Trade Wars — How They Affect E-Commerce?
Recent headlines show President Trump wielding the threat of tariffs to nations all across the world. Mexico, Canada, China, Europe, and Japan all face stiff tariffs on imported goods as a result of Trump’s “America first” trade strategy.
What are tariffs and how do they affect global trade? More importantly, how do they affect your online business? The rise of e-commerce over the last two decades is a significant contributor to global GDP, and you may be surprised to learn that Trump’s tariffs may indeed hurt the bottom line of your business.
A Short History of Tariffs and Trade
In 1913, the heads of major economies met to negotiate the first global trade agreements. However, this budding trade liberalization came to a halt with the advent of WW1. As trade collapsed, economies faltered and stock markets shuttered in the wake of the war. Nations became increasingly protectionist with their trade policies, further slowing economic growth.
In 1920, the formation of “The League of Nations,” led to the unwinding of these protectionist policies and further pursued trade liberalization in the hope of spurring international trade. The first world economic conference held by the League in 1927 saw efforts to outline multilateral trade agreements marginalized by the fallout from The Great Depression.
The U.S bypassed these agreements in 1930 by introducing the Smoot-Hawley Act, adding a 50% tariff to all imported goods. Adding to its growing economic authority, President Franklin D. Roosevelt established the trade act of 1934, giving the U.S president the power to negotiate all bilateral trade agreements, without the need for congressional approval.
WW2 led to another collapse in global trade, with the United States emerging as the global economic leader by the end of the war. In the aftermath of WW2, leaders from 23 countries established the Global Agreement on Tariffs and Trade in 1947.
As globalization of the world’s economies marched forward to the end of the 20th century, many nations violated trade agreements to gain an economic advantage over each other. A prime example is the “The Chicken Wars” from the early 1960’s, where Germany and France placed a tariff on U.S. chicken imports. In 1973, western nations introduced “The Arab-Nations Embargo” on oil imports to show support for Israel during the Yom Kippur War.
The 1980 U.S embargo on Russian grain, and the U.S – E.U “Pasta Wars” of 1985 are also classic examples of trade agreements gone wrong.
Trumps Tariffs vs. China’s Currency
President Trump states that global benefits from the American economic expansion of the past 70 years have come to an end. He points the finger notably at the Chinese, labeling the nation’s Central bank, the PBOC, “currency manipulators.”
The devaluation of the Yuan by the PBOC in mid-August and December of 2015 sent emerging markets into turmoil, with some EM currencies losing up to 25% of their value overnight as the contagion from the Chinese devaluation rampaged through stock and currency markets across EM markets.
The “weaponized Yuan” has plenty of ammo left to further devalue their currency in 2018 and 2019, with the value of the Yuan predicted to fall from the 6.84 handle to the 7.6 handle by the end of 2019. This currency devaluation by the PBOC enables Chinese manufacturers and exporters to offset the impact of tariffs at the U.S. border.
Stating they have an unfair trade advantage, Trump introduced a tariff plan that focused on increasing tariffs for Chinese steel and coal imports. In retaliation, the PBOC underwent a series of stealth devaluations in the Yuan, a move that offsets the economic hardship from the tariffs.
China and the U.S. seem locked in the early stages of a trade war that could see an outcome that hurts the economic growth of both nations.
Trade Wars Effect Every Nation
It doesn’t matter where you live in the world, the economic impact of tariffs affects every nation. Tariffs throttle trade and increase the cost of exporting and importing goods for all countries around the world by increasing trade deficits and adding to the global debt.
Added taxation of Chinese goods by the U.S, China’s largest consumer market, forces Chinese retailers to drive up the price of locally produced merchandise, increasing the cost of goods and logistics for e-commerce retailers and consumers around the globe.
How do Tariffs Effect E-Commerce?
Even if you live in Europe, you could be affected by Trump’s tariffs. Added taxation at the border means U.S consumers have to pay more for their online purchases. EU e-commerce retailers serving the U.S. market will feel the pinch as their goods reach customs. Expect thinner margins on all your products offered in any niche; trade wars affect a wide variety of goods and services.
Tariffs push up prices, more duty at the border translates to costs that need to be absorbed by either the retailer or the consumer. In today’s competitive online marketplace, increasing your prices may mean a loss of potential business to your competitors that choose to assimilate the cost of extra duty into their margins.
New Marketing Tactics for Trade Wars
Changing times require a change in your online strategy. The last time the world entered a trade war was over twenty years ago. The global economy experienced rapid growth and tremendous change during this time. The introduction of online business connects consumers all over the world, shipping millions of parcels across borders every day.
Learn to adapt to these changing times by enrolling in the IMC graduate program. The key to success in a changing economic environment is communication. Communication keeps you in touch with your customers, as well as new regulations imposed by countries in an ever-changing global economic landscape.
Take a proactive stance to the looming economic threat posed by tariffs and other protectionist policies on multilateral trade agreements. Focus on how you can serve your local market better.
Research local market segments and increase your marketing efforts to target local businesses and consumers. As an online business owner, you need to adapt to change and be flexible with your strategy to stay sane and solvent in a protectionist economy.
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