Do Tariffs Really Work In A Globalized Economy?
The Trump administration has introduced a series of trade tariffs against China to punish the second-largest global economy for its “unfair trade practices,” according to the BBC. China, in turn, imposed tariffs on U.S. imports, especially on agricultural products.
The U.S. and China are the world’s largest economies with huge demand and supply potential for each other. China exports 70% of the footwear sold in the U.S., and according to the Office of the United States Trade Representative, in 2018, the U.S. exported more than $9 billion worth of agricultural products. The U.S.TR also reported the U.S. trade deficit with China was approximately $419 billion that same year.
In a more connected, post-Cold War world, countries have been increasingly relying on one another for products and services. Laws of economies of scale are sinking into the architecture of global trade, with the World Trade Organization functioning as a trading watchdog, protecting countries’ interests within the international laws. In addition to the World Trade Organization, sovereign countries have been using regional trade agreements to either extend or protect their economic interests outside their borders.
Different trade strategies are adopted by countries to extend their economic interests.
Small businesses are directly impacted by any growth or shrinkage in export volume as they form the supporting body in the domestic manufacturing and service sectors. In the post-Cold War world, tariffs have been reduced or eliminated to help create an easy flow of goods and services across borders. Countries, however, still use tariffs to either protect their local industry or punish their target country.
Since my early career in international trade, I have been studying international trade dynamics, especially in the light of international relations. Through this experience, I’ve seen that there are several ways small businesses you can avoid a tariff’s impact, some of which I would like to discuss here:
Value-Addition Through A Neutral Country
One of the tactics most commonly used by businesses impacted by the tariffs against their products is to take partial manufacturing into a third, more favorable and neutral country that isn’t impacted by the trade restrictions. This helps keep the costs low with little or no impact on the businesses’ exports while evading the tariffs against the country.
China’s apparel and footwear businesses, for instance, can seek out manufacturing partnerships in Pakistan, Bangladesh and even in India, all three countries with established textiles infrastructure, while keeping their exports at previous levels to the U.S. I’ve seen similar strategies adopted by other countries when they faced either higher tariffs or outright sanctions from the importing country.
Many prudent businesses spring into action by establishing their value-added facilities outside their native countries’ boundaries to minimize the impact of tariffs on their businesses.
Increasing The Public Pressure
Tariffs create a significant pressure on the exporting country’s businesses as their exports slow down and importers look for alternatives elsewhere if suitable and quick alternatives are available. Small businesses can form unionized bodies with ample budgets to initiate lobbying and public relations campaigns overseas that might reverse the adverse actions by the importing country.
The exporting country sometimes offers generous subsidies to its manufacturers to help reduce the burden of tariffs. When China imposed tariffs on U.S. soybean exports, for example, the U.S. government rolled out $16 billion in subsidies to its farmers to help mitigate the impact of a trade war with China.
It is important for small businesses to leverage the power of their local chamber of commerce and related trade associations to lobby their government for subsidies.
Increasing Demand For Domestic Products
Countries under the threat of tariffs can also create domestic demand for their products to help reduce the impact of lower exports. A growing country like China can easily identify and bolster local demand sectors for its textiles and footwear products by incentivizing its population to buy domestic products. The U.S. government can also encourage the local manufacturing sector to ramp up its production for local consumption like it did with its oil sector.
Local businesses impacted by tariffs can create “buy local” campaigns to encourage their communities to buy domestic products. Individual businesses can create individual as well as collaborative “buy local” campaigns through social media or by creating awareness through traditional media platforms.
Creating Demand In Other Economies
Both countries engaged in a recent trade war, China and the U.S., have been actively seeking out new markets for their products. With billions of dollars in its pocket, China is steadily expanding into the African, Middle Eastern and Central Asian markets through its Belt and Road Initiative. The U.S. also uses the tools at its disposal to expand its “soft power” to help promote its economic interests.
Similarly, individual businesses can also seek out new markets near their home country or elsewhere, especially if the market size and capacity to consume their products are healthy.
With a variety of alternative tools at a state’s or business’s disposal amid a trade war, I believe it’s virtually impossible to create a real impact through tariffs in a highly integrated world. Active negotiations and the strengthening of the global trade framework are some of the most prudent options to create a value proposition for your domestic business.
Trade wars not only impact large manufacturing units, but also the supporting small businesses associated with the sector. Small businesses, through their associated chambers of commerce, can lobby to ensure their interests in any trade war. It is important for any small business to not only understand the macro-economic policies and politics but also learn about the tools that can help them during a trade war.