Here's how you can weather the storm of an international trade war.
Editor's note: This story has been updated with details of the Phase 1 agreement signed by the U.S. and China, as well as the Chinese government's move to reduce tariffs on $75 billion of U.S. goods. This is an ongoing story and will be updated as new developments occur.
Amid the turmoil caused by a recent spate of tariffs, there has been a great deal of news, analysis and speculation surrounding financial markets and large industries. While international trade wars are necessarily large in scope and have macroeconomic implications, they can also affect small businesses. The lack of coverage might have left small business owners wondering, "What are these tariffs, and what do they mean for my business?"
What is a tariff, and who pays it?
Tariffs are taxes or duties imposed on a particular class of imports or exports, such as lumber or soybeans. There are a couple types of these taxes:
- A unit tariff is a fixed dollar amount on a specific item, such as steel. These tariffs are expressed as a dollar amount.
- An ad valorem tariff is proportional to the value of imported goods. These tariffs are expressed as a percentage and are the most common.
Tariffs are typically paid by the buyer of the imported good, though there could exist a private agreement between buyer and seller in which the seller pays the tax. Historically, the purpose of imposed tariffs is twofold: to raise national revenue and to protect a country's companies from being undercut by foreign competition by disincentivizing the purchase of cheaper imports. The effects of tariffs vary, but they tend to raise the cost of an imported good for businesses and consumers, while boosting the affected markets for domestic companies.
What are the Trump tariffs?
The U.S. announced the first set of tariffs on May 31, targeting the steel and aluminum exports of Canada, Mexico and European Union nations. Almost immediately, these nations made clear their intent to issue retaliatory tariffs of their own. In addition to the aluminum and steel tariffs, the U.S. levied lumber tariffs against Canada and is exploring adding automobile tariffs to the list of those levied against the EU.
The U.S. also heavily targeted China for what it has called unfair trade practices, drawing the ire of and retaliatory threats from the People's Republic as well. It began with a U.S.-imposed 25% tariff on $50 billion worth of imported Chinese goods. China struck back with a $34 billion tariff of its own, setting the stage for the ongoing tug-of-war. The two powerhouse economies have dueled throughout the past year in a ceaseless, tit-for-tat trade war characterized by unsuccessful talks and mounting tensions. In May, the U.S. imposed further tariffs on $200 billion of Chinese goods. In turn, China raised tariffs on $60 billion of U.S. imports.
In May, the U.S. agreed to lift tariffs on industrial metals imported from Canada and Mexico, provided the countries adopt new measures to prevent the import of subsidized Chinese steel from being shipped to U.S. markets. The countries also agreed that the U.S. could reimpose the tariffs if there were any signs of a surge of Chinese metals into American markets and that any retaliation by Canada and Mexico would be confined to the aluminum and steel industries.
On June 5, 2019, the U.S. threatened to target an additional $300 billion of Chinese imports. However, on June 29, 2019, at a G20 meeting in Japan, the U.S. agreed to levy no new tariffs if China purchased U.S. agricultural products in return. Negotiations deteriorated, though, and by Aug. 1, 2019, the U.S. levied 10% tariffs on an additional $300 billion of Chinese goods. In return, China ceased purchasing U.S. agricultural products and announced retaliatory tariffs on $75 billion of U.S. goods.
China cuts $75 billion in tariffs on U.S. goods after months of tension
After months of back-and-forth between China and the U.S., where one country would raise the stakes with new tariffs only to be countered by the other, China announced it would cut $75 billion in tariffs on U.S. goods imported into the country.
The reduction in tariffs would affect U.S. goods such as soybeans, pork and automobile parts. The Chinese Ministry of Finance released a statement regarding the ongoing trade war:
"The next steps depend on the development of the Chinese-U.S. economic and trade situation. We hope to work with the United States toward the final elimination of all tariff increases."
Chinese tariff cuts come in wake of Phase 1 agreement intended to end trade war with U.S.
The additional tariff cuts come a month after the signing of an agreement with the U.S., called the "Phase 1" agreement. That agreement aims to wind down the trade war between the two countries, which are the largest national economies in the world.
Under that agreement, the U.S. would continue to levy 25% tariffs on roughly $250 billion of Chinese goods, while tariffs on $120 billion of Chinese goods would be reduced to 7.5%. The U.S. would also delay additional tariffs planned for $156 billion of Chinese goods, including toys, clothes and electronics. In return, China agreed it would purchase more than $200 billion in U.S. goods.
While the Phase 1 agreement and China's subsequent reduction in tariffs on soybeans, pork and auto parts are the first signs of abatement since the trade war began, hundreds of billions of dollars in tariffs levied by both countries remain in place. Businesses small and large should expect to feel the continued effects of tariffs on their supply chains.
How should small businesses manage the changing market?
Naturally, international tariffs are seismic events that will have massive consequences, but they will also impact small businesses in ways you might not anticipate. In the U.S., small businesses make up 99.7% of employer companies and 48% of the private workforce, so their collective well-being has a huge effect on the economy in terms of employment, wages and growth. In other words, their economic value is highly significant.
Tariffs have indirect and unintended consequences throughout the economies they target and the consumers who live there. Even something as seemingly focused as an import tax on steel and aluminum can have a ripple effect, impacting businesses in other industries. For entrepreneurs, it is important to deftly manage your company 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 are 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."
An example of a small business that suffers unexpected consequences could be a small bakery that regularly purchases products like pie tins and whipped cream. While bakeries are a far cry from businesses in the steel or aluminum industry, products like these are essential to their operations. Odds are that companies that make pie tins or whipped cream (which comes in metal canisters) will adjust their prices to reflect the new costs or lay off their employees. The small bakery that was already operating on razor-thin margins ends up absorbing a good portion of these new costs from its suppliers and will likely have to renegotiate standing arrangements. If you are in that bakery's position, you can't afford to eat those new expenses. So, what can you do?
According to Richardson, small businesses should keep a few things in mind as the supply chain adjusts to these new tariffs:
Stay attuned to profit margin. What costs can you absorb, and which must be covered? Are you able to reduce any expenses to offset the increase in goods subject to tariff-related hikes? Can you renegotiate a favorable deal despite those price increases? Where can you offset costs before raising your prices?
Understand your own pricing. Raising prices is a dangerous game for small businesses. Sometimes a price hike might be necessary to stay profitable when suppliers increase the cost of doing business, but it could keep customers away, damaging revenue. Understanding how you're priced in terms of the market average, as well as how highly your customers value your product and what kind of price increases they would tolerate, is key to making smart pricing decisions.
Manage inventory levels. It is always important to manage inventory efficiently, but especially when costs are rising and uncertainty is high. If your warehouse is full to bursting with goods that simply aren't moving, you have money tied up that could keep your business afloat during stormy weather without passing costs on to customers (or at least minimizing how much of those costs you pass on to your customers). Cash is your business's lifeblood; make sure you only buy and replenish the inventory that moves.
- Import/export businesses need to communicate. If you're an import/export business, obviously tariffs represent a more immediate concern. Richardson suggests staying in regular contact and building relationships with government foreign exchange officers who can inform and guide you regarding new or changing policy.
"The biggest issue for small businesses is managing cash flow; it's the oxygen to the business," Richardson said. "When something threatens cash flow, [entrepreneurs] stop spending. Any sort of regulation or tax or tariff that looks like it's going to add a cost, no matter what business you run, slows you. You spend less, you conserve, you watch and wait, you hold on to your cash."
Given the nature of the specific tariffs, small businesses looking to expand or build new locations should consider doing so now, before lumber and steel tariffs impact prices significantly. Rather than build, you could also consider looking for existing real estate. Need new office furniture, like desks? Now might be the time to buy them, before lumber prices drive up costs.
If the proposed tariffs on Chinese goods go through, tech prices for smartphones, laptops, TVs and other electronics could increase, so you should purchase any new electronic equipment you need soon, or consider purchasing refurbished or used devices.
If you're in the market for these goods, consider financing their purchase to avoid the impact of future tariffs. Not only will tariffs increase the prices of affected goods in the long run, but the Federal Reserve is likely to continue raising interest rates, meaning it is cheaper to borrow money now than it likely will be down the line. [Looking for financing but not sure where to start? Here's a look at some of the best business financing options out there.]
Of course, some small businesses might benefit from the tariffs if they sell goods that previously competed with imported goods from the targeted countries. For example, the price of American steel has already gone up yet remains the more competitive option, considering the tariffs placed on foreign steel.
What's the current landscape, expected impact and future outlook?
The Trump administration is concerned with the U.S.'s current trade deficit with the world. It has been increasingly aggressive in its posture with trade partners in the hopes of closing trade deficits.
Besides steel and aluminum, lumber, and possible automobile tariffs, the U.S. has threatened to impose tariffs on billions of various Chinese goods. China and other targeted nations have responded with tariffs of their own on a diverse array of products, including American pork, whiskey, machinery, tobacco and coal.
Joseph Foudy, a professor of economics at New York University's Leonard N. Stern School of Business, said the main characteristic of the global trade environment now is uncertainty. That makes it difficult to determine the long-term costs of the escalating, multilateral trade conflict.
"The toughest thing to price in is just the market uncertainty and those effects," Foudy said. "The stock market is jittery, but there's so much uncertainty about what [the] U.S. and others will impose. We see them move nervously but toward no particular outcome. It is slowing down business investment; uncertainty does that ... businesses need to know what's happening or they just put things on hold."
According to Foudy, the future is unclear. The back-and-forth between the U.S. and other nations could continue to escalate, or the tariffs could simply be leveraged to extract concessions elsewhere, and the turmoil will wane. It's hard to say, he said, especially in the age of "Trumpian uncertainty."
"I could easily foresee this turning into a series of tit-for-tats where each country is harmed, there is some negative effect on market confidence, and it brings down GDP growth by a quarter or half percent," Foudy said. "But there is so much uncertainty as to whether U.S. will carry through on these threats and how many threats on tariffs are really just to get concessions on other issues."
Like Richardson, Foudy suggested small businesses try to negotiate favorable deals with their suppliers now and, if possible, lock them into that deal for a long term. This, he said, could help businesses avoid cost increases a year or two down the line if tariffs stick.
On the other hand, Foudy said, avoiding long-term commitments with customers could give you more flexibility to raise prices down the line if you must pass on costs to them. However, communicate to them now the potential risks tariffs pose so they aren't blindsided if the day comes you must adjust your prices.
Finally, Foudy said, small businesses expecting impacts on some essential goods should stockpile them now, before prices increase. This could save them a lot of money later, even though the upfront expense could hurt in the short term.
Even if tariffs are here to stay, Foudy said, the real impacts of these economic shifts are never felt until years after implementation. For small businesses worried about cost increases caused by tariffs, now is the time to act.
Some source interviews were conducted for a previous version of this article.