Will US Energy Businesses Soon Be Forced to Alter Their International Business Strategies?

The opening shots of a potential global trade war have already been exchanged. Daily headlines proclaim the imposition of a new tariff by one country on imports from another. Unless, and until, conflicting nations find solutions to their underlying disputes, US businesses with international operations must necessarily consider the impact of these tariffs on their business model. Other global events are also unfolding that must be considered as well.

Saudi Arabia recently suspended trade with Canada and ordered the expulsion of the Canadian Ambassador in response to a series of tweets from Canada’s foreign minister that were critical of the arrests of several Saudi citizens. In the United States, the Trump Administration has announced renewed sanctions on Iran. Sanctions on Iran’s oil industry will take effect in November. The EU, in response, announced that a blocking statute, intended to shield European companies that continue doing business with Iran from secondary sanctions, would take effect at precisely the same time.

Tariffs

The impact of tariffs on international business is easy to understand and predict. At Wildcat International, we manufacture our proprietary tools and we purchase other tools and equipment from the manufacturer ("OEM"). We have options on where we manufacture our tools and which OEMs we purchase from. OEMs involved in international business also have options on where to locate their facilities. If we must pay a tariff on a tool that we manufacture in the US and then ship to a foreign country, but not on a tool manufactured in that foreign country, we are obviously incentivized to manufacture our tool overseas. Our OEM vendors are similarly incentivized. 

Consequently, if the trade war is not resolved in the near term or worse it escalates, I can see US businesses purchasing more foreign-manufactured products for their international business operations. Some changes will be immediate because the purchasing or producing company has flexibility. Others will take longer if, for example, a company has a long-term contractual commitment to a manufacturer or seller. Regardless, there is no question but that if tariffs remain in place, US companies will make the necessary adjustments to reduce their impact.

Saudi Arabia Dispute with Canada

It is far too early to accurately predict whether the current dispute between Saudi Arabia and Canada will escalate or will resolve itself. The two countries have reason to reach an agreement, such as a $13 billion-dollar defense contract that is still in effect. However, if they are unable to reach an agreement and either bans all trade with the other, US energy businesses will have to find alternatives for any goods or equipment that they currently acquire from a Canadian company for use in Saudi Arabia. Canada and Saudi Arabia engage in $3 billion dollars in trade annually. Much of that is energy related. Consequently, the potential loss of Canadian suppliers is a real concern for US energy businesses.

Iranian Sanctions

US sanctions on Iran have essentially eliminated any US business involvement in Iran. I’m unaware of any US energy company transacting business in Iran or with an Iranian business. Until recently, the same could be said for EU-based energy companies. If the Trump Administration and the EU continue with their currently announced plans, it is possible that European companies could soon start working with Iranian energy companies. If so, what happens to US businesses if the sanctions preclude not only doing business with Iran but also doing business with companies who do business with Iran?

Clearly no US business wants to incur the wrath of the federal government by violating Iranian sanctions. So, do they reach out to their European business partners now and encourage them to not do business in Iran? If so, what might they offer as an inducement or warn of as a consequence? Do they start looking for potential replacements? Are they under contractual obligations that hamper their ability to replace a European vendor doing business with Iran? Are there practical considerations that hamper their ability to cut ties with a European business? And for each of these problems, what options exist?

We at Wildcat are closely monitoring the tariff, trade, and diplomatic issues at play. Hopefully, governments will find solutions that encourage the free trade that has been key to the post-World War II economic development. If not, we will have to alter our business strategy to ensure that we can continue offering our international customers the best possible prices and services.