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Shifting trade policies: A framework for understanding and managing uncertainty

Trying to understand how best to adapt operational and strategic plans in response to shifting trade policies can be challenging and time consuming. Moreover, even with substantial planning and sound risk management, issues can arise that are beyond a business’s control, such as tariffs and protectionist measures.

Indeed, recent tariff and trade policy announcements, dubbed by some as “the biggest change to global trade in 100 years”, exemplify the uncertainty and pressures facing businesses and the global economic outlook, and warrant stepped-up contingency planning.

Trade uncertainty requires a considered approach

A record number of organizations cite trade policy uncertainty as a significant factor shaping business results (see Figure 1). The tariff and trade announcements on April 2 are unlikely to improve this outlook. Research shows that widespread trade policy uncertainty often leads businesses to hold back on spending and strategic investments, fearing that sudden changes could undermine the value of those investments.

Figure 1. Trade policy uncertainty index

Source: Iacoviello (et al) (2020), as updated at https://www.matteoiacoviello.com/tpu.htm
The TPU index is based on automated text searches of seven newspapers, with the measure calculated by counting the monthly frequency of articles discussing trade policy uncertainty.

In a rapidly evolving policy environment, businesses that develop awareness of their exposures to potential points of disruption, take a structured approach to assess how policy changes may impact those exposures, and coherently plan against those risks can distinguish themselves from peers who may face greater constraints from the current volatile environment. Applying a risk management framework to your supply chain strategy can provide useful guidance in this respect.

A risk management framework approach

A risk management framework can help businesses navigate complex risk landscapes while establishing a process to address risks. This includes making more informed decisions, potentially saving time and money, and driving business growth.

Identify the risk: Conducting an in-depth analysis can help pinpoint low-, medium-, and high-risk areas. For instance, Marsh McLennan’s Sentrisk can help you to identify your riskiest sites, suppliers, components, and products within your supply chain. Your risk manager can use this information to evaluate how potential trade policy changes might affect these risk areas.
Measure the risk: Consider which of three objectives a trade policy may fall under: generating revenue, pursuing trade/non-trade concessions, or protecting/reshoring production. This analysis may help to assess the likely duration of a policy change and the probability that it could be changed. For the trade/non-trade concessions objective, assess whether a targeted country is likely to make concessions or be incentivized to reciprocate. You can then begin to more accurately assess the potential impacts on your operations based on these assumptions.
Mitigate the risk: There are steps you can take to protect your operations, such as drawing on alternative suppliers or using insurance solutions like trade credit to aim to safeguard your balance sheet. If your business is not ready to act immediately, consider creating a plan of action based on the views you have developed from the previous two steps that can be implemented if conditions unfold as predicted.

From uncertainty to understanding: Improving your response

Trade uncertainty has shown that we cannot always predict the future. However, businesses can take proactive steps to be better prepared for a range of outcomes.

By adopting a structured approach to process the current high frequency of announcements and policy changes, businesses can better protect themselves, identify opportunities created by disruption, and be positioned to act ahead of their peers.

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