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. â€śSmall businesses are especially hard-pressed because they donâ€™t have the reserves to tap into to wait for more stable circumstances,â€ť said Davidson College economics professor Shyam Gouri Suresh.
Weâ€™ll help you understand how tariffs affect small businesses and what you can do to protect your firm when unexpected costs threaten growth.
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 governmentâ€™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%.
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.
â€śThey have to either swallow this increase in price, or they have to pass that price increase on to the end consumer,â€ť Gouri Suresh said.
Big businesses are in a better position to absorb higher costs than small businesses. Large companies can operate on smaller margins, while small businesses donâ€™t have as much of a cushion and eventually must raise prices.
â€śAs they increase prices, they may start losing their customer base,â€ť Gouri Suresh said. â€śItâ€™s a really difficult bind to be in. It favors bigger businesses that have deeper pockets who can ride out this trade war.â€ť
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 donâ€™t have to make similar price increases because of tariffs.
â€śIf all businesses are having to raise their prices in a particular product space, then thatâ€™s different,â€ť Russ said. â€śAnd this does seem to be a broad-based cost increase for U.S. firms.â€ť
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.
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.
The U.S. governmentâ€™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.
â€śThe problem with whatâ€™s happening with the most recent trade war is the numbers are flying every day,â€ť he said.
Tariffs have also affected industries differently, making it difficult to compare the impact across companies, Russ said. â€śItâ€™s hard to offer specific advice. We just donâ€™t know right now whatâ€™s going to happen,â€ť she said. â€śI guessâ€¦just be ready for anything.â€ť
Despite the unpredictability of the trade war, there are steps you could take to better position your business for economic changes.
To minimize the price increases that youâ€™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.
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.
â€śBeing nimble is going to be a really big boon for businesses if they can turn on a dime and reconsider what theyâ€™re buying and what theyâ€™re selling,â€ť Gouri Suresh said.
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.
<span class="fn" data-placement="bottom" data-content="
LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.
” data-original-title title>Disclaimer
max loan amount
max loan amount
max loan amount
max loan amount
This Cash Back Number May Surprise You
Best Travel Credit Cards With No Annual Fee
Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit
Credit Cards Charging 0% Interest until 2021