Toyota Motor Corp. has longtracked President Donald Trump's trade threats toward Japan, not tomention tweets slamming the automaker for building a new plant inMexico. Yet when the U.S. actually imposed tariffs on aluminum and steel imports lastyear, Toyota's crisis management kicked into an entirely differentrealm.

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The company now has a “virtual war room” of about 150 employeesmapping out the impact of various U.S. trade policy scenarios,according to a person familiar with its strategic planning. About50 of them, mostly supply chain and logistics experts, are based inNorth America. The great unknown: Will Washington's rapid policyshifts on trade end in 2020, or carry on for another four years ifTrump is re-elected?

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In the shadow of a shape-shifting trade conflict betweenWashington and Beijing, business leaders find themselves in ageopolitical free-fire zone. The rules that have governed economicrelations between both countries since China's growth miraclestarted in the 1980s are being torn up, forcing corporateexecutives to hedge against a great unraveling of supply chains,manufacturing networks, and pricing strategies.

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“We are concerned that the U.S.-China trade war is going toaffect everybody,” Akbar Al Baker, CEO of Qatar Airways, said atthe International Air Transport Association's annual meeting inSeoul, where airlines see lower profits, freight traffic, and tradein 2019.

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Or as Citigroup Inc. CEO Mike Corbat put it at a conference inNew York on May 29: “If there's a trade war, no one necessarilyescapes that.”

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Great Unknown

Some executives remain confident that cooler heads will prevailamong U.S. and Chinese trade negotiators. “There's too muchself-interest in keeping this thing on the rails,” James Gorman,Morgan Stanley's CEO, told Bloomberg Television on May 30 inBeijing.

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Yet the price of being wrong is huge, leaving executives littlechoice but to stress-test supply networks, capital spending, andproduct pricing plans. Their challenge is compounded by the nearimpossibility of figuring out what the future will look like duringa time of massive political disruption.

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“This contest will be a drawn-out process that will likely lastour careers,” said Stephen Jen, a former economist at theInternational Monetary Fund (IMF) and Morgan Stanley who now runsEurizon SLJ Capital, a hedge fund and advisory firm. “We asinvestors and analysts need to pace ourselves and try to not justfollow the latest news. We need to understand the economics and thecultural differences.”

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Global stocks took a $4 trillionhit in May as global trade tensions ratcheted up. Morgan Stanleychief economist Chetan Ahya, meanwhile, sees a U.S. recession in less than a year should theTrump administration impose tariffs as high as 25 percent on anadditional $300 billion of Chinese exports (on top of those $250billion in goods already impacted) and Beijing retaliates in kind.The trade conflict will form the backdrop to the Group of 20gathering of finance ministers and central bankers in Japan overthe weekend.

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While Trump's trade hawks haven't yet triggered a massive U.S.production shift back to the states, some companies are reassessingtheir Chinese factory networks. This month San Mateo-based actioncamera maker GoPro will start moving much ofits U.S.-bound production from China to Guadalajara, Mexico.

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About 70 percent of American companies doing business in Chinathat participated in a survey last Octoberby the American Chamber of Commerce in South China were consideringmoving all or part of their production out of the country.

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Whether to bolt or double down on China depends on specificstrategic factors, as well as a CEO's working assumption about howdeep and long the U.S.-China conflict will run. For companies withlong time horizons and huge fixed costs, China still might be worththe risk. Exxon Mobil Corp. is going forward with a plannedmultibillion-dollar chemical plant expected to begin operations in2023, betting the project won't be ensnared in the currentU.S.-China trade spat.

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Exxon views the plant in the southeast province of Guangdong asa “lifelong investment” that'll have a “50- or 100-year timeline,”CEO Darren Woods said after the company's recent annual meeting.“While we're sensitive to what we're seeing in the currentenvironment and the implications, and understanding how theseimplications will play themselves out, we're also trying to putthat in the context of this longer-term time horizon.”

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$7 Billion Hit

Should the next round of tariffs kick in, othercapital-intensive companies, like footwear makers, will face atough choice between absorbing a massive increase in costs andpassing them along to consumers. In an open letter to Trump,more than 170 companies, including Nike Inc. and Adidas AG, citedestimates by their industry trade association that the freshtariffs under consideration would mean a $7 billion annual hit totheir consumers.

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At luxury retailer Ralph Lauren Corp., some of whose classicPolo and Lauren brands are made in China and could face a 25percent tariff hit, executives are trying to assess the potentialdamage. “Think sweaters, polo shirts, some of our footwear,” CEOPatrice Louvet said in an interview last month. “As you canimagine, we are working on different scenarios, absolutely.”

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Tariffs get a lot of attention, as they should since they're soeconomically damaging. Less quantifiable are the non-tariffweapons—investment restrictions, export controls, consumerboycotts, black lists, financial sanctions, antitrust decisions,and even criminal indictments—both sides are employing forleverage. China fined Ford Motor Co.'s main China joint venture $23million for alleged antitrust violations.

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Trump has never been shy about calling out companies such asHarley-Davidson Inc. or General Motors Co. over production shiftsor proposed plant closures. The U.S., citing national securityconcerns, has basically blacklisted Huawei Technologies Co. fromdoing business with American firms, though the ban has been delayedby 90 days. The Chinese company also faces U.S. allegations that itflouted sanctions on Iran, among other charges.

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China has returned fire by threatening to add FedEx Corp. to itslist of “unreliable” companies that are alleged to be harming theinterests of Chinese companies. That could ultimately includeAlphabet Inc.'s Google, Qualcomm Inc., and Intel Corp., as well asnon-American companies Toshiba Corp. and ARM, which may dial backties with Huawei since the Chinese telecom giant was singled out byWashington.

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The European Union and United States, meanwhile, are tanglingand have threatened punitive tariffs over a long-running disputeabout alleged subsidies at Boeing Co. and Airbus SE. “Time isrunning out to stop this dangerous threat to an industry thatemploys directly more than a million highly qualified jobsglobally,” said Airbus SE Chief Commercial Officer ChristianScherer in a letter sent to European airlines that was seen byBloomberg.

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It's hard to find an industry that doesn't have something atstake—directly or indirectly—in a world full of trade disputes.Billionaire hedge fund investor Ray Dalio, founder of BridgewaterAssociates, sees a “long ideological war” ahead for the U.S. and China. Ifhe's right, the fallout will be on the minds of many CEOs for yearsto come.

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—With assistance from Kevin Crowley, Sarah McGregor, BenjaminKatz, Kyunghee Park, Kim Bhasin, Joe Carroll, and Sohee Kim.

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Copyright 2019 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

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