Extreme uncertainty is engulfing the global business landscape. In particular, the tariff war originating in the United States has become a bomb that determines the survival of corporations beyond mere shock. Unlike previous conflicts, this war does not distinguish between allies and adversaries. It even strikes neighbors and economic allies such as Canada and Mexico, which have solidified into almost a single market through free trade agreements (FTAs). South Korea has already been targeted, making it a situation where a large-scale bomb could drop at any moment. However, business cannot be halted, no matter how difficult it is, and it must not be. Here are ten strategies for corporations engaged in global business to respond more effectively in the field.
Strategy 1│Clearly identify the burden of the tariff
If an additional tariff of more than 25% is imposed, normal business operations become impossible. However, one cannot stop exporting. U.S. import corporations will also not remain idle. Principally, it is reported in the media that the burden of tariffs is shouldered by the exporting country. However, this is not accurate. Most tariffs are borne by the importing country. This is because it is the corporations or individuals that carry out customs clearance who bear that burden. Therefore, the bombs being dropped by Trump land first on U.S. corporations and consumers. Practically, it is determined by what Incoterms the International Chamber of Commerce (ICC) has set in the contract. Incoterms are criteria that define the point of risk and cost transfer in transactions between corporations, and there are currently 11 types in use. Among these terms, only the Delivered Duty Paid (DDP) condition has the tariff burden on the exporter, while the rest is the responsibility of the importer. However, most of our corporations primarily use Free on Board (FOB) when exporting. The utilization rate of DDP, which requires domestic exporters to bear U.S. tariffs, is only around 2%.
On the surface, the U.S. tariff and our exporting companies are unrelated. Therefore, if there is a DDP condition in the current contract, alternatives must be sought quickly.
Strategy 2│Determine the ratio of additional tariff sharing
The period required to enter the warehouse of importers in the U.S. through trade contracts, production, and transportation typically takes 3 to 6 months. If tariffs are significantly increased in the interim, it causes considerable confusion. Therefore, it is essential to establish the principle of a 50-50 sharing of additional tariffs (with exporters and importers sharing equally). However, to facilitate easy resolutions and ongoing transactions, a contract must be prepared that clearly states the settlement for that payment in the next transaction. The additional order is vital, even if some expenses must be conceded. If matters cannot be resolved amicably, there is a need to negotiate a compromise on the sharing ratio beforehand to avoid losing important transaction lines.
Strategy 3│Do not engage in discussions of force majeure regarding tariff bombs
Most importers who must bear the additional tariffs are likely to harbor dissatisfaction. If the importers cite state control to argue for force majeure, the situation can become prolonged, resulting in significant losses for both sides. Particularly, if a court finds that there is no fault on the part of the importer and that the situation cannot be controlled, it is highly likely to grant immunity to the importer. Corporations typically include a force majeure clause stating 'other causes beyond the control of the parties' in their export-import contracts. Therefore, rather than debating force majeure, it is better to seek long-term friendly cooperation strategies.
Strategy 4│Resolve disputes through international commercial arbitration rather than in court
The likelihood of disputes between corporations is expected to increase significantly. Therefore, prompt and amicable resolutions are of utmost importance. In anticipation of such situations, the use of commercial arbitration should be promoted. To prevent deliberate claims arising from sluggish sales, the standard trading agreement should be revised to limit the claim notification period to within 14 days of arrival at the destination port. Even so, in anticipation of inevitable disputes, provisions for international commercial arbitration, which can be enforced legally in not only the ruling country but also in the counterpart country for rapid resolution (stand-alone cases), should be included in contracts in advance. Particularly, rapid arbitration results should be adopted to minimize management risks, receiving them quickly within 1 to 6 months.
Strategy 5│Actively utilize trade insurance
Current tariff bombs seem to be just the beginning. If they persist for a considerable time, there are concerns that they could significantly impact the financial status of importers. If economic recession occurs both in the U.S. and globally, the situation could become uncontrollable. This would signal red lights for the financial structure of import companies in the U.S., increasing the risk of failing to make proper payments for import costs. In anticipation of this, it is necessary to proactively increase the proportion of trade insurance coverage and strengthen credit investigations.
Strategy 6│Prepare emergency logistics measures
To avoid tariff bombs, a quick response (QR) strategy should be established to expedite contracts and transportation to within one month. Considering that it typically takes one month from the announcement of the tariff bomb to its implementation, this aims to devise a workaround through swift transportation. To achieve this, it is necessary to increase the volume of secured raw materials and finished goods inventory at domestic factories. It is also essential to actively consider air freight, which accounts for more than 50% of our exports (in terms of value), for rapid order fulfillment. With air transportation becoming popular, small cargoes or samples, as well as IT products, should be actively considered for air shipping. Additionally, negotiations should be held with trading partners in the U.S. to increase the stockpiles of raw and intermediate materials in local factories or warehouses.
Strategy 7│Emphasize cash flow management
The painful experience of the tariff war is shared globally. The Smoot-Hawley Tariff Act, enacted by the United States in 1930, is a prime example. The U.S. raised the average tariff rate on 20,000 imported goods to 40%, waving a banner of 'America First' in the 1930s. This aimed to protect the agricultural and industrial sectors to shield the U.S. market from foreign products and stimulate domestic consumption. Other countries did not simply watch this unfold. Canada, at that time, retaliated with tariffs of 33.5% on apples and 50% on pork. As a result, U.S. gross domestic product (GDP) recorded a decrease of over 20%, with unemployment soaring to 25%. The current tariff war could similarly lead to a global economic recession. Companies need to prioritize cash flow over sales to avoid liquidity crises.
Strategy 8│Encourage product differentiation
Product differentiation through the launch of new products or the addition of new features should be employed to stimulate product demand. This strategy aims to avoid the worst-case scenario of demand reduction due to tariff increases. Particularly, even changing packaging, size (capacity), or design to create the impression of a new product can help mitigate the negative impact of price increases resulting from tariff bombs.
Strategy 9│Form a united front with industry associations and consumers in the U.S.
The current tariff bomb has a significant political nature aimed at consolidating support. Therefore, our corporations and government need to engage in activities that form alliances with U.S. demand groups (including industry associations) and consumers. Tariff bombs directly stimulate prices in the U.S. and erode the competitiveness of U.S. businesses, making it difficult for them to remain in place for long. It is essential to communicate that companies cannot increase production or factories solely due to tariffs, which also restricts job creation. Even if there are no short-term changes, patient and ongoing lobbying efforts are necessary.
Strategy 10│Highlight the positive aspects of Korean exports
A joint effort between the public and private sectors is needed to properly inform about our export components. Only about 30% of consumer goods among exports to the U.S. are comprised of final goods, while the rest consists of capital goods (facilities) for building factories in the U.S. or raw and intermediate materials that support U.S. manufacturing competitiveness. Additionally, it should be pointed out that unlike merchandise trade, we are facing significant deficits in service trade.