How Tariffs Affect Small Businesses

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Updated on Friday, July 16, 2021

Tariffs are a special type of tax charged only on imported goods. When we think about the effects of tariffs, we are usually concerned about who ends up paying the bill: producers abroad or consumers and small businesses at home? Tariffs can force small businesses who rely on foreign suppliers to raise the prices on their products or seek out alternative sources.

Below we discuss how other ways tariffs are affecting small businesses and how you can protect your firm when unexpected costs threaten growth.

What is a tariff?

A tariff is a tax that a country levies on imported goods and services. Companies that pay those tariffs to bring goods into the country likely pass on that cost to customers. Because tariffs increase the price of imports, those goods may appear less desirable to budget-conscious consumers. As a result, they may choose to buy cheaper domestic goods and services.

“As foreign manufacturers of goods can pass along all or most of the costs to American firms or consumers, even the most well-intended tariff may counterintuitively raise costs on those it was designed to protect,” says Krieg Tidemann, Niagara University assistant professor of economics.

A tariff is typically charged as a percentage of the value of the product that a buyer must pay a foreign exporter. In the U.S., importers must pay tariffs at 328 ports of entry, which the U.S. Customs and Border Protection controls. The paid tariff goes to the Department of the Treasury and makes up a portion of the federal government’s revenue.

Trade wars and tariff increases

A country may introduce a new tariff or increase existing ones to restrict trade from particular countries or reduce imports of specific types of products. In retaliation, affected countries may decide to levy their own tariffs, which leads to a trade war.

In 2018, the U.S. Chamber of Commerce implemented a 25% tariff on steel and a 10% tariff on aluminum under the national security provisions of the Trade Expansion Act. In response, affected countries retaliated with duties on an estimated $43 billion of U.S. export products, ranging from motorcycles to alcoholic spirits.

In 2021, the U.S. and the E.U. agreed to suspend all tariffs on $11.5 billion of goods for five years. This move was made after agreeing to a truce in their 17-year trade dispute over U.S. subsidies for Boeing and E.U. subsidies for Airbus aircraft. What this means is small American businesses like bourbon makers in Kentucky, for example, can now freely export to the E.U., said Davidson College associate economics professor Shyam Gouri Suresh. “It looks like this suspension might continue indefinitely as the U.S. and E.U. see improved trade relations. As a result, U.S. firms will see more customers from abroad and businesses will get more sales.”

On June 15, 2021, President Biden stated that the U.S. and the E.U. would “work together to challenge and counter China’s non-market practices in this sector that give China’s companies an unfair advantage.” While trade talks are continuing between the United States and China as of press time, at least $370 billion worth of Chinese imports face tariffs, some as high as 25%. “It is likely that many of these tariffs will continue under President Biden,” said Gouri Suresh. “The Biden administration sees China as not just a trade partner but also a potential economic and political adversary.”

The effects tariffs have on small business

Increased tariffs and resulting trade wars have cost American businesses big and small $94 billion between February 2018 and April 2021 alone, according to Tariffs Hurt the Heartland, a coalition of businesses and trade groups that oppose the tariffs. Automakers, tech companies and agricultural producers have been especially hard hit, but the National Retail Federation has also compiled profiles of affected small business owners from music teachers to gift shop owners.

While businesses were initially worried about selling products during the COVID-19-related global recession, the impact of insufficient supplies and production bottlenecks has reverberated through the supply chain, with tariffs only making the cost pressures worse. “Businesses have to either swallow this increase in price, or pass it on to the end consumer,” Gouri Suresh said.

Tariffs can be challenging for certain businesses and industries

Big businesses are in a better position to absorb higher costs than their smaller competitors. That’s because small businesses may lack the bargaining power to shift some of the tariff on foreign sellers, said Tidemann: “Large businesses may buy goods in sufficient scale that foreign suppliers will willingly cover some or all of the tariff just to avoid potentially losing the sale to another supplier.”

Small businesses may also lack the specialized managerial manpower of their corporate competitors, making it challenging to quickly identify alternative suppliers or strategies to avoid tariff burdens, added Tidemann.

“Tariffs may just magnify the price increases that consumers are already witnessing as the economy recovers from the COVID recession,” he said, citing a proposed increase in tariffs on Canadian lumber. “With lumber prices already soaring due to limited supply amid the current housing boom, raising tariffs on Canadian lumber is only likely to exacerbate the rising price of new housing construction or prices of other products reliant on lumber for production.”

Tariffs can indirectly help domestic businesses

Tariffs on foreign goods should benefit domestic producers making similar products, as their products could suddenly become less expensive than those from competitors who face additional taxes on their goods. That being said, domestic businesses may eventually raise prices as well due to increased demand for their goods, Gouri Suresh said, but this could come at great expense to other producers and end consumers.

“For instance, American steelmakers are reportedly seeing bigger profits from higher demand, increased prices and a boost in production. But the higher prices could reverberate negatively throughout the economy since almost all industries use steel,” he said.

How to prepare your business for economic changes

Although tariffs have not been reapplied on Canadian steel and aluminum, the concern many economists have is that the U.S. has been too slow to reverse the policies placed by the Trump administration. Overall, the Biden administration’s support for tariffs is not unexpected, said Tidemann, given his long-standing advocacy for protectionist policies that aim in theory to boost purchases of American-made goods and services. “While this may change in the future, we should not be surprised if the current tariff policy remains relatively unchanged over the remainder of Biden’s time in office.”

While this makes it easier to plan more efficiently, there are some additional steps you could take to better position your business for economic changes.

Cut back on operating expenses where you can

To minimize the price increases that you’d have to pass on to customers, consider cutting back your operating costs as much as possible. This could allow you to run the business on a tight budget when needed.

Apply for a tariff exemption

Several categories of goods are exempt from tariffs, such as items that are necessary for health and safety. Goods are exempt on an industry-wide basis, and large groups of lobbyists and business owners must typically work together to seek exemptions.

Companies affected by recent tariffs may request to be excluded from Section 301 tariffs on Chinese goods. Those who have filed exemption requests with the Office of U.S. Trade Representative claim they are unable to find comparable goods outside of China or that it would be extremely costly to do so. Approvals for these requests, so far, have been low, at around 5%-7%.

Consider an industry change

If you can easily alter your business concept or the way you produce goods, you may find ways to avoid the added cost of tariffs. “Being nimble is going to be a really big boon for businesses who can reconsider what they’re buying and selling in the post-COVID world and adapt accordingly,” Gouri Suresh said. “The economy is in a state of flux and so it’s a good time to carefully consider an industry change.”

Use your network to stay abreast of tariff changes

It may feel difficult to run a small business while also keeping tabs on international trade wars and policy changes. Consider reaching out to organizations that represent business owners in your industry to see if they have any resources you can use to stay informed of changes and how they may impact your business.

The bottom line on how tariffs affect small businesses

U.S. tariffs on Chinese goods are hurting some American firms more than the intended target, Gouri Suresh said. The widespread impact on U.S. businesses and consumers may not be sustainable and tariffs could soon decrease. But if not, high prices on imported goods may become the new normal, and small businesses will likely continue to feel the effects of high tariffs.

“In the long run, either the tariffs end or everybody learns to live in this new world,” said Gouri Suresh. “If I were a small business owner, I would consider planning ahead with some confidence due to the greater predictability in current tariff policy than what we’ve seen before.”