Dispute’s reach includes deals
The China-US disaccord means there is less hunger for deals, according to EY.
Growing tension between China and the US has resulted in a dampened appetite for deals, professional services company Ernst & Young (EY) has said.
In a research note, EY claimed that although agreements are still going on, there are less of them — and they are occurring for less money than previously. The US-China dispute’s dampening of pact hunger especially concerns big cross-border acquisitions, the firm states. However, EY noted that businesses are continuing to make tactical moves and Europe and Southeast Asia are taking centre stage as China tries to lower its US dependence.
The merger mountain
At the start of this year, 93% of those replying to EY’s Trade Survey felt that tariffs would affect their firm’s plans for mergers and acquisitions (M&A). Fast-forward to now, and those respondents have seen their fear realised. EY Geostrategic Business Group leader Jon Shames explained that M&A timelines are feeling the impact of both levies and growing cross-border deal-scrutiny.
“The tense relations between the US and China, and their high degree of economic interdependence, create an operating environment that companies are finding increasingly challenging,” Mr Shames noted.
Although agreements are still going on, there are less of them — and they are occurring for less money than previously
Citing a statistic from Refinitiv analysts concerning how the value of announced transactions globally dropped by 35% in Q3 last year against the previous three months (with the smallest amount of announced new agreements since 2013), EY said that the big cross-border pacts characterising the M&A market for the past half a decade are getting harder to seal as the US-China trade war rattles on. According to American investment bank and financial services firm J.P. Morgan, in 2018, there were 16 deals worth over $10bn that had taken over 12 months to complete.
“Rather than face this level of unpredictability, many affected by US-China trade tensions are choosing to follow a strategy of wait and see,” EY said. “London-based Steve Krouskos, EY global vice-chair [for] Transaction Advisory Services, added: ‘Geopolitical, trade and tariff uncertainties have finally caused some dealmakers to hit the pause button.’”
Growth worse than anticipated
EY’s research was released just days before international financial institution The World Bank claimed that this year’s world economic growth is predicted to “ease to a weaker-than-expected 2.6%” before going up to 2.7% next year.
“Emerging and developing economy growth is constrained by sluggish investment, and risks are tilted to the downside,” the bank said. “These risks include rising trade barriers, renewed financial stress and sharper-than-expected slowdowns in several major economies … Structural problems that misallocate or discourage investment also weigh on the outlook.”
“Rising trade barriers” was a clear nod to the US-China dispute? As of early June, there seemed to be no sign of an end to US-China tariffs. A tweet from US President Donald Trump on June 3 made that clear: “China is subsidising its product in order that it can continue to be sold in the USA. Many firms are leaving China for other countries, including the United States, in order to avoid paying the Tariffs. No visible increase in costs or inflation, but U.S. is taking Billions!”
Mitigating against damage
EY offered a number of action points for interested parties.
“As moving production bases or changing suppliers takes time, it may be prudent to look at other strategies, such as origin or customs valuation planning and tariff engineering, to mitigate the effect of tariffs until the outcome of the trade talks is known,” it explained, continuing: “Make sure you are using the correct harmonised tariff code and consider whether you can import a product in a different form (e.g., more built-up or more knocked-down) to change the codes.”
EY advised interested parties to check the scale of production in mainland China and utilise Taiwan and Singapore (or other viable locations) for country-of-origin purposes.
“Look at import value, as this generally forms the base for customs duties calculations, and consider whether you can use the first-sale rule to your advantage into the US,” it said: “Consider establishing a foreign trade zone in which to store produce in case import quotas are filled — useful if you might get caught with a ship full of, say, steel outside a US port.”
The Baltic Exchange will hold its next Shipping Economics & Investment course on 10 and 11 June in London in the UK. More information can be found here.