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By: Bassam Aoun

    There is no set definition for what constitutes a “trade war”. A tit-for-tat exchange of protectionist measures kicks off the debate, but the core discussion remains primarily existential. Is this a trade war? Why is this a trade war? How long will it remain a trade war? These questions become particularly weighty when one country’s current account balance is a virtual mirror image of the other, as reflected in the diagram.

    The term’s ominous implications notwithstanding, the WTO and other global trade authorities are quick to warn policymakers against engaging in commercially inhibiting practices that would spill across borders. Considering the impact of globalization on the international marketplace over the past few decades, the potential results of arbitrarily inserting trade barriers (or dissolving longstanding trade agreements, for that matter) have actually become even more harmful than previously considered. Industries and sub-industries are far more intertwined than before, so the ultimate impact on the consumer cascades even more resoundingly as supply chains adjust to the policies. Sourcing markets, for instance, are exemplary in demonstrating how a trade war discussion may inadvertently alter market behaviour.

     

    Sourcing Markets

    In addition to pressures on macro indicators – be it your forecasted real GDP growths, inflation rates or current balance accounts – grassroots elements of the supply chain, although less visible to the mainstream, often feel the brunt of high level trade policy jolts. Product sourcing is a key consideration for a number of industrial and consumable markets – especially so in food retail. SKUs in emerging markets have increasingly begun including international brands on shelves, particularly in formerly centrally-planned economies (eg. Belarus, Ukraine, etc.) that have recently opened up trade policies and embraced a general modernisation of the sector.

    A trade war conversation, even between countries seemingly unrelated to disparate markets, could ripple into a new global trade outlook, incentivising businesses and policymakers to err on the side caution rather than optimism.

    Furthermore, an open flow of goods has contributed to the permeation of key megatrends in those markets (Healthy Living, Premiumisation, etc.). These trends are significant growth drivers for any consumer-driven industry that they play a role in. The presence of trade war risks limiting sourcing outlets, slowing the momentum for these markets.

    In fact, the simple threat of escalating protectionist policies will corner businesses into considering contingency plans in their sourcing and general operations. This dampens investment prospects, expansion plans and reshapes the question: will we even be able to afford doing business like this next quarter?

    Ultimately, the definition of a trade war should not be the primary concern – the hidden effect of mere rumour can trickle down to a single soybean farmer whose buyer chose to seek a sourcing contract elsewhere.

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