Businesses are struggling to model the impact of tariffs
History and economic models provide little precedent for the impact of Trump’s tariffs, so the implications are worryingly unclear, says Annette Spencer
It’s safe to say that tariff talk is no longer a mere backdrop to financial news, it’s shaking currency and financial markets. While governments are beginning to think about next steps and potential retaliatory measures, there are immediate questions for companies too. The time to ‘wait and see’ may have passed, especially for businesses with a substantial exposure in targeted countries or who participate in complex global supply chains.
Corporate treasurers are responsible for financing business activity and managing liquidity. While we often have to quickly assimilate complex macroeconomic events, we use history and economic models to predict the likely impact of such events on financial markets and therefore the steps required to mitigate these risks for the business.
The challenge with the recent announcements from the White House is that the wider macro-economic impact is unclear. There is little relevant precedence to draw on and the impact of retaliatory measures is hard to quantify – both in the short term and further out. Some models show the US dollar weakening while others provide reasons for it to strengthen. Interest rate expectations are also changing due to concerns over inflation and possibly stagflation. It is this general uncertainty which is causing the most concern for treasurers – and as has been vividly seen, to the stock markets globally.
The hedging horizon
For example, manufacturers, fearing the imposition of tariffs, were busy building up inventory in the US ahead of “Liberation Day”. This has required access to additional liquidity to support this increase in working capital.
As the implications of the tariffs and of responses become clearer, supply chains and trade routes may change and treasury teams will need to be able to respond quickly to additional requests for funding and changes in currency exposures.
Boards do seem unsurprisingly nervous and are keen to understand what the markets are saying and looking to their treasurers to understand their exposures to financial markets and to communicate these clearly and accurately to them and other stakeholders
For most treasurers, currency and interest rate risk management is based on carefully thought-through long-term risk management policies that have board approval. These are designed to support the business in a wide range of market conditions and provide some certainty and protection against short-term market movements. Where some flexibility is possible, a number of treasurers are increasing the level of short-term hedging while decreasing the horizon of the overall hedging activity. Some banks are reporting an increase in the use of currency options to provide additional protection against major currency movements.
Boards do seem unsurprisingly nervous and are keen to understand what the markets are saying and looking to their treasurers to understand their exposures to financial markets and to communicate these clearly and accurately to them and other stakeholders. According to treasurers we have been in touch with, their boards are asking them to check if their policies remain fit for purpose.
In my view, treasurers need to encourage their boards to avoid knee-jerk responses. Treasurers need to engage with the business to understand the impact of tariffs and what steps the business is planning to take, if any. Access to accurate and up-to-date data will be crucial to enable the treasurer to communicate how treasury and in particular liquidity risks are being managed. It’s another occasion when treasurers will need to step out of the shadows and demonstrate the value they can add by working with the business to assess the risks, take appropriate action, and communicate key messages clearly with internal and external stakeholders.
For the UK government, it’s good to see we are hearing positive moves on this, but it’s vital they bring forward and stick to a clear date for publication of the industrial strategy. We need something meaningful with tangible content which will help real businesses in real time.
Annette Spencer is chief executive of the Association of Corporate Treasurers