For Firms, Trump’s Tariffs Are Not A Matter of Economics, But Geopolitics

For Firms, Trump’s Tariffs Are Not A Matter of Economics, But Geopolitics

The Trump administration’s tariffs have marked a dramatic shift in US trade policy, ushering in an era of economic nationalism and aggressive protectionism. Framed as a tool to correct trade imbalances and revive American manufacturing, these tariffs target key imports – steel, aluminium and a broad range of Chinese goods – and have prompted swift retaliation from major trading partners. This is resulting in a volatile period of global trade disruption, supply chain uncertainty and economic fallout across sectors ranging from agriculture to technology. Business leaders have a myriad of issues to address, and starting with the right context is imperative to implementing the correct response.

While mitigating this landscape, risk professionals should recognize that:

• This is not a financial risk; it’s a geopolitical one.
  If organizations think of this purely from an economic perspective, they will find their risk strategy out of sync at every step and potentially leave themselves in a worse position. This is because the tariffs themselves do not appear to be governed by economics, but are instead heavily guided by geopolitical and strategic imperatives at a national level. It is therefore crucial to examine the current landscape through the lens of strategic relationships and geopolitical signalling, especially when it comes to suppliers' relationships. Failing to do so means reacting to symptoms rather than addressing the underlying causes. Instead of forecasting the actions of the US administration solely based on numerical or economic data – as has been commonplace during past administrations – it is now more practical to consider its messages and values. This approach is more challenging as it involves intangible elements, but it's essential for accurately anticipating future developments.
  
  
• Businesses face financial impacts head-on.
  Firms experience the tangible impacts of trade policies directly on their balance sheets, rendering political rhetoric or spin insignificant in the face of the real-world implications of geopolitical decisions. Take bourbon, for instance. Bourbon is historically targeted in trade disputes as a symbolic US export. Retaliatory tariffs immediately increase the cost of bourbon abroad, significantly harming its competitiveness. Bourbon producers also rely on global supply chains for barrels, grains, packaging materials and logistics. Mega distillers may be able to better navigate geoeconomic turmoil, but small batch distillers – a section of the market that had double digit growth over the last decade – will be devasted. This rings true beyond bourbon: smaller firms have a far more difficult road ahead than bigger players.

   

• Firms must become international players across emerging markets.
  For many organizations, rerouting entire supply lines is a near-impossibility regardless of the geopolitical landscape. Thus, CEOs and CROs must start thinking more seriously about what it means to engage in corporate diplomacy. Firms have a few major benefits over nations when it comes to engaging in diplomatic thinking – one strategy to consider is to leverage their separation from their own government’s national policies to reposition themselves as a ‘global’ or ‘international’ player.

   

• America can expect retaliatory tariffs from the rest of the world.
  As European and Chinese markets respond, many US-based firms should expect their ability to remain competitive to take a hit. Agriculture is usually targeted first in retaliatory policies, due to its economic importance and political sensitivity – leading to layoffs and loss of family farms. Tariffs on imported steel, aluminium and auto parts will raise production costs, leading to reduced competitiveness abroad; as a result, Jeep has already laid off 900 employees in Michigan. Higher input costs and lost export markets hurt industrial machinery and equipment manufacturers, leading to closed factories and assembly plants – the opposite of the administration’s goal to protect American jobs. Aerospace exports (planes, engines and components) are targeted due to high economic and symbolic value, hobbling America’s already struggling manufacturing sector.