Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Updated on Monday, November 11, 2019
Tariffs are duties charged on imports, and U.S. buyers pay the costs. Small businesses that bring in imported products can either absorb the expense or pass it along to their customers. When tariffs increase, as they have on certain goods imported from China, as well as the import of steel and aluminum products, countries often retaliate by increasing their own tariffs on American goods arriving on international shores.
Small businesses bear the brunt of tariff hikes and the resulting trade wars. “Small businesses are especially hard-pressed because they don’t have the reserves to tap into to wait for more stable circumstances,” said Davidson College economics professor Shyam Gouri Suresh.
We’ll help you understand how tariffs affect small businesses and what you can do to 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. Tariffs increase the price of imports, potentially making them less competitive or desirable compared to domestic goods and services.
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. Companies that pay the tariffs to bring goods into the country likely pass that cost on to customers. The paid tariff goes to the Department of Treasury and makes up a portion of the federal government’s revenue.
A country may introduce a new tariff or increase existing ones in order to restrict trade from particular countries or reduce imports of specific types of products, which is what the U.S. Trade Representative decided to do to combat unfair trade practices with China. The U.S. Chamber of Commerce implemented tariffs of its own on certain imports of aluminum and steel for national security reasons. Trade talks continue between the United States and China as of press time, but at least $300 billion worth of Chinese imports face tariffs, some as high as 25%.
The effects tariffs have on small business
These increased tariffs and resulting trade wars have cost American businesses big and small $38 billion, 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.
“They have to either swallow this increase in price, or they have to pass that price increase on to the end consumer,” Gouri Suresh said.
Passing on the costs of tariffs: A closer look
Big businesses are in a better position to absorb higher costs than small businesses. Large companies can operate on smaller margins, while small businesses don’t have as much of a cushion and eventually must raise prices.
“As they increase prices, they may start losing their customer base,” Gouri Suresh said. “It’s a really difficult bind to be in. It favors bigger businesses that have deeper pockets who can ride out this trade war.”
Some firms may not be able to pass costs onto customers if they compete with businesses unaffected by high tariffs, said Katheryn Russ, an economics professor at the University of California, Davis. Small businesses likely have to take a blow to their profit margins if competitors don’t have to make similar price increases because of tariffs.
“If all businesses are having to raise their prices in a particular product space, then that’s different,” Russ said. “And this does seem to be a broad-based cost increase for U.S. firms.”
U.S. producers facing Chinese tariffs conversely have had to drop prices to remain competitive in China. For instance, soy farmers in the U.S. significantly reduced prices to avoid passing on cost increases to Chinese consumers.
Businesses that stand to benefit from tariffs
Tariffs on foreign goods should benefit domestic producers making similar products, as their products would be less expensive than those taxed at a high rate. Those producers may be able to raise their prices knowing the demand is higher, Gouri Suresh said.
For instance, American steelmakers are reportedly seeing bigger profits from higher demand, increased prices and a boost in production. But the rush to production may backfire as it meets a global economic slowdown.
How to prepare your business for economic changes
The U.S. government’s actions have been unpredictable, which makes it challenging to plan and prepare for increased tariffs, Gouri Suresh said. Tariffs have historically been implemented slowly, but the recent increases have not reflected the gradual nature of past rate hikes.
“The problem with what’s happening with the most recent trade war is the numbers are flying every day,” he said.
Tariffs have also affected industries differently, making it difficult to compare the impact across companies, Russ said. “It’s hard to offer specific advice. We just don’t know right now what’s going to happen,” she said. “I guess…just be ready for anything.”
Despite the unpredictability of the trade war, there are steps you could take to better position your business for economic changes.
Cut back 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.
Consider an industry change.
If you can easily alter your business concept, you may find that an adjacent industry is less affected by tariffs than the one in which you currently operate.
“Being nimble is going to be a really big boon for businesses if they can turn on a dime and reconsider what they’re buying and what they’re selling,” Gouri Suresh said.
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 and Section 232 steel and aluminum tariffs. Thousands of companies have filed exemption requests with the Office of U.S. Trade Representative, claiming 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.