Import tariffs and the ongoing trade war have been getting extensive news coverage recently. President Trump has repeatedly talked about China’s trade surplus with the U.S. and his desire to reduce it to a more reasonable level.
America’s trade deficit with China runs into hundreds of billions of dollars. This chart provides a stark illustration of this fact — U.S. imports from China exceeded its exports to the country by $419 billion in 2018.
U.S. trade with China
U.S. trade deficit with China has soared since 1985
Source – BBC
What has President Trump done to address this issue? He has introduced the so-called “Trump tariffs”. With the introduction of these tariffs, goods imported into the country become more expensive, resulting in lower demand for them. This should lead to reduced imports into the U.S. and a smaller trade deficit.
What is a tariff?
A tariff is a tax imposed on goods that are imported into the country. When the U.S. increases tariffs on merchandise manufactured in other countries, it could have several consequences:
⇨ Imported products would cost more. This could lead to an increase in demand for items that are made in the U.S.
⇨ The U.S. government would benefit from additional revenue.
⇨ The increased price of imported goods would result in lower demand for them. Consequently, the country from which the goods are being imported could suffer an economic contraction.
⇨ Small businesses in the U.S. that rely on imported raw material could suffer a setback as they face rising costs.
⇨ Retailers of imported goods could see a drop in sales volumes.
It’s important to know that import tariffs could be imposed in two ways. There could be a “unit tariff”, which is also referred to as a “specific” tariff. This is a tax on each unit that is imported into the country. An example would be a tariff of, say, $100 on each lawn mower that is imported from China.
The other variant is an “ad-valorem tariff”. This is a levy that is calculated based on an item’s value. In our example of imported lawnmowers, the U.S. government could charge an ad-valorem duty of, say, 10% on the value of the lawnmower.
Let’s now examine how Trump tariffs were introduced and the impact that they have had.
What are Trump tariffs?
President Trump expressed his unhappiness about China’s unfair trade practices back in 2014, when he tweeted, “Remember, China is not a friend of the United States!”
But the trade war began in earnest in January 2018, when the Trump administration imposed tariffs on solar cells and some models of washing machines being brought into the country.
Although Trump tariffs primarily target China, they are aimed at other countries, too. Here’s a timeline of the trade war that is currently underway:
|January 2018||Tariffs on solar panels valued at $8.5 billion and washing machines worth $1.8 billion being imported into the U.S. are approved.|
|March 2018||Imports of steel and aluminum would be subject to tariffs of 25% and 10% respectively. The countries affected include Canada, Mexico, South Korea, and the European Union.|
|June 2018||The European Union retaliates with tariffs on American goods. The list of items includes bourbon whiskey, Harley-Davidson motorcycles, blue jeans, and peanut butter manufactured in the U.S.|
|July 2018||Canada says that it will impose tariffs on U.S. products.|
|July 2018||The U.S. announces tariffs on $34 billion of imported Chinese goods. China announces tariffs on a similar value of American imports.|
|August 2018||Steel tariff rate on imports from Turkey hike from 25% to 50%.|
|August 2018||China files a dispute regarding the solar panel tariffs at the World Trade Organization.|
|August 2018||The U.S. revises the value of Chinese goods affected by tariffs to $50 billion. China retaliates with its list of American products of similar value.|
|September 2018||U.S tariffs on $200 billion of Chinese goods goes into effect.|
|May 2019||The import tariffs on Chinese goods being brought into the U.S. is raised from 10% to 25%.|
|June 2019||President Trump says that U.S.-China trade talks are back on track after he had a “great meeting” with Xi Jinping on the sidelines of the G20 summit.|
How can import tariffs affect you as a small business owner?
Some small business owners think that import tariffs are important only for those companies that buy goods from other countries. They hold the opinion that the primary impact of a trade war would be felt primarily by large corporations and governments. However, that’s not entirely true.
Small businesses could be affected by a hike in import tariffs.
According to the National Retail Federation, a trade body that promotes the interests of department stores and independent retailers, “Tariffs are a tax paid by American companies and consumers — not by the foreign governments targeted by the tariffs.”
Another trade body, the National Federation of Independent Business (NFIB), a small business association with its headquarters in Tennessee, expresses a similar sentiment. The association’s communication director, Adam Temple, says, “Small businesses account for about half of the economy, and while the current debate heavily focuses on the impact of tariffs and retaliatory actions… the effects on small businesses often get overlooked.”
It’s important to remember that the impact of the import tariffs may not be felt immediately. But over a period, small businesses could have to contend with higher input costs. Which are the goods that could see a rise in prices? The list includes almost 6,000 items. Here are some that could affect small businesses:
⇨ Auto parts
⇨ Clothing and shoes
⇨ Cosmetics and personal care
⇨ Air conditioners
⇨ Anything that is made of iron or steel
⇨ Various types of machinery
How import tariffs can affect small businesses:
Gabriela runs a small restaurant near the central business district. She has recently expanded the level of operations and bought a new walk-in freezer and an espresso machine. Fortunately, the increase in her sales revenue allows her to meet the installments payable on the new equipment.
But she notices that her profitability is declining. When analyzing her costs, Gabriela sees that the prices that she pays for seafood purchases have gone up. The supplier informs her that the cost of imports has risen as the seafood is sourced from China. Rather than raise prices, Gabriela decides to strike off tuna and crab dishes from her menu.
What can you do as a business owner to mitigate the impact of Trump import tariffs?
If your input costs go up, you may be tempted to raise prices. But that may not always be an option. Your customers may not always be willing to pay more. They may reduce their purchases or move away altogether.
What can small business owners do if their costs shoot up? Here are some of the measures that you could take:
1. Consider reducing your profit margin
How have you arrived at the price at which you sell your products and services? If you set your prices too high, you’ll lose customers. A lower asking price will get you more clients, but it will lead to a decrease in profits.
One way to resolve this dilemma is to analyze your cash flow vs. profit. Remember that your business needs cash to survive and for that purpose, cash flow is more important than long-term profits. Before you take a pricing decision, ensure that you take your company’s liquidity position into account.
2. Try and lower your production cost
Small business owners should not restrict their focus to the maximum price they can get for their product or service. There’s another way that you can increase your profit. Think about how to reduce your production costs.
Are you paying more than you should for insurance? Are all your overhead expenses justified? A quick review of the amounts that you regularly spend could help you to identify wasteful expenditure that your company is incurring.
3. Save on employee expenses
This expense absorbs a significant portion of almost every small business budget. Think about how to reduce your labor costs. Outsourcing some work or reducing overtime expenses could boost profitability.
4. Are your suppliers overcharging you?
Most small business owners prefer to deal with one or two suppliers for each category of raw materials or other products that they buy. This is a good policy. It can save you the trouble of identifying and evaluating new suppliers.
However, there is also a downside to this approach. You could be paying more than you need to. Consider asking for quotations from new vendors and learn how to negotiate with your suppliers. A relatively little effort in this direction could save you some money.
5. Work towards reducing your inventory carrying costs
Retailers can lose large sums if they hold merchandise that no one wants to buy. Your money will remain blocked, and you may even have to write off the amount that you have invested. How can you avoid getting into this predicament? Here are 15 tips on inventory management for small business.
6. Consider financing your inventory
If you are expecting an increase in demand or you need to buy additional merchandise for the peak season, consider raising money through inventory financing. For that and many more purposes, Camino Financial offers a wide range of small business loans with flexible requirements, additional benefits, and at competitive rates of interest.
We stand by our motto, “No business left behind”- That means that, if you need a quick capital injection to compensate for the increase in the price of your inventory, you will find in us a trustworthy financial partner.
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