The Trump administration’s readiness to impose tariffs on imported goods and the prospect of on escalating trade war is putting a strain on working capital at many US firms, the Wall Street Journal reports.

The WSJ interviewed several analysts and executives, who say that some companies have run up inventories of raw materials or finished goods in a bid to head off higher costs. Others have offered customers longer payment terms to help them adjust to the new policy landscape.

Both measures soak up cash as an unintended impact of the tariffs that poses a threat to businesses’ financial health. As more money is absorbed by product stockpiles or payments to suppliers, and less is received from customers, companies are left with less available capital or cash to cover their operations and any emergency expenses.

Proactivity and precaution

The business daily quotes Craig Bailey, associate principal at consultancy Hackett Group, which estimates that about US$3.4 trillion in working capital was locked up across US companies at the end of 2018, up from $2.7 trillion five years ago.

Bailey suggests that buffer may be unnecessarily large and  that US companies could free up nearly 40% of that figure if they ran their businesses more efficiently. “As interest rates go up and as tariffs hit, they’re going to find that they have too much cash tied up in inventories which they can’t quickly realise and liquidate.”

Ongoing trade talks between the US and China, as well as the recent near miss of a new trade war with Mexico, suggests that the risk will continue and the possibility of additional tariffs cannot be rules out. “Any new tariffs are expected to bring new complexities to operations and prompt the need for more adjustments, raising the odds that working capital will soak up more cash,” the WSJ notes.

Threats of potential tariffs—including on goods imported from Canada, Mexico, China, Japan and the European Union—have persuaded some US companies to take pre-emptive action.

In late 2018, ahead of a potential increase in US tariffs on Chinese goods, warehouse club operator Costco Wholesale Corp worked with suppliers to decide how to allocate tariff costs between the retailer, its suppliers and its customers, said finance chief Richard Galanti. Costco also estimated how the increases would affect customer demand and adjusted purchasing commitments.

“In some cases you brought in certain seasonal items that we’d typically get in January, February, to the extent you had availability of additional containers you brought in merchandise [early],” said Galanti.

Costco’s precautions show how tariffs alter businesses’ finances even before they take effect. In the end, the increase in tariffs from 10% to 25% on about $200 billion worth of Chinese goods didn’t hit in January, as expected, and instead took effect in May.

Confusion over tariffs also affected distributor Arrow Electronics, whose customers were flummoxed by who would bear the brunt of newly assessed tariffs on Chinese-made goods, according to the company’s chief financial officer, Chris Stansbury.

Some suppliers absorbed the costs and others passed them along, charging extra for each part. Sometimes the charges were applied to each shipment. Others sent a month-end, lump-sum invoice for tariff charges. “Tariffs caused a lot of confusion,” Stansbury told the WSJ. The confusion became an excuse for some customers to delay paying for their shipments, he added. “I was a little too patient and we got burned for that.”