Personal Finance

How trade wars can hurt company image

Meng Wanzhou
Huawei Technologies chief financial officer Meng Wanzhou as she exits the court registry following the bail hearing at British Columbia Superior Courts in Vancouver, British Columbia on December 11, 2018. PHOTO | AFP 

The US-China trade war that began sometime last year with the imposition of protectionist and retaliatory tariffs by both nations has now escalated after the Huawei scandal.

A trade war occurs when two nations begin to impose a lot of unnecessary protectionist measures against each other’s business interests.

The World Trade Organisation (WTO) encourages liberal trade and removal of barriers to stimulate global trade and encourage competition. High imports taxes, lengthy and technical processes are just but some of the barriers to global trade.

Protectionism occurs when one nation uses its domestic mechanisms to limit trade with another state. For example, it can impose high tariffs on imports such that the products cannot compete effectively in the domestic market due to the high retail price.

The consumer will mostly opt for cheaper goods.

This is what has been happening between China and the US where tariffs and retaliatory restrictions have been used.

A certain measure of protectionism is encouraged where the goal is to protect the local industry. For example, if tariffs are imposed on imports, then the domestic products will be cheaper and able to compete effectively.

Kenya has in place anti-dumping legislation that protects the domestic market in the event of survival threats caused by imports.

Using protectionism in this way is ethical. However, sometimes it is dangerous to global trade, especially when motivated by supremacy and egoism. It is reputed that World War 2 was preceded by the great depression arising from trade wars, among other factors.

The US-China trade war may affect global trade, especially since there is a level of ally support on both sides.

For the sake of global trade, both parties need to find a way to resolve the impasse through WTO dispute resolution mechanisms.

Huawei, a corporation owned mainly by Chinese nationals, has been accused of fraudulently representing material facts to some US financial institutions in the wake of an economic sanction imposed against Iran.

Huawei is also accused of having ownership links to a Tehran-based firm, which it used to trade in Iran during to avoid sanctions. The accusation against Huawei is misrepresenting the ownership links to the financial institutions.

As a result, Huawei chief financial officer (CFO) faces extradition charges in Canada.

espionage claims

China has seemingly retaliated the move by Canada to extradite the CFO by arresting some Canadian nationals on various charges.

The Huawei scandal is said to escalate the trade war even further, especially when there was a call against usage of some Chinese technology on espionage claims.

There have been allegations of unfair trade practices by Huawei where the corporation allegedly sought to steal some trade secrets from competitors.

As the scandal unfolds, one thing that is clear is that Huawei faces a very damaged global reputation. Trade wars traditionally involve two nations, and seldom do they involve corporations and individuals.

The lesson I take is that trade wars can damage the reputation of home-grown multi-nationals.

Such corporations may face a backlash. Therefore, it is important for them to shield themselves from trade wars.

One way is to avoid getting directly involved. When it comes to strategic planning and risk analysis, it is quite important for such multi-nationals to properly assess this political risk and come up with mitigation strategies in the wake of trade wars.

I hope for a speedy conclusion of the US-China trade war.