Tariffs are also known as customs taxes that impose extra expenses on the cross-border goods. These incremental costs change the profit calculations of businesses and determine where businesses will invest. This article elaborates on the effects of customs taxes (ภาษี ศุลกากร คือ) as far as investment decisions at the international level are concerned. Knowledge of these effects can enable the investors to predict market changes.
Explaining how tariffs influence global investment decisions
Supply chain relocation decisions
Improved tariffs on foreign products result in an increase in their prices and companies relocate factories. The companies are moving production to the countries whose target markets have low or no tariffs. The following are the main ways in which tariffs remake supply chains:
- Factory relocation: Factories are taking manufacturing activities to countries that can have a favorable trade policy.
- Nearshoring trend: Tariffs promote the relocation of factories near the end consumers which lessens the expenses of shipping between the countries.
- Multiple sourcing: Companies establish parallel supply chains in more than one country, as a way of avoiding tariffs amongst different countries.
- Inventory hoarding: companies import extra products prior to the adoption of new tariffs, and store them in warehouses, later selling them at a later time.
- Vertical integration: Firms acquire suppliers within target markets to shift production within tariff walls.
Currency market movements
Tariffs have impacts on the value of currencies through altering the level of trade between countries. The result of the implementation of new export tariffs in a country is the weakening of its currency since the demand of its products decreases. The currency impact of tariff changes are as follows:
- Export country weakness: Countries that are struck with import tariffs have their currencies fall as they fail to be bought by foreigners.
- Import country strength: Countries that put tariffs can experience an increase in their currencies since they will purchase less foreign products.
- Safe-haven flows: Trade wars lead to the upsurge in money into safe currencies such as the US dollar and Swiss franc.
- Commodity currency falls: When tariffs halt world trade and decrease demand, resource exporting countries have to deal with currency pressure.
- Carry trade unwinds: When tension about tariffs increases, investors sell high-risk, high yielding currencies and buy a safer one.
Sector specific investment impacts
All industries are not equal beneficiaries of tariffs: industries targeted lose out and the other industries get to benefit. Intelligent investors will invest in beneficiaries and not victims. The trade barriers in the sectors are as follows:
- Domestic manufacturer boost: The local factories are not under a threat of foreign competition and enjoy increased profits because of the tariffs on imports.
- Exporter pain: Firms that are selling to a high extent to the nations which apply tariffs suffer in terms of incomes because of a decline in demand.
- Supply chain disruptors: Tariffs cause damage to a company that has a complex cross-border supply chain as compared to a local producer.
- Substitution plays: Investors purchase shares of firms that produce goods that substitute costly imports.
- Retail margin squeeze: The stores which are unable to transfer the tariff costs to the customers experience a decline in profits as the costs increase.
A look at the frequently asked questions
Do tariffs always hurt the stock markets?
Not necessarily, in some cases markets in countries where there are tariffs tend to increase when the industries which are safeguarded are greater than the loss of exports.
What is the speed of tariffs to investment choices?
Firms change supply chain within months; however, the majority of huge factory migrations require one to three years.
Are there ways of hedging tariff risk?
Yes, tariff exposure can be hedged by purchasing put options on export-heavy indexes, or they can be shorted using target country ETFs.
What are some signals of coming tariff changes?
Tariff actions are usually preceded by trade deficit reports, political speeches and rulings by the World Trade Organization.
Are tariffs cause inflation?
Yes, the cost of imports in terms of taxes increases the consumer prices and it might compel the central banks to increase interest rates.
