By now, everyone is well aware of the ongoing trade war between the US and China, unless they’ve been living under a rock. However, it has been the latest bout of Trump tariffs that has really affected small businesses and the reason why every business owner needs to know how these tariffs will affect them.
What is tariff?
For the sake of clarity, it is important to note that there has been a trade tension between the US and China for over a decade, but this didn’t affect small businesses until now. The current situation is headed for an all-out trade war that even China’s Ministry of Commerce warned could be the worst in history.
Anyway, the simplest tariff definition you need to know is that it refers to a tax charged for importation and exportation of goods between countries. In the case of the current China tariffs, $550 billion worth of Chinese goods to the US and $185 billion of US goods to China are subject to Trump tariffs. For $250 billion of those goods coming from China, tariffs are as high as 25% with plans to raise them to 30% starting on October 1. The tariffs that really affect small businesses, though, were raised on September 1 from 10% to 15% and these mainly affect consumer goods. The raise was made in response to China’s additional tariffs on $75 billion worth of US goods on August 23.
Contrary to what President Trump claimed during his 2016 campaign trail, the cost of tariffs is passed on to the consumers. From the tariff definition, you can see that tariffs are meant to increase the cost of imports, thus encouraging industries to use local manufacturers. The problem with the current tariffs, however, is that there are currently no local manufacturers for certain goods, forcing businesses to swallow the higher costs. Nevertheless, the real puzzle is how the support among entrepreneurs for these tariffs is split 36% and 34% for and against them. Perhaps the best way to go about explaining it is to show exactly how such measures can affect someone’s business rather than simply answer what is tariff.
How will these Trump tariffs affect your business?
These tariffs have been in effect for over a year, and already small businesses have felt the pinch. On September 6, a report by the Small Business Confidence Survey conducted this year indicated that small businesses in the US had already experienced a 37% increase in the cost of doing business as a result of China tariffs. Furthermore, many of the affected companies were forced to increase the price of their goods and services, resulting in a loss of customers for 46% of the cases. These statistics are very scary for any business owner, and the main concern should be how they may get affected too. To help you identify potential problems in the future, consider these likely problems.
The higher cost of products may dampen cash flow
Keeping a balance on cash flow is crucial when running a business because it determines its financial health. Whenever cash outflows exceed the inflows, your business runs into a negative cash flow, which basically means you’re spending more money within a period of time than you’re making. While a business may sustain a negative cash flow for a few months, extending it further could mean its own doom. And that is the problem with Trump tariffs in particular because they are so sporadic and unexpected.
Take the example of JLab Audio that supplies headphones across the US. The company designs its products in the US but they are manufactured in China. In 2018, JLab petitioned the government for an exclusion from the tariff list, and the petition was granted. Under this assumption, the company shipped its fourth-quarter inventory as usual, but suddenly the company was back on the tariff list. Because the products will arrive in September, they will be subject to the now higher tariffs of 15%. In a statement to CNBC, the company’s CEO Win Cramer lamented on how his company was going to lose 10% of its gross profit as a result of the tariffs.
This is the kind of damage to cash flow these tariffs can cause to any business that imports its goods from China. Worse still, entrepreneurs can never predict when the tariffs will be imposed, and this has forced some businesses to stockpile inventory in anticipation. However, this can also be a tricky balance in case tariffs are rolled back and you are stuck with expensive products to sell at a loss.
Losing clients due to higher prices
Once the price of products is higher, businesses must find a way to work around it or shut down. Companies like JLab Audio above may have the resources to eat the higher costs, but smaller companies and individual entrepreneurs do not. This situation is exemplified in a survey done by Jungle Scout on Amazon sellers. In the survey, 72% of the sellers experienced a 17% hike in the cost per unit over the past year due to the tariffs. Keep in mind, this is even before the most recent raise of tariffs up to 15%.
From the survey, it was clear that most of the sellers source products from China, and are now grappling between raising what they charge their customers and accepting lower profits. 25% of those interviewed expressed their intention to quit altogether rather than eating the cost or finding new suppliers. If a business chooses to pass on the cost to the customer, chances are they will either walk away or cut down their demand, both of which are not good.
Any business that imports raw materials and/or products from China is in the same predicament moving forward. The electronics industry has especially been hard hit because of the extensive manufacturing ecosystem and low prices.
Uncertainty and restructuring
In business, it’s always advisable to prepare for the future. But what do you do when the future itself is so uncertain? This is yet another problem business owners are now facing. What you need to realize is that even seemingly unrelated tariffs may have a trickle-down effect on your business. Today’s lumber, steel, and automobile tariffs may end up affecting your business too.
To counter this uncertainty, businesses are having to restructure. This could include searching for alternative sources suppliers or making changes in house like reducing the staff. Ultimately, the decisions will have to be made in order for the business to survive.
