Author's note: At midnight on July 6, the U.S. officially levied $34 billion in tariffs against the People's Republic of China. China responded in kind, levying its own $34 billion in tariffs. China targeted U.S. food, beverages, and vehicles. The U.S. targeted Chinese vehicles, technology, medical devices, and industrial machinery.
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. It might have left small businesses wondering what are these tariffs and what do they mean for my business?
What is a tariff?
A tariff is a tax 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, for example.
An ad valorem tariff is proportional to the value of imported goods. Historically, the purpose is to raise revenue for the country and protect a country's companies from foreign competition. The effects of tariffs vary, but they tend to raise the cost of an imported good while boosting the market for domestic companies.
What are the new tariffs?
The first set of new tariffs were announced by the U.S. 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 threatened tariffs targeting China, drawing the ire of and retaliatory threats from the Peoples' Republic as well.
Naturally, these are seismic events that will have massive consequences, but they will also impact small businesses in ways you might not have anticipated. In the U.S., small businesses make up 99.7 percent of employer companies and 48 percent of the private workforce, so their well-being collectively has a huge effect on the economy in terms of employment, wages, and growth. In other words, their economic value is highly significant.
How small businesses should manage the changing market
Tariffs have indirect and unintended consequences throughout the economies they target. Even something as seemingly focused as an import tax on steel and aluminum can have a ripple effect, impacting businesses in other industries. As an entrepreneur, 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 and 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 onto customers. It means more time thinking about pricing, renegotiating and managing cash flow."
An example of unexpected consequences affecting small business could be a small bakery, for instance, that regularly purchases products like pie tins and whipped cream. While a bakery is far from other 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 their 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, there are a few things small businesses should keep 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 so 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 suggested 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."
Due to 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. Or rather than build, consider looking for existing real estate. Need new office furniture, like desks? It might be the time to buy them now 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 any new electronic equipment should be purchased 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.
The current landscape, expected impacts 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 tariffs, lumber tariffs, and possible automobile tariffs, the U.S. is threatening to impose tariffs on $450 billion worth of various types of Chinese goods. Each of these nations has responded with tariffs of their own on a range of products, including American pork, whiskey, machinery, tobacco, coal and a diverse array of others.
The main characteristic of the global trade environment now, said Joseph Foudy, a professor of economics at NYU's Leonard N. Stern School of Business, 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 ongoing back and forth between the U.S. and other nations could continue to grow, or the tariffs could simply be leverage 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 period. Doing so, Foudy said, could help avoid cost increases a year or two down the line if tariffs stick.
On the other side, he 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, but communicate to them now the potential risks tariffs pose so they aren't blindsided if the day comes you adjust your prices.
Finally, Foudy said, small businesses expecting that some essential goods will be impacted should stockpile them now, before prices increase. Doing so 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.