Trade credit, political risk insurance and surety to secure non-payment risk, enhance finance and protect investments are some of the mitigation solutions businesses may seek to explore
By Steve Taylor, Head of Credit Solutions, Asia, Aon
The recently announced U.S. tariffs have sent ripples through the global trade landscape. The resulting volatility will impact currency exchange rates, trade flows and geopolitical dynamics, leading to potential credit downgrades [for some companies], adapted supply chains and shifting capital flows.
These factors make business investment decisions challenging, yet they also present opportunities to leverage data and analytics for more informed decision-making.
While tariffs may appear as isolated percentages, they represent [the] U.S.’s ambitions towards balancing their budget deficit, encouraging re-shoring and boosting domestic investment.
The goals are to reduce government spending by USD 1 trillion and increase income by USD 1 trillion—figures that are easy to remember but have a substantial impact on the global economy.
Importers
U.S. importers are expected to bear the brunt of the import tax, with costs typically passed on to consumers through higher prices, to U.S. businesses through reduced profit margins, or absorbed by foreign exporters through lower prices.
For companies impacted, tariffs are expected to, among other things, disrupt cash flow, profitability and debt service levels. Companies reliant on imports with high debt levels and thin margins may be hit harder.
Exporters
Higher tariffs could make products less competitive in the U.S., decreasing export volumes and revenue. Exporters may need to diversify their export destinations. U.S. export-dependent companies could see revenue and margins drop if tariff costs cannot be absorbed through the supply chain.
Asian Countries & Sectors Most Impacted
Countries with the largest U.S. trade surpluses are hit hardest, with new tariffs on top of the baseline for Vietnam ($110 billion+ of exports to the U.S.) and China ($500 billion+ of exports to the U.S.). Industries most impacted in Asia include the automotive industry (Japan and South Korea), electronics (China, Taiwan, South Korea), apparel (China, Vietnam, Bangladesh) and energy (China, South Korea).
Company Strategy Before and After Announcement of Tariffs
Before: Forward-looking companies may have increased imports to stockpile goods before the tariffs took effect, anticipating higher costs and potential supply chain disruptions. This strategy aimed to mitigate immediate impacts and maintain inventory levels.
After: In the short term, companies will need to adapt, including considering renegotiating supply contracts, passing on costs, seeking alternative supply options and exploring new markets. There may also be longer term investment in domestic production to reduce reliance on imports.
Mitigation Solutions to Navigate Volatility
Trade credit, political risk insurance and surety to secure non-payment risk, enhance finance and protect investments are some of the mitigation solutions businesses may seek to explore.
Credit Risk: With the probability of company defaults higher, more companies are expected to use trade credit insurance to grow existing and new buyer relationships, aid credit management decision-making and secure lending facilities.
Guarantee Facilities: When importers need to post import guarantees, the total amount of duties and taxes owed on imported goods increases with tariffs. Consequently, the required bond amount will be adjusted to cover the higher potential liability. In many countries, surety (issued by insurance companies) can be used. Surety provides an alternative unsecured guarantee facility for clients—a valuable tool for treasury.
Investments: To de-risk investment decisions and mitigate against government actions, companies can turn to political risk insurance to help protect against events such as currency inconvertibility.
Impact on Economic and Political Risk Landscape
The tariffs will exacerbate economic and political risks globally. Economically, they could lead to higher inflation, reduced GDP growth and disrupted supply chains. Politically, the tariffs may strain international relations and provoke retaliatory measures from affected countries. This fragmented landscape will require companies to navigate increased uncertainty and volatility.
Conclusion
The recently announced U.S. tariffs present both challenges and new opportunities for importers, exporters and the broader economic and political environment. For businesses in the region, trade, capital flows and strategic partnerships will need to adapt as the future tariff negotiations unfold. Companies can proactively manage these risks through strategic adjustments and insurance solutions to achieve resilience and stability. Leveraging data and analytics and using risk mitigation tools such as political risk insurance, credit insurance and surety bonds can help businesses navigate this complex landscape and emerge stronger.