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CFOs Brace for Trade Tensions, More Tariffs After Election

10/27/2020 | 04:45am EST

By Mark Maurer

Finance chiefs are closely tracking how U.S. trade policy could change after the presidential election, potentially leading to higher tariff-related costs and new restrictions on certain products.

The winner of the election will have to navigate tensions with China and Mexico as well as determine the course on trade tariffs that can hurt a company's financial health, disrupting its cash flow and supplies. Washington currently imposes tariffs on roughly three-quarters of all products China sells to the U.S.

A second Trump administration is expected to continue using tariffs to try to protect U.S. companies from foreign competition and negotiate better trade agreements. President Trump in a second term will also likely continue using unilateral tools such as new tariffs to address trade concerns with China.

By contrast, Democratic challenger Joe Biden has said he intends to consult with allies on a common approach toward China and won't sign new trade deals until he gives the middle class an economic boost, in part by creating jobs. The former vice president has also said he would use tariffs, such as quotas on imports from countries that fail to meet climate targets.

Some U.S. companies struggled during the roughly two-year U.S.-China trade war as uncertainty around trade policy weighed on their profits, sales and investments. Businesses sought to tighten their inventories and adjust pricing to ease the impact of tariffs on their goods. The Trump administration had said tariffs were necessary to pressure China to change practices that were unfair to U.S. companies, and that it pushed American companies to build or source products domestically.

Major auto makers such as Ford Motor Co. and Tesla Inc. were hit hard by the increase in tariffs in recent years because they make a large volume of cars in the U.S. for export to China.

The U.S. and China in January signed a Phase One trade deal, serving as a cease-fire in their trade war. Thanks to that deal, Ford now faces some nominal tariffs on auto parts exported to China and auto parts it makes there and imports into the U.S., but not at the level of 2018, when China put a 40% tariff on U.S. car imports.

The auto maker hopes a phase-two deal will resolve any remaining issues between the countries, a Ford spokeswoman said. "The lower we can get duties when it comes to exporting to other countries, obviously, the better financially it is for Ford," the spokeswoman said.

Ford doesn't import any furnished vehicles from China, unlike some of its U.S. competitors, but its exports to China during the trade talks were heavily impacted by the tariffs. Ford isn't anticipating significant change in trade policy should Mr. Biden win because he also has signaled his intent to be tough on China, the company's spokeswoman said.

Motorcycle manufacturer Harley-Davidson Inc. last year shifted production of certain models outside of the U.S. after the European Union imposed tariffs on its vehicles in response to the Trump administration imposing tariffs on steel and aluminum producers in Europe and elsewhere. The Trump administration criticized Harley-Davidson's move.

Trade tensions also remain with Mexico, even though the U.S. in January signed a trade pact with the country. Mr. Trump has sought talks with Mexico over concerns about imports of Mexican strawberries and bell peppers.

Chipotle Mexican Grill Inc., which imports avocados from Mexico and other countries, hopes new restrictions won't come into force as they could increase the restaurant chain's costs and inhibit its imports, Chief Financial Officer Jack Hartung said.

"That would be a bummer," Mr. Hartung said, adding he isn't sure if that would be more likely to occur under Mr. Biden or Mr. Trump.

Executives consider U.S.-China business relations and new trade agreements to be top policy risks regardless of who wins the election, according to an Oct. 13 survey of U.S. corporate executives by professional-services firm PricewaterhouseCoopers. But under a second Trump term, those risks ranked higher for companies.

If Mr. Trump wins, 42% of respondents said their companies will likely reduce investments in China, compared with 20% of respondents who said that if Mr. Biden wins, the survey found. Twenty-eight percent said they would likely increase investment in China under Mr. Biden, compared with 15% under Mr. Trump.

Recent trade tensions have increased the likelihood that companies will try to relocate overseas operations to reduce some policy-related trade risk, said Scott McCandless, PwC's U.S. trade policy leader. Manufacturers have, for example, been looking to diversify their supply chains in Vietnam and other alternatives to China to avoid U.S. tariffs, he said.

Write to Mark Maurer at mark.maurer@wsj.com

(END) Dow Jones Newswires

10-27-20 0544ET

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