Tariff-affected US executives consider changes to dealmaking, supply chain and manufacturing strategies, says EY survey
New York, 25 October 2018
- 86% of US executives impacted by tariffs plan to pursue M&A in response to trade restrictions
- 84% are reviewing or have already made changes to their procurement strategy, global manufacturing footprint or global warehouse strategy/network design
- 72% of respondents to offset increased production costs through higher prices
US executives of tariff-affected companies are responding to trade barriers by rethinking their corporate strategies in the US and abroad, according to the EY Trade Barrier Impact Survey, conducted by Ernst & Young LLP’s Transaction Advisory Services (TAS) business. Eighty-six percent of respondents will seek M&A and 73% plan to divest part of their business in response to recent trade restrictions, signaling a reactive change in corporate strategy for the majority of affected companies heading into 2019.
“Trade policy developments out of Washington have driven affected companies to revisit their supply chain and manufacturing footprint,” said Bill Casey, EY Americas Vice Chair, Transaction Advisory Services. “Without a known expiration, companies are assuming tariffs will remain for the long-term and considering new potential strategies accordingly. Transactions and supply chain modifications are among the near-term solutions for affected companies to remain competitive in both the US and globally and rely less on foreign sourcing.”
Executives believe tariffs will be here for a while. Over half of the respondents (55%) believe tariffs will last until 2020 or later. As a result, 84% of affected companies are reviewing or have already made changes to their procurement strategy, global manufacturing footprint or global warehouse strategy/network design. Of note, over half (51%) have already made changes or are reviewing changes to their procurement or sourcing strategy in reaction to tariffs.
Increased costs have been a nearly universal result for companies affected by tariffs. Ninety-four percent of respondents said their company is exposed to increases in overall production costs specifically because of tariffs, underscoring the impact of recent trade barriers on US companies. Of those that are exposed, 73% plan to consider M&A specifically to offset the cost. In addition to transactions, 72% plan to pass on the increase in production costs resulting from tariffs to their customers in the form of higher prices.
Opinions on Tariffs Vary by Age, Industry
When it comes to the broader impact of a potential trade war, age emerged as the prevailing indicator of perspective. Although 78% of respondents believe a trade war would likely push the US economy into a recession, only 60% of those over 50 years old say this is likely versus 93% of those 25-39 years old. This age discrepancy also applies to executives’ perspective on the impact of tariffs on tax reform. Seventy-seven percent believe a trade war would undo the outcomes of tax reform, but when looking at age, 63% of those over 50 say this is likely versus 92% of those who are 25-39 years old.
Differences were also found when predicting where further changes would occur. Eighty-seven percent of those over 50 years old expect the US to place more tariffs on goods from China in the next 12 months versus 70% of those 25-39 years old. When looking at the impact tariffs will have on their business’ foreign competition, 68% of those over 50 years old believe tariffs will have a negative impact on their foreign competitiveness, while 60% of those 25-39 years old believe tariffs will have a positive impact.
“Baby Boomers and early Gen Xers remember the Cold War and know what it’s like to do business in a competitive global arena, whereas today’s young people have only experienced a US-led global order where free trade was an assumed policy,” said Casey. “This experience chasm helps explain why younger people may be exhibiting increased concern.”
Beyond age, industry was another indicator of attitudes towards tariffs, particularly in the technology sector. Technology executives are much more pessimistic about the effects a trade war. Eighty-nine percent believe it’s likely a trade war would push the US economy into a recession – versus 78% of all respondents – and 92% believe it would undo the outcomes of the Tax Cuts and Jobs Act – versus 77% of all respondents. In addition, although 48% of executives overall expect the US to place more tariffs on both Mexico and the EU, only 37% of technology executives believe this to be true for Mexico and 34% for the EU.
Notes to Editors
About the EY Trade Barrier Impact Survey
The EY Trade Barrier Impact Survey was commissioned by EY TAS. Five hundred US C-level executives at tariff-affected companies with $1b+ in annual revenue were interviewed, including 100 respondents in each of five industries: automotive, technology, consumer products, agriculture and industrials. The margin of error for the survey was +/- 4.4 percentage points for data at the overall level, and 9.8 percentage points for each industry.
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