How the US-China trade war will impact SMEs

The trade war initiated by US. President Trump has escalated rapidly over the last month. On 6 July, a 25 per cent tariff was slapped on $34 billion worth of Chinese imports. In turn, China immediately responded with a 25 per cent tariff on the equivalent amount of US agriculture products and motor vehicle imports.

Following the retaliation by China, the US has released a list of Chinese products worth $200 billion last week, which could be hit by a 10 per cent tariff as early as September.

It seems that the trade war is now full-on and escalating quickly between the world’s two largest economies. At the same time, the US is also having a fight over trade with its key allies including the European nations and Canada. So what is the impact on Australian SMEs?

Short-term impact

Over the short term, there should be limited impact on Australian SMEs, as long as Australia is not directly targeted. Given Australia was exempted from the steel and aluminium tariffs and the fact that US actually has a trade surplus with Australia, Australia is unlikely to be targeted by the U.S. anytime soon.

If we look at the financial market, it tells a similar story with S&P 200 index at its 5-year high. It appears that the market is not worrying too much about the trade war.

In fact, Australian SMEs could stand to benefit from the trade war between the U.S. and China. The initial list from China targets US agriculture products, including soybeans, wines and meats. It is a good time for Australian SMEs to reach out when businesses affected by the tariffs searching for alternative suppliers.

Long-term impact

The longer term impact of Trump’s trade policy on Australian SMEs is more uncertain. It all depends on whether the current protectionism approach is used as a negotiation tool over trade or the Trump administration intends to implement it in the long run.

If parties cannot come back to the negotiation table and the trade dispute prolongs, it will eventually hit the economy of both sides, and slow down the global economic growth. More importantly, it also brings further uncertainty around the globe. Businesses do not like uncertainties and will most likely cut back investments and lower demands.

If you are in an industry that is sensitive to the general economic conditions, you have to take caution when considering expanding capacity and taking on more debts.

As a precaution, SMEs should also diversify supplier and customer base across different regions and countries where possible. Just like investing in share market, you never put all your eggs in one basket.

Lastly, regardless of trade war, businesses have to stay competitive to be successful. SMEs should build up the resilience of the business through product or service innovations. The competitiveness of the business will help to mitigate potential negative effects from trade war.

Dr Ronghong Huang, Lecturer in Finance, UQ Business School

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