Pistols at dawn: Managing transactions on the brink of a US vs China trade war

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Many of Trump’s campaign commitments are cause for concern for a treasurer, but for those within or dealing with China, a potential increase in trade tariffs could prove the most disconcerting of all. We explore the possibility of trade conflict and how treasury teams can best manage their payments in this potential minefield.

China and America currently stand face-to-face; two economic gunslingers hands hovering over their triggers, waiting for the other to act. And whether or not either will draw for their guns boils down to one man – President-elect Trump.

Throughout his campaign, Trump championed the idea of a tariff on trade with China to reduce the large US goods trade deficit. With Donald Trump’s victory, the tariff is now a real possibility. He has stated he will formally exit the 12-country Trans-Pacific Partnership trade deal and impose a 45 percent levy on imports from China. Whether he will pull the trigger is still unknown but his intent remains intact.

Of course, China has not taken kindly to the suggestion. It has argued it will take a tit-for-tat approach and impose its own tariffs and restrictions – threatening to cut off American companies such as Apple that are invested heavily within the country. Considering last year Apple sold more goods in China than in the US, the golden dragon’s bite is definitely as bad as its bark.

Volatility in Prices
But Apple will by no means be the only corporate hit. For treasurers working for corporates based in China or the US – the two largest exporters in the world – a trade war could present a host of problems.  In the event that tariffs are imposed, both the yuan and the dollar will experience heavy volatility and prices will fluctuate significantly. Trade agreements between the two countries will also fall into repute and existing payment structures uprooted. For a treasurer on either side trying to manage their transactions, this volatility and uncertainty will prove extremely difficult. At worst, it has been argued that the proposed 45 percent tariff would paralyze US-China bilateral trade – meaning the majority of payments between the two nations could cease entirely.

With potentially hostile times on the horizon, financial controllers need to act now in order to protect themselves against the fallout of a future trade conflict. In order to do this, there are a number of roads treasurers and CFO’s may look to go down.

The first step is for a corporate treasury to evaluate its provider. Trade tariffs and an economic war with China will increase prices across the board, especially for those manufacturers based in the US. China supplies the resources and parts central to the production of many American goods, such as cars and appliances. Therefore, tariffs will make it more expensive for American companies to purchase these necessities. In order to save money when costs and prices are rising (and the economy potentially weakening) financial controllers should re-evaluate their payment provider. They need the most competitive platform, one that provides a good connection between China and the US and the best FX rates. This way, treasury teams can save on lifting fees and other associated costs that would otherwise add on to already expensive tariffs.
 

Prioritize data automation to hedge against uncertainty
Once the right platform has been assessed, corporates then need to prioritize data. Trump’s plan for the future is still ambiguous and it is still unknown whether he will commit to a policy of levies on China. This causes uncertainty because if he does impose tariffs, America and China will both experience tense and volatile times. With this in mind, corporate treasurers need to prepare for all outcomes. Data is key here, and treasury teams should ensure they have automated exchange rate data feeds and access to historical FX data. This way, they can make the best decisions regarding their incoming and outgoing payments with up-to-date exchange rate and economic data.

A Trump tariff could have serious economic and political repercussions across the board. Treasurers in both countries will feel the squeeze, costs and prices would dramatically rise in America, and China would feel a hit to its exports. This would have a knock-on effect and it would be increasingly difficult, and costly, for a corporate to manage its payments.

As it stands, both countries have their guns holstered. But treasurers on both sides need to ensure they are prepared and protected if Trump reaches for his weapon and sparks economic war.