance a very effective tool, especially in times like now, where many companies are confused after the sweeping sanctions against Russia and high inflation.
Related: This insurance strategy could save you thousands
Decide whether you want to exit a market or category entirely or find a supplier that is not subject to tariffs
Tariffs cut both ways, even though they are intended to act as barriers to prevent competing foreign products and companies from harming domestic industries. Just look at the specific industry of washing machines, as the tariffs introduced by the US during the Trump presidency have caused the prices of washing machines to rise by almost 12%, according to economists at the University of Chicago and the Federal Reserve.
This led to domestic entrepreneurs having to pay their own domestic government tariffs for buying the products rather than the country from which they imported them. As you can imagine, this also affects international entrepreneurs, especially in sectors such as agriculture where the World Trade Organization lists 100% of the products with a rate.
Related: 2 years since trade deal with China, tariffs don’t work for US companies
For the businesses and consumers who needed those washing machines, they had to pay the increased price for them rather than China or other countries targeted by US tariffs. According to UCLA Anderson Reviewadditional studies have also concluded that the trade war hurt American consumers and businesses more than China.
The example illustrates why it is very important to have an international supplier that is not affected by the sanctions or tariffs that your company or products from your country face. However, this option is usually reserved for companies that can afford to move large parts of their supply chain to other countries, limiting this option to a few companies. Partnering with a company in a country without the same fees or sanctions is also an option, but again, there are many logistical complications that few companies are prepared for.
While there are immediate ramifications to sanctions against Russia that could potentially decimate a supply chain, it is critical for businesses to keep in mind that the impact will be felt in the long term as well. Trade wars usually slow economic growth. So it behooves companies to start now and conduct a risk assessment regarding both sanctions and the potential for an economic slowdown. Even if your business isn’t affected now, it may be in the future.