How the middle-market can navigate the U.S.-China trade dispute

Not a day goes by without a new headline proclaiming progress, or lack of progress, in the ongoing trade disputes between the U.S. and China. There have been many losers, some winners and a lot of companies in the two nations, as well as in third countries, trying to assess the impact on their business and how they can, and should, handle it.

I don’t wish to discuss the grievances, real and imaginary, behind the conflict. Nor do I wish to assess the probability and timeline for a successful resolution. This changes daily, and any assessment may no longer be true when this article publishes.

The trade conflict will be resolved when the price both parties (as well as others) pay has become too steep to bear, and when domestic and international politics allow a resolution.

It’s my view, however, that such a resolution will be temporary. Sooner or later, the conflict will flare up again because of divergent interests, the fundamental differences between the U.S. and Chinese systems, and the role played by foreign direct investment in addition to trade.

Companies should plan for the long haul, closely monitor and respond to changes as they come along and develop a long-term, strategic plan for doing that.

No one is immune

What I have written so far may apply to any company, even those without a global presence, which is true for more than half of middle-market firms in our surveys. Construction companies rarely trade internationally, but they’re affected by globalization in a variety of ways, e.g., the price and availability of raw materials.

Businesses of all sorts can be threatened by the emergence of new competitors or outsourcing from third parties that import ingredients or parts from China and raise prices because of tariffs.

Vulnerabilities

Still, middle-market firms face unique properties when it comes to the conflict. These firms are rarely in a position to influence domestic or foreign constituencies (e.g., China’s concession regarding Tesla’s tax) through lobbying and other means. This makes them more vulnerable.

Middle-market companies are also more sensitive to unfair competitive practices, such as violation of intellectual property rights, which are expensive to fight. Rectifying such violations is one of the U.S.’s trade negotiation demands, but the scope of the problem doesn’t promise a quick resolution.

How to respond

What can middle-market companies do to prepare?

1. Monitor the situation. Ask how you, your suppliers and your customers will be affected, for instance, by a potential tariff hike.

2. Prepare a contingency plan. Identify alternative providers for a component you source from China, or consider bringing it in house.

3. Develop a long-term strategic plan to deal with the evolving friction. Remember that such tension can also bring opportunities, such as forcing competitors to raise prices.

4. Establish alliances with firms and other constituencies. Unions, for example, will be eager to bring production in house and thus may be more cooperative in creating a hospitable work environment.

 

Oded Shenkar is the academic advisor of the National Center for the Middle Market, which provides knowledge, leadership and innovative research on the U.S. middle market. The center is a collaboration between The Ohio State University Fisher College of Business and Chubb. The Ford Motor Co. chair in global business management, Oded heads the international business area at Fisher and is a member of the Centers for Chinese Studies and Near East Studies.