Performance Advisory Director Phil Lyons provides an update on the (as current as possible!) impact of trade tariffs and how we can support clients.
According to the Department for Business and Trade, over 40,000 UK businesses exported to the US, and 45,000 imported from the US in 2023.
The tariffs recently imposed by the US on its global trade partners will likely impact everybody indirectly, and with retaliatory tariffs on US products not out of the question, input costs for UK businesses could also be on the rise.
Background – what’s happened?
Notwithstanding the latest policy reversal, at the time of writing the US has imposed a 10% tariff on goods imports from most of its global trade partners, with additional tariffs still in place for the aluminium, steel and automotive industries (although those on the last of these may be suspended).
These tariffs will likely impact everybody at least indirectly, and with retaliatory tariffs on US products still not out of the question, input costs for UK businesses could also be on the rise. For any company exporting goods with a large proportion of elements from China, the tariffs will be even steeper; up to 145% at the time of writing.
If you operate in a competitive market, a 10% increase in price is likely to lead to a large fall in demand. This leaves you with two options:
1. Leave the lucrative US market, or
2. Lower your prices to enable you to continue competing.
A 10% price reduction will likely result in severely depleted profit margins, as things currently stand. If input costs also rise in the event that retaliatory tariffs are introduced, profit margins will be further eroded.
Who is likely to be most impacted?
Companies facing three different scenarios will potentially be impacted by the introduction of the new US tariffs:
- UK companies exporting to the US - 40k companies in UK
- UK companies exporting goods to the US with Chinese elements – these may be impacted by up to 145% tariffs
- UK companies facing increased competition from overseas companies diverting their goods from US to UK
How deeply each of these groups will be impacted remains to be seen, however we can be certain that in order to maintain competitiveness in domestic and export markets, UK companies will need to place a laser focus on cost as never before.
The large majority of companies have cost reduction targets (96% according to a recent Deloitte survey), however only 18% of companies achieve those.
What does history teach us about the impact of tariffs on exporters?
The impact of any specific tariff will depend on the good it is imposed on, the amount of the tariff and the market it relates to. There are, however, lessons to be learned with regard to the overall impact of tariffs on both the price and the quantity of exports.
In 2018, the US imposed tariffs on imports in six different waves, ranging from 10-50% for various different goods. This gives a recent example from which we might be able to estimate what the impact of the current tariffs might be.
The table below shows the impact on various goods in terms of the price and the quantity demanded of those goods. In this example we see that the price increased roughly by the amount of the tariff, and as a consequence demand reduced by 20 to 50%.
The price increase and fall in demand in the table above are as at two months after the imposition of the tariff. It is likely that prices reduced in this example in the slightly longer term, as domestic producers raised their prices and exporters began to absorb some of the additional cost.
The fall in demand figure in the table above represents an aggregate view of the impacts of the 2018 tariffs. Within these numbers there will be winners and losers in the group of exporting companies – those who were able to cut costs and improve margins will have been able to maintain demand and likely increase their share of the market as competitors withdrew.
How can we help you address your cost base?
At Leonard Curtis we can help you to optimise your cost structure according to the conditions you face as a business. Using our data-driven methodology, we assess every cost to uncover the drivers of those costs, and help you to re-shape processes and your organisation in order to minimise cost and maximise profitability.
So, whether your business decides to decrease its prices into the US, leading to decreased margins, or you accept reduced demand from the US as a consequence of the tariffs, we can help you to right-size your costs to protect profit and reap the benefit of increased profit margins on all your other sales.
We have experience across a wide range of industries and work with businesses of all sizes. If you are impacted by the US tariffs and would like to discuss cost reduction, please contact Phil Lyons on phil.lyons@leonardcurtis.co.uk or 07740 405364.
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