The United States government levied some massive tariffs against China this summer. And the move obviously wasn’t appreciated by leaders in China. In the end, the $34 billion in tariffs from the United States (on things like vehicles, medical devices, and industrial machinery) were met with $34 billion in tariffs from China (on things like vehicles, food, and beverages).
And the U.S. tariffs weren’t limited to China. Canada, Mexico, and European Union nations were also targeted. And, like China, they often responded with threats of their own retaliatory tariffs.
So what exactly is a tariff? We see the word in headlines all the time these days, but what is it and how does it impact a small business?
In a nutshell, a tariff is a tax on a specific type of import or export. One kind of tariff, known as a unit tariff, is a fixed dollar amount assigned to an item. The other version is called an ad valorem tariff, and is proportionally based on the value of the imported item.
Tariffs can be used to raise a country’s revenue. Also, they’re handy when it comes to limiting competition from foreign companies.
While those goals may seem great for domestic companies, tariffs have a tendency to set off international events that aren’t helpful for business. For example, the aforementioned tariffs levied against our country by China, Canada, and other countries have created tough times for some industries.
“When the elephants dance, everybody gets shaken up,” said Lyneir Richardson, executive director of the Center for Urban Entrepreneurship and Economic Development at Rutgers Business School. “In this instance, [small businesses are often] dealing with the supply chain asking for higher costs that cannot be quickly passed onto customers. It means more time thinking about pricing, renegotiating, and managing cash flow.”
Many large companies are certainly feeling the strain as their supply chains get more expensive. According to reports, Goldman Sachs analysts estimate that Ford and General Motors stand to lose a combined $1 billion due to higher steel prices. Likewise, the beer industry estimated that the tariffs would ding brewers to the tune of $348 million annually.
At this point, a lot of this tariff talk is conjecture. After all, it’s not clear how many of the international tariffs will actually go into effect. And even if they all did, some of the economic impacts would take years to materialize.
In the meantime, small businesses can do a couple things to prepare. First, try to negotiate long-term deals with your suppliers. That way, if costs go up due to tariffs, you won’t feel that impact as much.
Second, try to avoid these same types of long-term commitments with your customers. If your costs go up in the next year or two, you should be able to raise prices where necessary to compensate. Some businesses are already taking this approach, even communicating to their customers in these early stages that they may need to raise prices in the future if tariffs cut into their profit margins.