The U.S. trade tension with China is top of mind for many importers and exporters, with the Trump administration raising tariffs on imported goods from China, and China imposing retaliatory tariffs on exported U.S. products.
Many U.S. businesses are trying to deal with the cash management implications of tariffs as an increased cost of doing business with China, as they work to plan their operations, hedge their investments, and manage their cash flow.
Even with the ongoing changes in the U.S.-China trade relationship, there are payment options available to you to help mitigate the risk of fluctuating tariffs.
Uncertainty About Tariff Amounts and Deadlines
One of the most immediate impacts of the trade war is that it has injected a new element of uncertainty into the operations of U.S. businesses that sell to or buy from Chinese companies. Depending on the industry or product, U.S. companies don't know if they're going to have to pay tariffs on their imported goods, or how much the tariff will be.
Bruce Celek, Senior Vice President, International for First Horizon Bank, says that tariffs are having a mixed effect on business: "On the import side, we're seeing some U.S. companies that have been stockpiling Chinese goods ahead of time to minimize the impact of the tariffs, but other companies on the export side have seen their sales in China dry up because of tariffs." Because of the retaliatory tariffs, Celek says China's position is, "We're not buying more from U.S. companies until this tariff situation gets sorted out."
John Gurney, SVP and Sales Manager, International for First Horizon Bank, says that some U.S. companies have adapted their strategies to anticipate higher tariffs that may not actually materialize. At one point during previous trade negotiations, the U.S. had proposed a deadline of December 31, 2018, by which all Chinese goods that were already being tariffed at 10 percent would potentially have their tariffs increase to 25 percent. As a result of this potential punitive increase, some U.S. importers decided just to accept the 10 percent tariff and start buying more Chinese goods before the December 31 deadline. "Sometimes, in these situations, the threat of higher tariffs is worse than the reality of dealing with the 10 percent tariff," Gurney says.
“The uncertainty drives people kind of nutty.”
- John Gurney
SVP and Sales Manager, International for First Horizon Bank
Uncertainty about pricing and import regulations can be expensive in international trade. "No one wants to get hit with an increased tariff on a product that's on a ship in the middle of the Pacific Ocean and then, when it gets to port, the price has gone up by 15 percent," Gurney says.
Two Tools to Help Manage Changing Tariffs
Companies have several tools at their disposal to adjust their cash management to help handle the new realities of tariff uncertainty. Two of the most effective methods involve using a Letter of Credit or a payment method called Documents Against Payment.
Letter of Credit: Better Payment Terms for Tariffed Goods
"A Letter of Credit is a payment solution that First Horizon Bank can provide to importers that can help them manage their cash flow by getting longer payment terms from their international vendors," Celek says.
Instead of asking a vendor for longer payment terms, which many vendors could not afford to float on their own, a Letter of Credit offers the bank's credibility and financial strength as an extra layer of protection that the vendor will get paid, while helping the U.S. importer get some extra time to manage the cash flow impact of tariffs. "We might be able to transition terms — from 50% payment immediately and 50% after shipment — to 90-day terms where the U.S. company has 90 days after shipment to make 100% payment," Celek says. "This can mitigate the impact of higher prices in the form of tariffs."
Letters of Credit are not a new concept, but they might not be top of mind for many U.S.-based importers because of perceptions that they are too costly or too complex, compared with other financing options. However, now that interest rates have gone up, if companies are borrowing at 5 percent interest (or more) for short-term financing to make payments to vendors, a Letter of Credit might be a more cost-effective option.
Documents Against Payment: Delaying Payment Until Goods Arrive
Another tool that companies can use to improve their cash flow in response to punitive China tariffs is Documents Against Payment. This method of payment provides an extra layer of verification and gives importers added flexibility to delay payments for imported goods.
"Documents Against Payment is probably the most underutilized payment method that's out there," Gurney says. "The vast majority of companies I meet with have never heard of it, but it provides a great deal of value."
Documents Against Payment works like this: For an import transaction, the shipping documents come to the importer's bank — not to the importer. The bank receives the original bills of lading that serve as the title documents for the goods being shipped, and the cargo cannot be released to the importer without these documents.
"The ocean carrier will not release cargo without someone showing up at the port with the ocean bill of lading to prove that they're the rightful owner of the cargo," Gurney says. "By using Documents Against Payment, the bank holds on to the shipping documents, and we only release them once the importer’s account has been debited.
Documents Against Payment helps U.S. importers avoid making payments too soon, which can make a positive difference in managing cash flow, especially when there are extra costs from tariffs. "The shipping documents get to us, and we ask the importer if they want us to debit their account now. This gives the importer a way to delay payment by an extra few weeks," Gurney says. "The importer might say to go ahead and debit them now, or to wait a week, as the goods are still in the ocean and not yet to port."
Gurney says companies are not always conscious of the different payment options that are out there. "We do a lot of education about payment options, explaining what the risks of the various options are, how those risks can be mitigated, and what the implications are for cash flow."
Tough Choices for Commodity Suppliers
If the so-called trade war continues indefinitely, the overarching uncertainty that it provokes could drive international companies to reevaluate their supply chains in ways that could hurt suppliers in China or the U.S. or both. "Some U.S. companies will shift their sourcing from China to other countries, particularly Asian countries," Celek says, "because those other countries aren't affected by the tariffs."
Chinese companies — or the Chinese government — also could change their supply chains and purchasing policies in ways that reduce sales for U.S. businesses, especially in commodity industries. "We deal with lots of commodity-based companies that are exporting overseas, such as tobacco companies," Celek says. "China just dictated, earlier this year, they're not going to buy any more U.S. tobacco this year. That puts a strain on U.S. tobacco growers. Tobacco can sit in storage for years as long as it stays dry. So some U.S. companies are stockpiling their tobacco crops, trying to wait out the tariff situation."
"In North Carolina, the hardwood lumber industry exports white and red oak to China," Gurney says. "A lot of these companies are telling us that they were seeing some softness in demand from China even before the trade war started. However, the tariff situation is just one more thing to slow down the overall volume of trade. Depending on how long this goes on, could China could end up substituting some other type of lumber, instead of buying oak from the U.S.?"
The trade tensions also may have implications for how companies invest in locations and facilities. "The longer this goes on, the more it encourages multinational companies to put facilities outside of China," Celek says. "It motivates companies to find a way to mitigate risk of further disputes between the U.S. and China."
Wherever your business fits into the international supply chain for your industry, it's important to keep the latest tariffs in mind as you evaluate your cash management strategies. First Horizon Bank's International Services group can help you implement cash flow positive tools to help address the impact of tariffs or other cash flow negative events.
International Services Transactions and Credit
