Radical economic changes - are companies' economic judgements still valid?
Tariffs as a breach of trust in the global economy
Worldwide threats of tariffs are destroying confidence in the global economy. In global supply relationships, import duties change the cost situation of many companies. In most cases, the double or even triple-digit amounts we are currently talking about cannot usually be offset by savings in other areas or margin reductions. Price increases for affected products are necessary. With the exception of luxury goods, whose premium prices the target group will continue to be willing to pay, price increases will be the result, even if only components and not the product are introduced. There will be a decline in sales. It is necessary to check whether the affected companies will still reach their break-even point with the lower sales.
Sales risks due to import costs and price increases
From the perspective of exporters, import duties in supplied sales markets are also poison for product sales. If there is domestic competition or groups of countries that are subject to significantly lower tariffs, entire markets can collapse.
Export barriers and the loss of entire markets
The company analysis is complex because, on the one hand, for a country that massively increases import tariffs, it is necessary to estimate for the individual companies in this country how strongly they are affected with their supply chains and are therefore subject to massive cost increases. On the other hand, for companies with global sales, it is necessary to examine the extent to which they are affected by the import countries' tariffs and the impact on their own sales. In both cases to which companies are exposed, the available liquidity plays an important role as a buffer. If this is low, financial difficulties can arise very quickly.
Company analysis under new uncertainties
Even the suspension or cancellation of tariff announcements does not increase confidence in such decisions. Rather, the consequences will also have an impact on other markets. Companies from countries subject to tariffs will certainly look for new sales regions or increase their efforts to place their products in markets without high tariffs to a greater extent than before.
The uncertainty in the affected markets will also lead to increased reluctance on the part of companies to invest. This in turn will have a knock-on effect on other companies, further intensifying the economic downward spiral.
Commodity dependency and strategic reactions
Finally, it is now apparent that individual countries are also reacting to these customs activities in other ways. For example, China, an important supplier of rare earths, has announced that it will stop exporting them completely. As these are needed for semiconductors, smartphones, electric car batteries and other digital products, this will have a massive impact on production at companies that have sourced the materials from China. The lower quantities available internationally will also lead to price increases, with negative effects for all companies that use semiconductors in their products. However, due to the long production cycles for semiconductors, there are lead times.
Financial markets as a geopolitical risk
However, the tariff dispute between the USA and China in particular harbours another risk that could have global consequences. China is currently likely to be in possession of American government bonds totalling more than USD 750 billion, which it uses to finance American debt. If China sells a large proportion of these bonds, the prices for these bonds will fall significantly and interest rates will rise sharply. This in turn will have an impact on rising property interest rates, with dramatic effects for the American housing market. There is also a risk that contagion effects from the devaluation of bond portfolios could lead to effects similar to those we saw in 2008 after the Lehmann bankruptcy. It is therefore to be hoped that this option will not be taken. It is also likely to harm the Chinese market.
Against this backdrop, we should be confident that the US tariffs and threats will soon be withdrawn due to the damage to its own economy and that the markets will stabilise again and confidence will return. This will also reduce the risk of insolvency in many areas and make the work of credit management easier again.