Trump trade tariff increases credit risks for US firms

Trump trade tariff increases credit risks for US firms | Insurance Business

Trump trade tariff increases credit risks for US firms

President Donald Trump is riding a rocky road in his international trade policies. Last month, the Trump administration imposed steel and aluminum tariffs on some of its closest allies: Canada, Mexico and the European Union (EU).  

Reaction to the tariffs – 25% on imports of steel and 10% on aluminum – have been heated. Canadian Prime Minister Justin Trudeau called the tariffs “unacceptable” and an “attack on [Canadian] industry”. At the recent G7 Summit in Quebec, Trudeau pushed-back in a passionate news conference in which he said Canada would move forward with retaliatory measures on July 01, applying equivalent tariffs back on the US.

Likewise, Mexico and the EU have issued similar retaliatory responses. EU Commission President Jean-Claude Juncker called the tariffs “protectionism, pure and simple”. The EU also announced it will take the US to the World Trade Organization’s ‘trade court’ to get Trump’s policy declared illegal.

Simply put: today’s global marketplace is volatile and unpredictable. So, what does that mean for the US economy and for trade credit insurers?

“Ultimately, it’s a mixed-bag. For domestic aluminum and steel producers, the tariffs on imports have the positive effect of adding gross margin through an increased sales price. Conversely, for consumers of aluminum and steel like automobile makers and appliance-building companies, the impact is likely to be negative as production costs will increase,” said Wayne Bayer, vice president, underwriting, Trade Credit Insurance, QBE North America. “Firms that consume lots of aluminum and steel will try to keep their prices competitive for as long as they can, but in doing so, they’re at risk of weakening their income statements and balance sheets, which increases their exposure from a trade credit perspective.”

Aluminum and steel are integral to American industry throughout the supply chain. There are far more companies consuming steel and aluminum than companies producing them. Therefore, the negative impact of Trump’s tariffs on the wider US economy “could be very significant,” according to QBE North America chief economist Yue Ma. Consumers of aluminum and steel will have to pay more for the goods as a result of these tariffs, which means their credit risks will increase, and their performance and competitiveness could deteriorate. In the medium term, that could translate into inflation pressures for the US economy because the end-consumer will ultimately have to pay for the additional cost of production.

“Another indirect impact of these tariffs is the threat they pose to NAFTA,” Ma added. “They completely go against the terms of NAFTA and threaten not only the renegotiation but potentially even a total disintegration of the trade agreement, which would be catastrophic to American companies. If NAFTA fails or is dramatically renegotiated, companies will be forced to redraft their production models and their supply chains. That will take a lot of money, time and could significantly increase their credit risk.”

Trade credit insurance can help companies in covering their credit risks. However, as a non-compulsory insurance product, the take-up rate in North America currently sits at a very low 3-4%. Firms tend to turn to trade credit insurance when they have a credit problem or foresee exposure in the near future – but that’s often too late for insurers to take on the risk.  

“Trade protectionism has been on the rise globally, and it’s causing a lot of unpredictability. The news is full of proposals for new tariffs, withdrawals of those proposals, sanctions on proposals and so on. It’s all a bit whimsical in the sense that it makes it very difficult for businesses to make long-term plans,” said Mills Ramsay, vice president senior credit officer, QBE North America.

Ma added: “Trade credit insurance can help companies apply longer term risk management strategies. At QBE, we would advise firms to consider trade credit insurance when business is good, so that when a problem does strike, they don’t find themselves trying to get coverage for an uninsurable risk.”

 

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