You just can’t avoid all the media coverage on the President of the United States, Donald J. Trump. However, there’s been one aspect of the Trump presidency that doesn’t get as much coverage as it should – the never ending accumulation of tariffs. International trade is a large part of the economy and has macroeconomic implications, all of which can affect small businesses. With such little coverage, many small business owners find themselves asking, “What are tariffs and just what do they mean for my business?”
What is a tariff?
Tariffs are taxes or duties that are imposed on a specific class of imports or exports, like lumber or soybeans. Such types include:
- Unit tariff: a fixed dollar amount on a particular item, like steel, and these tariffs are expressed as a dollar amount.
- Ad valorem: the most common tariff that is proportional to the value of imported goods and is expressed as a percentage.
Who pays for tariffs?
Usually a tariff is paid by the buyer of the imported good however there can be a private agreement between the buyer and seller where the seller is the one responsible for payment of the tax. Throughout history, tariffs were imposed in a twofold mission: to raise the national revenue and to protect the country’s companies from getting undercut by foreign competition by discouraging purchase of cheaper imports.
What are the tariffs implemented by President Trump?
On May 31, the first batch of new tariffs were announced – the U.S. targeted steel and aluminum exports of Canada, Mexico and European Union nations. As a result, these nations announced they would issue retaliatory tariffs. Additionally, the U.S. also imposed lumber tariffs against Canada.
Undoubtedly you’re aware that the U.S. targeted China the most harshly as it claimed unfair trade practices had been raging for years – this immediately caused retaliatory threats from the People’s Republic. First, the U.S. imposed a 25% tariff on $50 billion worth of imported Chinese goods. China hit back with a $34 billion tariff and so began the domino effect of two powerful economies battling it out in a tit-for-tat trade war. In May, the U.S. imposed tariffs on $200 billion of Chinese goods and in turn, China raised tariffs on $60 billion of U.S. imports.
“Our talks with China – a lot of interesting things are happening,” said President Trump at a press conference. “We’ll see what happens. In the meantime, we’re getting 25% on $250 billion, and I can go up another at least $300 billion.”
What does this mean for small businesses?
The purpose of this back and forth, according to President Trump, is to level the playing field for U.S. companies selling goods in China.
“Small businesses span the spectrum, giving them unique exposures to the impact of tariffs and trade agreements,” says Bill Dunkelberg, the chief economist for the National Federation of Independent Business (NFIB). “It is clear that the small business sector, which represents half the economy, is being affected by changes in trade policy.”
Most major multinational companies have flexibility about where to buy, make, and ship their products, however small business owners only have slim options at their disposal.
How can small businesses manage the changing market?
In the U.S., small businesses make up 99.7% of companies and 48% of the private workforce. Therefore, their success has a massive effect on the economy in terms of employment, wages and growth.
There is no denying that tariffs have indirect and unintended consequences on the economies targeted and the consumers living there. That’s why something as focused as an import tax on steel and aluminum causes a huge ripple effect, impacting businesses across other industries. That’s why entrepreneurs must manage their company accordingly as the market adjusts.
“When the elephants dance, everybody gets shaken up,” said Lyneir Richardson, executive director of the Center for Urban Entrepreneurship & Economic Development at Rutgers Business School. “In this instance, [small businesses often] dealing with the supply chain asking for higher costs that cannot be quickly passed on to customers. It means more time thinking about pricing, renegotiating and managing cash flow.”
How small businesses can prepare themselves:
“What do you do in practical terms when you see one of your inputs has gone up substantially?”says Charley Ballard, Michigan State University economist. “You can try to squeeze greater efficiencies out somewhere else. Of course, most small businesses have been squeezed themselves to the point that there isn’t much low-hanging fruit left.”
While this sounds easier said than done, you have to explore new and creative ways to cut business costs. Some companies have looked into laying off employees, working in the dark to save on the electricity cost or allowing less overtime. Look at reducing expenses to offset the increase in goods subject to tariff hikes.
Watch the profit margins.
Take a look at what costs you can absorb and also which have to be covered. Once you know which expenses can be reduced, you can look into renegotiating a favorable deal even though prices have shot up. Consider how you can offset costs before you have to raise your prices.
Make or import products from somewhere else.
Changing up your supply chain is a coping tactic during the trade war but is also a good way to boost business in the long run. “Tariffs and quotas can have the effect of eliminating sources,” says Matthew Beckmann, the managing director of Houston-based Ascent Consultants. “Be proactive in working with substitute products that still meet quality-control standards. Do not wait for tariffs or quotas, but actively source and qualify these potential vendors as part of your regular job duties.”
Manage inventory levels.
Managing inventory levels is always a must but even more so when costs are on the rise and uncertainty consumes your brain. If you have a warehouse brimming with goods that aren’t selling then you are bleeding money that could otherwise keep your business afloat. Make sure you’re buying and replenishing inventory that sells.
If you run an import/export business, then it’s obvious that tariffs are a more immediate concern to your livelihood. You must remain in constant contact and build relationships with government foreign exchange officers who can help inform and guide you when there is a new or changing policy.
There is no way to tell when these tariffs are going to let up so if you’re worried about rising costs, the time to act is now.