Tariff Hikes: Risk Analysis by Sector

While tariffs and threatened tariffs have been difficult to keep track of over the last few months, some of the dust has started to settle. With a few exceptions for specific items and circumstances, exports from Canada to the US are tariffed at a rate of 25%. Chinese exports are currently tariffed at 20%, but a threatened reciprocal tariff of 34% is currently set to come into effect on August 12th. Trade deals are currently being worked out for UK and EU exports, but tariffs as high as 200% have been threatened for European alcohol. And exports from Mexico are currently being tariffed at 25%.  

But amid that uncertainty, one thing is perfectly clear: your business needs to be prepared for the potential credit and financial risks that increased or changing tariffs bring. Let’s take a closer look at a few key industries already being hit by tariffs – and what you can do to mitigate your business’ risk.

1. How Tariffs are Affecting the Manufacturing Industry
2. How Tariffs are Affecting the Transportation Industry
3. How Tariffs are Affecting the Steel Industry
4. How to Reduce the Impact of Tariffs

When tariffs rise, manufacturers are faced with a pretty brutal double-edged sword. Suddenly, it’s more expensive to produce their products, plus potential supply chain disruptions also means that those products can be significantly delayed. In both cases, it’s a hit on cash flow that can elevate your company’s credit risk.

Increased costs mean tighter cash flow, which can lead to late payments, defaults or even bankruptcy in more extreme cases. If a manufacturer relies on imports, tariffs could raise the likelihood of credit defaults and bad debt.

We’re already seeing uncertainty in the manufacturing sector lead to changes in how businesses make deals. In our research study The Murky Waters of Overseas Manufacturing, for example, 95% of surveyed manufacturers said they planned on asking suppliers for a discount in the next 6 to 12 months to proactively protect their cash flow.

Increased tariffs may lead to bigger changes in how the manufacturing sector operates. Steve Carpenter shares, “Onshoring is definitely become more of a discussed strategy in dealing with tariffs. International businesses are talking about future-proofing their businesses by manufacturing locally, even if these new tariffs are reverted back to what they were.”

The automotive industry has been particularly hit by tariffs, with a 25% tariff on foreign-made automobiles. Roughly 30,000 individual parts make up a single car, and some of those parts can pass the US-Canada border 6 times during the car manufacturing process. Some changes were made to the US-Canada tariffs to avoid “stacking” tariffs on items that have to pass back and forth between the two countries, but, as one automotive manufacturer said, reshoring a global supply chain is “not as easy as just flipping a switch.” 

Let’s keep up our body metaphor: if the transportation sector is trade’s arteries, steel is the backbone of industries like construction, infrastructure and manufacturing. Steel tariffs have an interesting history: the Tariff Act of 1870 put a duty of $28 per ton on imported British steel rails, increasing the price so that Americans were more inclined to use American-made steel. Eventually, this led to America becoming a main exporter of steel rails for train tracks. 

Of course, the world’s changed a bit since the 1800s. In theory, tariffs mean that domestic steel producers can become the preferred option when it comes to construction and manufacturing. Good news, right? Well sure, in theory. But with greater demand comes higher prices, and those high domestic prices can slow down infrastructure projects and, eventually, wilt that initial demand. 

On the flip side, steel companies in international markets can suffer when retaliatory tariffs or even trade wars come into play. If export volumes decline, credit risk can shoot up. 

Profitability is a major concern when it comes to tariffs in the steel sector. The cost to produce steel can fluctuate wildly depending on many different factors, including the political stability of countries where raw materials are sourced. Our research has found that 75% of manufacturers were “moderately worried” or “severely worried” that political instability and labor disputes in foreign countries could disrupt their supply chain. 

Steel has been a hot-button topic when it comes to tariffs. The US and UK have been at odds over a threatened 50% steel tariff. While other elements of UK trade and tariffs have seemingly been ironed out, steel is still up in the air. For most other countries, steel tariffs have been raised from 25% to 50%.  

Let’s recap: in the manufacturing sector, businesses could see increased production costs that make it harder to pay their bills on time. Companies in the transportation sector may have trouble keeping up with the increased cost of doing business, or fluctuating demand. And in the steel sector, the cost of creating the product can also rise sky-high, slowing business across different industries.

What do all of these things have in common? Businesses need to have strong cash flow and a deep understanding of their customers and suppliers to weather the storm. And the way to do that, according to Steve Carpenter, is by keeping a close eye on business credit reports. “Lots of companies say they’d like to continuously monitor their customers, but the practice falls to the wayside. You should be monitoring every one of your customers and suppliers to look for red flags, like a spike in their Days Beyond Terms (DBT).” 

Not every business will be impacted by tariffs the same way, but by knowing what to look for in a customer or supplier’s business credit report, you can get a better idea of their financial situation. Have they started paying suppliers consistently late? Maybe their cash flow isn’t doing so well. Aligning your business with customers and suppliers with the capacity to work with you, rather than against you, can be the key to surviving periods of tariff confusion.