How do tariffs affect businesses? Here are 4 important ways

June 17, 2019

Small business leaders need the skills to make the best of adverse situations. With limited power to effect economic change, you have to accept the hand you're dealt, and external factors like tariffs might force you to rethink your strategy.

For those who don't know, tariffs are taxes levied on imports and exports. What many entrepreneurs fail to realize, however, is that they don't have to be directly involved in foreign dealings to feel the repercussions. Here's an introduction to how tariffs impact small businesses.

1. Your supply chain might have to evolve

One of the main ideas behind imposing tariffs is that governments hope to protect domestic industries. By making it less profitable to import cheaply produced goods from other places, lawmakers hope to give their own business-minded citizens a leg up. Since tariffs increase government revenue, they can theoretically also be used to fund programs like subsidies.

In practice, however, things aren't quite so simple. Many tariffs have unintended impacts that are hard to predict. For instance, President Trump's steel tariffs raised the cost of manufacturing a car by about $250, and they were implicated in tens of thousands of automaker layoffs. This situation also offers an excellent lesson on how one policy can impact multiple facets of an industry: The 2018 tariffs on various imports from China increased the costs of more than 100 different parts used in cars. 

These concepts are particularly concerning for small businesses because they commonly rely on distributed supply chains. For instance, if you run a drop-ship e-commerce company, then a tariff might mean that you suddenly have to pay more for retail goods or consumer electronics from a longtime foreign supplier. If your enterprise manufactures its own products, then you could end up paying significantly more to do so. 

As a fledgling company without as much capital as a massive corporation, you might not have the latitude to pack up shop and move to a cheaper business location. It also takes time and effort to vet new providers and partners. In other words, small businesses should be prepared to adjust their supply chain practices in advance.

2. Tariffs tend to kick off new trade wars

Tariffs are highly political, and people tend to have strong opinions about them. These viewpoints often manifest in the form of other countries firing back with their own duties and starting customs wars. For example, in response to the 2018 tariffs, China imposed import taxes on a range of U.S. goods. 

These incidents of reactionary protectionism aren't isolated events, and history has shown that they can have dire consequences. The Smoot-Hawley tariff of 1930 was designed to prop up American farmers and companies following World War I, but other countries retaliated with tariffs of their own. Foreign businesses that formerly bought U.S. goods also stopped having sufficient revenue to do so, which further hurt domestic firms. Many modern economists now view these actions as contributing factors in the Great Depression.

Of course, things are different today. For instance, bodies like the World Trade Organization exist to arbitrate trade disputes before they get too out of hand, and politicians have more chances to learn from past mistakes. The key takeaway for small companies, however, is that it's usually not a good idea to wait for regulatory intervention to fix these situations. 

3. Domestic markets may become more competitive

Tariff-based protectionism isn't all bad. For instance, it can be essential to shielding consumers from dangerous products. 

When applied sensibly, tariffs can also function as intended. Famously, early U.S. leaders like Treasury Secretary Alexander Hamilton supported high import duties on foreign goods. Later laws based on these ideas may have played a crucial role in putting the then-young nation on a more even footing with older countries and strengthening domestic manufacturing.

When tariffs work, they can help small companies compete with larger enterprises, which often move overseas when production costs rise. They can also drive consumers toward patronizing American businesses like yours. For example, service companies that specialize in creative arts, such as interior design and architectural firms, could benefit from having more business clients. Of course, this is a double-edged sword because it encourages new competitors to enter the fray, but with a solid head start, you might be able to climb to the top of the dog pile faster than others.

4. Tariffs could redirect your expansion

Market saturation is when a given market has reached its maximum capacity for a particular good or service. For example, if your potato peeler company only sells its Dynamo-Peeler 400 model in your hometown, then market saturation might mean that everyone in the neighborhood has already bought one. To overcome this roadblock, you might try things like:

• Selling an upgraded Dynamo-Peeler 500
• Convincing people that every kitchen should really have two Dynamo-Peeler 400s
• Exploring new untapped markets

Tariffs can indirectly affect all of these options. By artificially inflating or depressing economies, they could change consumers' willingness to pay for your new peelers. If your research and development process involves testing the device on a range of international potato varieties, then you might have to jump through new hoops to find source material. Engineers and others that depend on unprocessed goods for quick prototyping and bespoke fabrication might also find it harder to bring concepts to market. 

In short, tariffs can throw unexpected wrenches into otherwise solid growth strategies. This unpredictability makes it wise to maintain flexible business models. For instance, instead of trying to break into the Japanese, South African or Canadian kitchenware market by partnering with regional retailers, you might broker a licensing agreement with a company that can reproduce and distribute your potato peelers locally.

The future outlook for small companies

The impact of tariffs on small business enterprises varies widely. Factors like the niche you occupy and the current state of the economy are critical determinants in whether trade taxes harm or help you. 

It's impossible to anticipate how specific tariffs will impact small businesses with 100 percent certainty. The overall message, however, is clear: Having a game plan that lets you stay agile is essential to your survival in uncertain times.