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Risk in Context

Reining in Trade Risks Following the Presidential Election

Posted by Michael Kornblau November 18, 2016

During this year’s US presidential election, each candidate made promises to get tough on trade.

A recently released memo from President-elect Trump’s transition team suggests that some concerns about potential policy reforms may be warranted.

According to the memo, the administration could focus on the following in its first 200 days:

  • Reconsidering the North American Free Trade Agreement (NAFTA).
  • Blocking the Trans-Pacific Partnership deal.
  • Stopping “unfair” imports and trade practices.
  • Pursuing bilateral deals.
  • Retaining and returning manufacturing jobs through tax, regulatory, and energy-policy reforms.

Yet even with a Republican majority in Congress, implementing a new US trade agenda may take considerable time. Given the Republican Party’s historical commitment to free trade principles, a consensus view may prove difficult to achieve. In addition, millions of US businesses rely on global trade while global finance and trade partners have become highly interdependent. And fighting trade wars on multiple fronts may cause more harm than good.

Worst- and Best-Case Scenarios

Changes to US trade policy may come with unanticipated consequences or opportunities.

In a worst-case scenario, US companies could face lower revenues due to new trade barriers, taxes, and/or tariffs placed on production inputs or goods they manufacture abroad and import to the US.  The potential reduction in working capital could lead to increased non-payment or bankruptcy risks, expense reduction pressures, and ultimately US layoffs.

Furthermore, if increased sanctions are imposed or import licenses are reduced or withdrawn, we could see higher non-payment risks for goods in transit or blocked importation of products upon arrival. US companies could also be forced to divest shares in certain companies or exit some countries.

In a best-case scenario, US trade policy would open doors to countries or sectors previously deemed restrictive or cost-prohibitive for expansion or resourcing. US companies could also benefit from financing incentives that support trade growth.

Assess Your Supply Chain and Trade Finance Risks

If you are concerned about how changes in US trade policy could affect your risk profile, operations, and finances, consider:

  • Assessing your susceptibility to potential reductions in trade flows and financing and their impact on your access to resources, production, distribution, and bottom line.
  • Reviewing and updating your business interruption and supply chain contingency plans and policies if supplies or suppliers become unavailable.
  • Evaluating whether your business may be at risk of increased customer defaults due to policy changes and taking mitigating actions.
  • Reviewing your political risk insurance policy’s terms and limits, particularly if you operate in — or are considering operating in — countries that may run afoul of an activist US trade policy.

While the future of US trade policy remains uncertain, understanding the risks and consequences of protectionist and pro-trade policies now may help you mitigate or prepare for their future impact.

Related to:  Trade Credit , Trade Credit

Michael Kornblau

US Trade Credit Practice Leader