This issue's key takeaways:
- A 25% tariff will create added financial volatility in the form of increased risk, particularly for organizations and industries that depend on suppliers and supply chains (which is practically all of them).
- Both private and public companies would see a jump in their financial risk profiles.
- The impact on private companies is both greater, and harder to detect without proactive tools.
- Identifying and mitigating supplier risk requires a deeper understanding of their financial health.
- Businesses can better prepare for economic disruptions—in this case tariffs—by taking advantage of tools that accurately assess the financial health of their suppliers.
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Tariff stress test data
By James H. Gellert, Executive Chair, RapidRatings
A trade war is here. Maybe. Probably. Certainly, the threat of tariffs is real and to some extent the tariffs themselves will be enacted. Then the counter tariffs, and so on. Corporations of all sizes are war rooming what these increased costs will mean. Despite rhetoric, the buyer always pays when tariffs are enacted, and in today’s market, not all buyers can afford what’s coming.
It’s complicated to predict what companies will be most affected, as there are innumerable variables at play. However, as a guide to the potential impact of tariffs, RapidRatings’ conducted stress tests to model the financial impact on supply chains.
The results are dramatic but not entirely shocking, like seeing your January heating bill after keeping the thermostat at 72 all month. Like the heating bill, there are details that explain the dramatic numbers.
So what do these stress tests tell us?
Tariffs will exert pressure on suppliers and supply chains
For starters, the stress test exercise reminds us of the delicate nature of supply chains in an interconnected global economy. Disruption in one sector has a cascading effect, weakening businesses and injecting volatility throughout entire industries.
Tariffs unsettle procurement, supply chain and third-party risk professionals by increasing the financial stress on suppliers, pushing many into liquidity crunches and/or operational scrambles as they navigate the “are they on?”/“are they off?”/“what’s the magnitude?” maelstrom. Some suppliers, already in declining financial health, are ill-equipped.
When costs go up, suppliers may be unable to absorb them, and rarely can they simply pass the costs along to customers without significant repercussions.
A faltering supplier who can’t produce or deliver on time will stunt productivity everywhere, creating a myriad of issues for companies who rely on healthy supply chains to function properly.
Big-picture impacts
The stress tests pose a simple question: what happens to US-based manufacturing suppliers when a 25% tariff is applied to goods and materials imported from China, Canada, Mexico, and Germany? Why this number and these countries? 25% is the number threatened against Canada and Mexico, and while 10% on China has been triggered, it’s entirely conceivable more will come. Threats of tariffs against the EU are in high murmur stage and for illustrative purposes, we picked one country with significant upstream suppliers to critical US manufacturing businesses, Germany.
Simply put, 25% tariffs are a big deal and will have a dramatic impact.
That’s not the full story, though. A big takeaway is the degree to which tariffs will raise the financial risk profile of suppliers.
A 25% tariff drastically increases the number of companies considered high and very high risk.
We see a 42% increase in public companies considered high risk, and a 68% increase in those classified as very high risk.
High risk private companies would increase by 74%, with 63% jumping to the very high risk category.
Zooming out, 25% of all public companies and a staggering 39% of all private companies would see their overall risk increase. All told, these tariffs will affect a large swath of the US manufacturing landscape, and by extension the economy as a whole.
The vulnerability of private companies
Last month we looked at supply chain vulnerabilities and the risks posed by suppliers in tenuous financial health. New tariffs are precisely the type of risk event that sends financially unsteady suppliers reeling, destabilizing supply chains in the process.
As the stress tests show, tariffs would push public and private companies into shakier financial health territory.
Private suppliers in particular are vulnerable to the added costs tariffs would bring. Unlike public companies that can raise capital through public markets, private companies rely on more limited funding options and can struggle to take on added expenses.
Additionally, private companies typically have tighter margins and smaller cash reserves, which can limit their flexibility during economic downturns.
This difference can be seen in the 9.4-point average decline in Financial Health Ratings (FHR) for private companies, compared to a 5.1-point drop for public companies, based on stress test results.
This matters because private companies make up the majority of supply chains for Fortune 1000 companies.
Shine a light on hidden financials
This isn’t all doom and gloom.
Yes, tariffs will exert more stress on suppliers and supply chains, but the true danger for companies is being blind to the financial realities of their suppliers in the first place.
And that’s a choice.
Hidden financial vulnerabilities can cause damage long before an acute event―such as tariffs―occurs, at which point it’s too late to respond effectively.
Companies with full visibility into the financial health of their suppliers can be more proactive in developing strategies and solutions that mitigate risk before it develops.
So yes, while these tariffs will increase the financial risk profile of many public and private suppliers, companies that understand why access to comprehensive financial data is vital, and utilize modern tools to do so, will be well-positioned to handle the economic impact.
Get the full picture. Download our infographic, Snapshot: Supply chain risk vulnerabilities.
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Navigating uncertainty: Proactive supplier risk management in volatile times
A proactive strategy is essential for managing supply chain risk in uncertain, rapidly evolving economic conditions.
Join James Gellert, RapidRatings’s Executive Chair, and Tom Derry, CEO of Institute for Supply Management (ISM) on March 19th at 12pm ET, for a fresh perspective on how organizations can take a modern approach to procurement and supply chain risk management.
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Stat spotlight
The Panama Canal is a critical component of the American supply chain. How critical? Approximately 40% of US container traffic, valued at around $270 billion, travels through the Canal each year, connecting the Eastern US and Gulf Coasts with markets in Asia and Latin America.
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The time machine: Tariffs through time
Tariffs are in the headlines a lot these days, but this isn’t the first time they’ve been a major point of contention. Here are four from US history that stand out.
- The Tariff Act of 1789: The first major piece of legislation after the US constitution was ratified, these tariffs were aimed at raising revenue to pay off federal debt and help protect nascent domestic manufacturing interests. Alexander Hamilton, who was very keen on not throwing away his shot, was a big proponent.
- The Tariff of 1828 (aka The Tariff of Abominations): A controversial law that imposed high taxes on imported goods and raw materials, Southern interests hated it (hence the nickname) and it was rescinded in 1833 during the Nullification Crisis.
- The Tariff Act of 1890 (aka The McKinley Tariff): This was a doozy, a big ‘ole tariff to the tune of an almost 50% increase on key imports such as wool and tin-plates. Everyone hated it and it was replaced by new laws in 1894. Tin-plates everywhere rejoiced.
- The Smoot-Hawley Tariff Act: Signed into law in 1930, this tariff was aimed at protecting US agricultural interests, which faced growing competition and overproduction from abroad. Surprise! It backfired in a big way, weakening not only the US economy but overall global trade. A bunch of bad things then happened.
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