Jeff Judy

Jeff's Thoughts - August 8 , 2018

Trade Wars I: Collateral Damage

I have no doubt that most of my readers have been following the tit-for-tat tariff increases being exchanged between the U.S. and pretty much all of our major trading partners. A variety of industries are already feeling the impact of this trade war.

Naturally, you'll want to stay up to date on how your own credit customers are affected by this situation. That might be harder than you think: not every business that is affected is specificallytargeted in these tariffs. You need to look beyond the broad-brush headlines and take a look at just about every type of borrower you serve.

Here in Minnesota, all the talk and all the reports focus on soy beans. Not only is Minnesota a major soy producer, a significant portion of each year's crop was sold to China. With Chinese tariff hikes on soy, in response to our own hikes on steel tariffs, our soy product is much less competitive in that market. Representatives of soy farmers are quoted in the media on a regular basis talking about the damage this trade war is doing to their business. (And it's too early to tell if a government bail-out will come through, and be enough.)

Obviously, if you lend to soy farmers, you will take a close look at how they are dealing with all of this. But what about your other customers, are they out of the woods?

First, look at the complete schedule of tariffs in detail. Soy gets all the press here, but there are many other exports from our region that are taking a big hit. Make sure you know what other elements of this trade war may impact your local economy.

Second, remember that this trade war cuts both ways. In other words, both export and import businesses are hurting. Even small manufacturers tend to use some foreign-sourced components and materials, and the tariffs we have set can significantly alter their supply costs.

Finally, look for ripple effects from those industries that are taking the most direct impact. How will secondary and tertiary businesses connected to those industries fare? Back to our soy farmers, a community bank serving a small- to medium-sized community surrounded by thousands of acres of soy beans probably has a natural concentration in soy-dependent income. The local equipment dealer, auto dealer, hardware store, and many other businesses in the area will all suffer if soy farmers make a lot less than they expected this year. It is not too early to have some conversations with your borrowers about what is happening.

It will take some patience and some diligence to ferret out all the extended consequences of these tariff battles. But if you want to avoid some ugly surprises, look for "downstream" impacts of the trade war throughout your portfolio.