Understanding the impact of economic and trade uncertainty

Trade disruption and local economic conditions are the two single most important considerations in business long-term viability. Businesses have no control over both variables, resulting in cashflow issues in the short term, and the potential business failure in the long term.

Trade disruption is caused by three factors:

• Supply
  • Oversupply of a product in an inbound trading arrangement (where the recipient country has an oversupply and imports are restricted) or
  • Oversupply in the outbound country (where goods are manufactured in excess and the product is dumped onto the global market)
• Consumption
  • Demand is constrained due to:
    • Money constraints due to lack of cash/equity/profit margins
    • Consumer perception
• Government policy
  • Government policy implementing some form of trade protection
    • Tariff barriers
    • Import embargos

Experience indicates that significant economic disruption in all industry sectors occurs when two things occur:

1. Local economic disruptions such as inflation, reduced demand or low performance and wages, and
2. A significant global disruption such reduce performance from our trading partners

The combination of these occurrences created significant cashflow restriction and impacted on all regional and metropolitan  economies. It also created a range of socio-economic impacts such as businesses closing, communities becoming smaller. This caused an exodus of associated businesses that supported both regional communities (schools, hospitality, recreation and associated services to agriculture). The impact is not a significant in metropolitan areas due to the industry diversity. However, the flow on effect will eventually reach the larger urban areas if the disruption is prolonged

Knowing that we require two factors to disrupt business, how will we mitigate and treat the potential impacts, knowing that we have no control over the external drivers. We can plan for local impacts, but can we plan for future global trade disruption?

Consider this, the United States accounts for approximately 29% of global consumer spending, making it the largest consumer market in the world. Europe follows closely, representing around 20% of global consumer spending, positioning it as one of the largest markets globally. China also plays a significant role, contributing about 17% of global consumer spending, making it a major market alongside the United States and Europe.

The United States currently imports 15% of its total imports from China, valued at approximately $450 billion. Previous trade frictions have resulted in an 8% reduction in trade between China and the USA. The new US policy will introduce trade barriers with China, imposing tariffs of 10%-20% on all products and up to 100% on some products.

The impact on China’s exports is significant, as the USA and the EU each account for 14.8% of China’s total exports.

What could these policies have on global trade, and can we mitigate the potential impacts?