US tariffs and supply chain finance

We take a look at the impact of US tariff actions on companies located in three countries (China, Vietnam and the US) to illustrate what's happening on the ground.

We consider the likely implications for supply chain finance programs and for compliance teams.

China

Wuming Shi (name changed) is sitting at his stand at the Cantonese Trade Fair.

His curated display of kitchenware is impressive and he's waiting for his regular contacts to appear. Usually, this is one of the big events of the year - accounting for a substantial proportion of his annual sales.

And you already know the story. His US customers are apologetic - either not turning up (because they cancelled orders already placed and see no point) or coming to say sorry in person because there's no sensible business to be done.

The implications for his factory are profound. There will be layoffs. Competition to replace the US order pipeline with buyers from other countries is intense - a race to the bottom. There is stock on the water that he will have to recover - re-shipping containers landing shortly in the US to new markets. There is stock in the warehouses waiting to ship to customers that will no longer accept it. And there's much less work now for the factory.

The local bank is also calling. Whilst there is going to be support, it's clear that his factory needs to have a plan. Cash management is going to be a priority, liquidity is already a concern, and some smart thinking is going to be needed.

Vietnam

Wuming Shi's competitor in Vietnam is on the phone. Nguyen Van Duc (name changed) is finding that things are moving quickly.

Duc has now managed to stabilise the US orders he had shipped and which were on the water. His US buyers have agreed to land the stock and pay the extra 10% duty, although he's had to offer a discount on the prices that he had agreed.

At least there will be some cash flow coming in rather than the headache of having to recover the finished goods and find another market for them.

But there is chaos ahead. Whilst US tariffs have dropped to 10% for now, the threat that they may yet go back to 46% remains - and US buyers are sitting on their hands. European buyers have switched their attention to China where they are bargain-hunting for equivalent products - and it is getting difficult to see how the year is going to play out.

US

Jane Smith (name changed) is a buyer at a US big box retailer managing a line of own-label household products.

She is used to calling the shots with her suppliers. She is an important customer. The retailer has a national footprint and the last few years has become established as a significant player in this segment.

She cancelled her trip to the Canton trade fair this year - not much point in going given that her mandate to place any orders with Chinese suppliers has gone. She's busy trying to find some other sources for the line of own-label household kitchen products that have been so successful with retail customers.

Her management have asked her to focus on suppliers in countries that were tariffed at 20% or lower before the recent reset, so as not to run the risk of being buried in case the higher tariffs come back. There's not a lot of choice and seemingly her competitors are also calling.

But at the moment, there is stock in the warehouse and some stock on the water. Shelves are going to be empty in a few weeks in her segment as she's not going to be able to land the inbound shipments from her Chinese suppliers given the tariff costs involved.

Moreover, as the goods are own-label - finding a non-US outlet for the products is going to be a headache. She can't let the supplier take back the goods as her business needs to control the usage of their brand - but on the other hand, she wants this to be the supplier's problem and not hers.

US Tariffs - supply chain finance - what might happen?

It is hard to predict the future here - but the uncertainty affecting international order books and international supply chains will cascade over into utilisation levels in supply chain finance programs.

The examples above focus on relatively simple supply chains of finished goods going to retail buyers. But the story plays out similarly across international trade - whether the products are components, chemicals, ingredients, soft commodities etc.

And here we are talking about international suppliers and not domestic - although there will be spill over into domestic supply chains in the US that, as of today, will be hard to predict.

Which countries are in the firing line?

This is a table of major exporting countries where US tariffs were previously raised above 20% (source BBC) - for the purpose of this post, we call these "High Tariff Countries".

International SCF - compliance and control

Compliance teams will need to pay closer attention to transactions because the incentive for suppliers in High Tariff Countries to take short cuts will be high.

• Buyers approving invoices for payment before shipment should carefully check and cross-check shipping documents, packing lists, and supplier documentation versus purchase orders before paying.

• Financiers should pay careful attention to whom they are paying. Suppliers in financial difficulty often aim to divert in-bound cash payments away from creditors - which can lead to a double payment obligation for the buyer.

As always, SCF programs are structured so that buyers have the performance risks of the supply chain. But, if issues arise, everyone inevitably ends up in the room to sort things out.

SCF - international suppliers

Usage by suppliers in High Tariff Countries of US supply chain finance programs will drop.

• This is because they will no longer have the orders and the invoices to discount. This will be true until there is clarity on tariff levels going forward and will remain true for China if tariff levels remain at the current level.

Usage by international suppliers who are not in High Tariff Countries of US supply chain finance programs will increase.

• This is because they are likely (if they are able to substitute for suppliers in High Tariff Countries) to experience increases in their US order books - leading to a need for liquidity that SCF can conveniently cover.

• They may also be trading with US buyers that they do not know well - and so may wish to mitigate perceived risks by getting paid more quickly - which means getting into SCF programs quickly to cover new orders they are taking for new clients.

Usage by suppliers in High Tariff Countries of non-US supply chain finance programs will increase.

• Suppliers will have liquidity stresses and SCF programs offer access to cash that is independent of their own credit standing.

SCF – international buyer requirements

The uncertainty, volatility and dynamic environment that we now face – whether in Europe or the US, means that credit lines and working capital will be carefully managed.

Some buyer credits may be going sideways or may end up under stress in this new environment. That’s because margins can be squeezed, supply chain disruptions are upon us once again, and suppliers may also be under stress leading to shortages of products or components.

Buyers will need their financial partners to be flexible and responsive. That means taking on new suppliers in new geographies, adding capabilities to existing SCF programs, especially the ability to pay suppliers at shipment rather than later after delivery.

There will also be an increasing need to add new SCF programs on top of existing. This is to gain more working capital firepower and also to reach new geographies – potentially also adding a digital SCF program that can get suppliers paid at shipment rather than relying on existing legacy SCF platforms that only natively support payments after delivery.

Running multiple concurrent SCF programs with different funders typically also takes buyers to a point where they implement their own platform rather than relying on bank platforms. A digital SCF platform enables a buyer to optimise utilisation across multiple programs and multiple funders.

SCF - financier challenges

Financiers need time to set up new structures and adjust / evolve supplier communities in the face of challenges from their customers.

But those challenges are surely coming:

• Buyers are going to need to add new suppliers, potentially in new geographies – and to do this quite quickly.

• The pressure to accelerate payments to suppliers to help their liquidity is going to increase – and this means payments to suppliers at shipment and not just after delivery.

• There may be pressure on credit lines that will mean that facilities are  under review - leading to buyers setting up additional SCF programs with other banks or non-bank funders.

• Operational challenges (see compliance above) need to be thought about - especially where banks are making payments to suppliers themselves under their SCF programs.

We all remember the COVID era of a few years' ago. Supply chain stresses rapidly translated into much higher utilisations of SCF programs. This will be happening again - although against a backdrop of incremental stress for US programs.

Digital SCF - now is the time

Digital supply chain finance platforms provide critical capabilities for this new era in international trade.

• Native integration of shipping and trade documents, enabling early payments to be safely approved to suppliers at shipment.

• Full service capabilities including payments and structures to manage compliance so that new suppliers in new geographies can be added quickly.

• True multi-funder operation, so that working capital lines across multiple programs can be optimised (one supplier can be concurrently a member of multiple SCF programs).

With everything going on, it might seem that the right way to move is to work with what you have got. Sometimes its better to look at the capabilities you really need and use the opportunity to upgrade in order to meet new challenges head on.

Call us to discuss any aspect of this blog post - we are experts in international supply chains, trade finance and working capital management. There is much more to say, as always - and insights from market participants dealing with these issues on the front line are of great interest to us here.