Tariffs, Trade Wars and Corporate Cash
In the midst of the recent saber rattling over a potential trade war between the U.S. and China, one salient point has often been overlooked: so far, other than narrowly focused tariffs on steel and aluminum, neither side has taken immediate concrete steps to act on the announcements. The recent tit-for-tat threats from the Trump administration, China and other U.S. trading partners are only the opening salvos of what will most likely be a lengthy, multi-party negotiation process. In fact, it may be a number of months before we know exactly what tariffs will finally go into effect and what the impact will be on specific industries and markets.
That’s small consolation to equity traders who have been trying to manage stock market volatility that’s returned with a vengeance. But for institutional cash investors, there should be time to develop appropriate plans to manage the fallout. Our research report this month, Tariffs and Trade Wars, takes a clear-eyed look at the possible short-, medium- and long-term impacts on fixed-income assets and commercial credits.
For example, the potential tariffs are not expected to have a major impact on economic growth in the very near term. Not coincidentally, the front end of the yield curve on Treasuries hasn’t moved very much. However, should trade confrontations escalate, there may be a negative impact on economic growth, and we’d expect to see a flattening of the yield curve beyond two years. Meanwhile, commercial credits of transportation and agriculture companies are getting a lot of scrutiny following well-publicized threats of Chinese tariffs in those markets. But it’s also important to understand the potential impact on an even wider array of companies that may face margin compression from rising input costs over the longer term. To take one example, if a trade war escalates, industries with globally integrated supply chains such as pharmaceuticals may have to consider investing in substantial changes in their global manufacturing and distribution networks, which could have an impact on credit-worthiness.
To understand what’s at work behind these and other findings, download our Tariffs and Trade Wars white paper. It provides a useful framework for corporate cash managers who need to develop appropriate strategies to balance liquidity, risk and yield during a new and uncertain era of international trade. The good news is there’s still time to act.