Although trade tensions with China have been brewing for decades, the U.S. began accelerating actions in response in early 2017 and began announcing tariffs in July 2018. Since then there have been multiple rounds of trade negotiation and actions on both sides designed to influence the other to a successful outcome.
So far August has seen an acceleration in actions by both parties, signaling that the trade war is really on. Failed progress resulted in an early August announcement by President Trump that a 10% tariff would be placed on an additional $300 Billion worth of products imported from China (China continues to break promises made in negotiations). The new tariffs will go into effect September 1, 2019. This is on top of the already levied 25% tariffs on $250 billion in Chinese imports.
China has pushed back on tariffs in many ways, including their own lobbying and influence operations, strategic moves with allies/their other trading partners, and targeting certain U.S. made products with their own tariffs and regulatory actions.
Now they have opened a new front in the trade war, currency manipulation. Soon after the announcement of the most recent tariffs, the tightly controlled Chinese currency was allowed to weaken past what had been a decade long mark of 7 to 1 against the dollar.
A weaker Yuan means Chinese goods are cheaper on the global markets. It also means it is harder for China to import foreign goods since they are all automatically more expensive.
The weakening of the Yuan caused the Trump administration to follow through on a long running promise to label China as a currency manipulator, a designation that is largely symbolic but that kicks off a more formal investigative process.
Strategically these tensions are having an impact on the economies of the world. This is one reason the fed announced interest rate cuts for the first time since 2008. They are concerned with this overall downward pressure on economies because of these tensions and do not want to see that translate into deteriorating business confidence.
Analyst from a wide range of organizations are warning that the latest round of tariffs will translate not just into pain for businesses that do trade with China, but for consumers. If the tariffs are put in place it will impact the cost of consumer goods, including clothes (40% of those sold in the US are made in China), shoes (70% of those sold in the US are made in China) and toys (88% of those sold in the US are made in China). These items have been largely untouched by the tariffs already imposed (the weakened Yuan may offset some of this).
The issues with China have also included a wide range of cyber topics, including:
- Years of hacking targeting intellectual property
- Years of cyber espionage targeting US policy makers
- Broad strategic influence by China on international standards organization shifting balance of power towards Chinese controlled firms
- Unfair practices regarding state support of state owned companies like Huawei
Who will blink first in the trade conflict? And how long will it last? These are key questions that we can all pontificate on, but since we can’t know with any reasonable degree of certainty, are probably not very relevant to dwell on. We recommend instead that businesses stay agile and develop plans to succeed regardless of the situation. This is easy to say and hard to do we know. But we offer some strategic advice on doing so below.
The following considerations are our recommendations for ensuring your business strategy is as agile as possible in this period of trade tensions:
- Investing for future agility may give you the competitive edge in a dynamic market where needs for computing power will ebb and flow. This means now is the perfect time to revisit your internal processes and use of external computing resources via cloud services.
- You may be able to free up resources to invest in cloud transition by optimizing your IT and security spend. This may sound like a bit of a contradiction in light of our next recommendation, but with planning it is very possible.
- Continuously consider your cybersecurity preparedness. Cyberattacks will almost certainly shift as the trade conflict progresses, and it is hard at this time to predict how. Some adversaries may decide to make direct attacks against U.S. manufacturing to degrade and disrupt production. So stay agile in defense. Ensure your team is following Cybersecurity Best Practices. In light of our advice above to optimize your IT and security spend, ensure you do this in a cost conscious way. We have found many firms can improve their security posture by review of configuration and policy, and many can actually cut cost by leveraging lessons learned from experienced professionals.
- Analyze your exposure to shifts in market buying power. It is time to review scenarios that will include not just a devalued Yuan, but scenarios where multiple nations devalue their currencies. This could not only make your products and services more expensive, but could cause a slowing in the global economy.
- Analyze your technology dependencies. Who do you license software from? Who does your support come from? Analyze whether or not support will suffer as the trade war heats up.
- A key dependency is always the supply chain. What parts of your supply chain will be impacted by the gathering storm? Will small businesses that serve you be under pressure because of the trade war? Will any be bought by larger firms? Will they be bought by overseas firms? Will investors supplying cash to your supply chain be under pressure? Will it cause an impact on your technologies?
- If you sell technology or tech related services (don’t we all?) analyze your markets carefully. Now is a great time to review and decide whether you should diversify into other markets, withdraw from markets where you have less hope of dominance, or focus on markets where you have a greater chance of significant growth. A key market to consider is the U.S. federal government (see our special reporting for Tech CEOs seeking to grow in the federal market).
- Continuously track the coming sanctions beyond tariffs. This includes restrictions on doing business in certain markets (we will track the technological related restrictions as we can and will provide our context here).
- Most all enterprises have been studying cryptocurrency and blockchain based use cases and capabilities. Depending on your business this may be a time to double down on solutions that can help you move value from overseas into your company.
- Inform your strategic thinking with a review of our special report on the strategic threat from China.
We will follow up on this list of considerations with insights into coming moves. Till then stay agile!
