In the simplest terms, a tariff is a tax on a foreign good. They are designed to hurt or slow imports on certain types of goods and products from abroad in order to help businesses at home (in the case of this article, the United States). When the president and others speak of tariffs on things like lumber and steel, what they’re really talking about is a tax on those goods before they can be taken off the cargo ship and transported to American companies to be sold or turned into other things like cars and houses.
The idea behind all of the tariffs is that, by making imports more expensive, domestic producers will have a more level playing field because they can sell their goods at a lower price than foreign competition.
There are pros and cons to creating new tariffs and the impact of tariffs on small businesses can vary wildly. Some economists believe that they allow domestic companies to inflate their prices to just under those of the foreign goods and make more money while still undercutting the competition. Those in favor of the tariffs cite the promotion of American-made goods and products.
The impact of tariffs are wide-reaching, even when they are added on things that aren’t as prominent as steel or lumber. Small businesses are especially vulnerable when new and sweeping changes are rolled out because everything from raw materials to finished goods like processed foods can have noticeable price increases overnight.
The recently announced tariffs on steel and lumber may not seem like a big deal for many small business owners, as they may be so far removed from the goods that are being disputed. The truth is, things like steel are in play right now because they are so pervasive in our daily lives that the implications of a tariff for any country are huge, especially for one the size of the United States.
In this article, we will explore some of the impacts of tariffs on small businesses and owners.
Industries Most Impacted
The businesses – large and small – who are affected most by tariffs are not always the most obvious ones. Manufacturers like carmakers are a great example of a business that would be drastically impacted by an increase in their raw materials costs, but others like an auto repair shop may suffer as the costs of their replacement parts increase. The trickle-down effects are numerous and may take a while to start showing up.
Another misconception is that only big businesses are impacted by tariffs because of their huge buying power and geographic reach. It may be true that big businesses have a louder and larger voice than others and can make their needs known from a broader platform, but it’s also true that the small businesses responsible for providing many of the parts used in the big operations are impacted as well. Their costs can increase, sometimes more drastically, than the largest manufacturers purchasing goods on a global scale.
What are the Effects?
Businesses of all types already operate on thin profit margins, so any shifts in their operating costs can have big implications. The impact of tariffs on small business can be amplified by their already thin profit margins and more impactful operating costs. In the automotive repair shop example above, the cost of a replacement transmission may be $1,500 and the shop may only be able to charge $1,600 – already far less than a 10% profit. If the cost of a replacement transmission increases even $20, the shop will have to be prepared to make that loss up somewhere else.
Generally speaking, an auto repair shop owner in small town America probably isn’t spending a ton of time studying global economics, but maintaining a solid handle on their costs and pricing up front will help prevent difficult situations when and if costs start to rise.
How to Deal with Pricing Changes
There are several ways that a small business can cope with the impact of tariffs, both on their costs and on their pricing to customers:
- Vendor Relationships – Where are the businesses purchasing their goods? There’s a great chance that more than one supplier is able to provide the necessary raw materials or parts, so maintaining relationships with as many vendors as possible will help mitigate the impacts of tariffs on purchase prices. In many cases, vendors will provide the best pricing to their best customers in an effort to keep the buying volumes up, but it will pay off to have 2-3 sources for each of the most important items in the supply chain so that there are options to shop around if prices start to shift.
- Managing Profit Margins – In the transmission example above, the shop owner would have been in hot water if they found themselves losing even more profit from a replacement part that was already barely profitable. If the owner had carefully monitored the fact that their replacement parts were not a viable source of income for the shop to rely on, they could have been building some cost-insurance into their labor rates or other charge.
- Pricing Strategy – If a customer becomes accustomed to paying one price for a product or service, an increase in the cost of that purchase is going to cause angst – regardless of a tariff or any other difficulties for the business. Pricing strategy goes hand in hand with managing profit margins. Being able to build room into a price to accommodate shifts in production costs will save the hassle of explaining to customers why their favorite widget just increased in price by 10%.
- Inventory Levels – This can be a major downfall for small businesses even without the threat of tariffs. Having too much finished product or too much raw material is the same as having cash sitting on a shelf – cash that can’t be used for anything. If production costs start to rise and there is too much of an unrelated raw material or unsold finished product in-house, there is less cash available to keep the business running and pay people. It’s important to keep only the raw materials needed to produce the goods that can actually be sold, and keep the inventory moving rather than sitting
The impact of tariffs on small businesses can vary greatly depending on the industry and how prepared the business owners are when uncertainty strikes. Politics play a big role in shaping how goods and materials flow across borders, obviously, and our political climate seems to shift almost every day. With that in mind, it’s best to have a plan, be cautious and careful in purchasing and pricing, and keep relationships strong.