As if small business entrepreneurs don’t already have their hands full staying in the black, they can add trade tariffs to their commercial concerns. The present administration’s trade policy, charging or proposing tariffs on goods from China, Canada, and Mexico, is sure to increase production costs for major manufacturers, but the impacts are also felt by Main Street small businesses.
Small Businesses Feel the Pinch
When casual observers think about trade tariffs, small businesses may not be the first thing that comes to mind. Instead, thoughts naturally turn to large-scale manufacturing, and how tariffs’ impact on steel and raw materials might affect the economy. There’s no question tariffs take a toll on US manufacturing, but the tactic also comes home to roost on Main Street, where small businesses feel the pain.
It is yet unknown how trade conditions will resolve with Mexico. The administration has used tariffs as a trump card, compelling Mexican authorities to double-down in the fight against illegal migration. For now, the proposed 5 percent tariff, climbing by an addition 5 percent each year, has been shelved, following Mexico’s pledge to toughen their stance against illegal immigrants.
The proposal drew strong criticism from small business advocacy groups, citing insufficient time and other factors, preventing business owners from making adjustments ahead of the tariffs. Though the pro-business presidential administration has sparked optimism in the small business community; ongoing trade tensions and tariff threats are making once-enthusiastic entrepreneurs less certain about US trade policy. Though there is support for immigration reform, small businesses are poised to pay a substantial price for a trade war with Mexico.
The Small Business Entrepreneurship Council recently showcased data from the International Trade Administration underscoring the relationship between trade with Mexico and US small businesses. According to the figures, more than half of the thousands of US-based businesses that import from Mexico have fewer than 20 employees. It is thought the figure is closer to 70 percent for businesses with 50 or fewer staff members.
Is The Pain Worse for Small Businesses?
Not only do tariffs affect small businesses, but the trade policy may actually hurt small operations more than it impacts big business. Large companies have deeper pockets, so they may be better prepared to respond to rising costs than mom and pop establishments are. Among the small businesses with the wherewithal to alter their plans ahead of tariffs, extra investment also brings greater risk, such as unsold excess inventory bought to beat tariffs.
In addition to less inventory flexibility, small businesses are also at a disadvantage leveraging the supply chain. Large retailers have considerably more power to change their supply sources, including taking supply away from independent businesses. Big players simply have more money to place large orders in countries not affected by tariffs. When push comes to shove, major retailers are served first and small business suffers.
The National Federation of Independent Businesses recently reported its membership’s outlook on trade tariffs. According to the organization, one-third of its members report feeling some or significant negative impacts resulting from changing trade policies with Canada, Mexico, and China.
BizBuySell specializes in connecting business buyers and sellers through its online marketplace. In another study exploring the prevailing sentiment among entrepreneurs, the organization asked more than 1,700 small business owners about the impacts of current and future tariffs exacted by the administration. More than 40 percent of respondents indicated China tariffs will increase their cost of doing business. And 64 percent anticipate raising prices as a necessary means of coping with the added expense. Worse, 20 percent said their businesses would not survive with China tariffs in place for another year.
How Will US Small Businesses Weather the Storm?
Even if your business doesn’t do direct import or export business with tariff countries, the measures act like an added tax, affecting everything your business buys. From electronics to vehicles, many of the things you purchase to conduct business are imported, so tariffs trickle down to your bottom line.
Although you probably can’t entirely sidestep the impact of tariffs, a recent USA Today article featured proactive moves you can make to mitigate their negative effects.
- Lock Down Pricing – Depending upon your organization’s supply chain needs, it may be possible to strike deals ahead of tariff rollouts, in order to protect pricing from your suppliers. Stakeholders are under similar pressure at all levels of the supply chain, so your suppliers may be tentative about future costs. At the same time, some of your supply partners may be eager to cut deals, just to avoid uncertainty.
- Buy Supplies, Vehicles, Electronics, and Appliances Now – There’s little doubt prices on these items are on their way up, so buying before tariffs take hold may save you some money.
- Source Locally and Domestically – Buying supplies from unaffected countries can help small businesses beat tariffs, but nothing’s better than finding domestic, even local, suppliers for your small business needs.
- Raise Prices – This isn’t a preferred solution – sellers already operate in competitive markets. With prolonged tariffs eroding profitability, many US entrepreneurs will come to this fork in the road, forced to make difficult price hikes.
- Sell In New Markets – If your exports face tariffs, you may be forced to explore new markets for the goods. US sellers that rely heavily on exports to China are already feeling the sting of tariffs – some experiencing sales downturns upwards of 80 percent.
- Secure Fixed Interest Financing – Further tariffs may lead to inflation, which could move interest rates higher. Securing fixed-rate financing can help protect you from volatile market conditions caused by tariffs. Expanding your line of credit may also prove prudent, ensuring you have access to cash, irrespective of tariffs’ effects.
If you thought global tariffs were not on your small business radar, think again – the costly trade taxes are bound to affect commercial ventures of all sizes.