A monthly publication for middle market business leaders
The Real Economy
Tariffs: Assessing the Economic Impact
The August 2018 edition of RSM’s monthly publication,
The Real Economy, features insights from Joe Brusuelas, the firm’s chief economist, on how growing global trade tensions between the United States and its NAFTA trading partners, as well as the EU, the U.K., China and Japan, are affecting the U.S. economy.
Brusuelas and Kevin Depew, RSM deputy chief economist, illustrate how the tit-for-tat imposition of tariffs is pressuring U.S. imports and exports, with immediate hits experienced by the so-called A3 ecosystems of aerospace, agriculture, and autos. The initial wave of trade tensions is more modestly influencing the petrochemical industries—plastics, rubber, chemicals, mineral fluids and apparel—as well as the food and beverage sectors.
The Real Economy also demonstrates, through government Beige Book data and sector-specific breakdowns, the increasing vulnerability of U.S. businesses to rising prices on a host of materials ranging from steel and aluminum to timber. If negotiated trade settlement isn’t reached soon, middle market businesses should begin to prepare for a price shock, driven by large businesses passing their rising input costs downstream. If a full-blown trade war breaks out, the hit to the economy will be large and difficult to quantify. Risks surrounding a company’s supply and value chain, currency and foreign exchange, and pricing will be challenging to anticipate and effectively manage. For example, in recent discussions with a fashion retailer, the company highlighted how difficult it was to identify the impact of tariffs within its distributors. In the company’s initial analysis, executives believed it was insulated from significant tariffs, but upon deeper analysis of a few key suppliers, identified some unexpected costs.
Internal auditors have an opportunity to dive deep into management’s pricing strategies and processes. A review of management’s understanding of tariffs’ impact at both the enterprise and operational levels will help identify areas that are not carefully thought out or understood, creating risk to the organization.
Some additional areas that internal audit might review include foreign exchange and hedging strategies. Here internal audit should review management’s foreign exchange exposure and hedging strategies. The board should be aware of hedging strategies, including limitations set, management contract reviews, control of valuation models, systems, and sources of information used to develop and maintain the strategies.
Finally, given the level of uncertainty in the marketplace surrounding trade and tariffs, management needs to have robust enterprise risk management processes in place to identify and assess emerging risks. Internal audit should review the maturity of management’s risk practices, including the organization’s risk governance, culture and risk management processes in place to identify, assess, respond, and monitor risk. With increased uncertainty in the global marketplace, tight labor and trade challenges, it is more important than ever to look at these practices. Using frameworks such as the 2017 COSO ERM Framework or the recently updated ISO 31000 Framework can help with reviewing these management practices.
For a deeper dive into these issues, click on the link below for this month’s issue of
The Real Economy.
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The Real Economy
The U.S. middle market makes up one-third of the country’s economy and employs one-third of its workforce, yet this economic growth engine is often overlooked. As the leading provider of assurance, tax and consulting services to middle market businesses, RSM wants to change the conversation.
The Real Economy is a monthly publication to help the middle market anticipate and address the unique issues and challenges facing their businesses and the industries in which they operate. Written by our chief economist, Joe Brusuelas, and including the insights of professionals throughout the firm,
The Real Economy is RSM's answer to making sure the unique needs and opportunities of this important segment of our economy are given the attention they deserve.