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How Small Businesses Can React to Tariffs to Save More

Since the announcement of increased import tariffs in 2018, the U.S. has entered a global trade war of a nature we haven’t seen since the 1930s. Its intent is to increase domestic manufacturing and save American companies money. However, for many small businesses the tariffs have fallen short of their goal. They have sparked concern across all sectors as small business owners struggle to swallow increasing costs on everything from freight to raw materials to inventory.

While it may seem overwhelming to fight something you can’t control, there are ways to take ownership of the situation. A good place to begin is by focusing on the costs you can control to to keep your business flexible as the market fluctuates. 

Tariffs Explained

Let’s talk through tariffs at a basic level before exploring cost-saving opportunities for your small business. 

A tariff is a tax imposed on imported goods. Tariffs can be either specific (set dollar amount per unit) or ad valorem (set percentage). It is common to calculate an average national tariff rate for comparison purposes, but often tariff rates vary by type of product. Only a handful of countries have a flat tariff rate across all goods. 

When the U.S. import tariffs increase, U.S. consumers take the hit. As companies like Macy’s or Walmart pay exponentially more to import Chinese-made products, their retail prices must increase to remain profitable. U.S. consumers, not China, will absorb the painful price increases on these retail goods.

According to The New York Times, even before the new proposed 30 percent rate, the existing tariffs are expected to cost the average American household more than $800 a year.

And when the U.S. increases import tariffs, the rest of the world responds. China has retaliated with proposed import tariffs on U.S. goods such as crude oil, automobiles, and farm products. Manufacturers and farmers across the country are frustrated by fluctuations in prices on oil, soybeans, corn, and pork creating instability in the markets.

The bottom line? Tariffs can hurt your bottom line (if you let them)

Whether you’re a factory bringing in raw materials from China, a household consumer, a manufacturer focused on production and distribution, or a farmer selling soybeans to a Chinese end-user, this ongoing trade war impacts your bottom line.

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First: Rethink your supply chain

Companies across all industries have been forced to rethink their entire supply chain. With imports from China increasing to levels as high as 25% on some products, many businesses are reevaluating their production and freight options. 

If you are a small business in the manufacturing world, you need to consider the possibility of manufacturing elsewhere. This is not a decision to be made lightly. It could take years to prepare for a change of this scale, not to mention the damage it would cause to hard-earned relationships with partners in China. But the reality of a trade war is a very real need to consider the advantages of a more diverse supply chain.

(don’t forget to re-evaluate domestic savings, too)

While international logistics are the talk of the town – you should also do what you can now to lower costs on domestic logistics. Start by sending an RFP (request for proposal) to at least three different logistics companies asking for lower rates and cost reductions on services.

Even if you have a decades-long logistics partner, do not be complacent on demanding the lowest costs possible. In almost every case, companies will offer lower costs to keep you as a customer.

Don’t forget, it pays to band together: many industry organizations and associations use their size to negotiate better deals for small businesses like yours. If you aren’t already consider membership in the most appropriate industry group, association, or cooperative for your business.

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Second: Think about your prices

When confronted with increasing costs, many small business owners raise prices. While this may be a good option for your business, you should proceed with caution. Don’t make drastic changes before evaluating potential impact and asking a few important questions.

Considering raising prices in response to tariffs? Ask these questions about your business first:
  1. Is there a way to negotiate discounts with your suppliers?
  2. Are there other expenses you can minimize to avoid a price increase?
  3. What level of increase would your customers tolerate?
  4. Are you priced competitively within your industry?

If you’ve done some research and determined a price increase is necessary to operate, make the change. But proceed carefully, monitor your profit margin, and don’t forget to carefully communicate with your customers. 

Third: Scrutinize your Inventory

Cash is king. And since cash is king, you want to be especially careful in times of uncertainty to maintain flexibility when it comes to cash flow for your small business. Do not tie up large amounts of cash on slow-moving inventory. Make sure your products have an acceptable inventory turnover rate. If not, make a plan to move through slow movers with a sale or possible return to vendor.

Planning is key: Carefully plan your purchasing budget and schedule to take advantage of any discounts, special pricing, or free freight opportunities. When news of tariffs began to spread, the WSJ reports that large retailers and distributors like Walmart Inc. minimized their impact by planning ahead (and with the help of larger sourcing teams and the scale to pressure suppliers).

If you have the cash flow, consider bulk: If your cash flow can manage it, consider bulk purchasing on top-selling goods in anticipation of further price increases due to tariffs. 

Cut the fat where you can: In addition to inventory assessments, determine how you can eliminate any unnecessary expenses.

Remember to stay vigilant & be reactive

While proactive changes like buying in bulk or streamlining your inventory are essential, one of the best things you can do in the face of rising tariffs is to stay vigilant and reactive. Watch for market changes in your industry. Read the latest news about tariffs, but keep focused on the profitability of your business. Maintain up-to-date profit margin and inventory turnover calculations to monitor efficiency. Keep cash flow as flexible as possible. Eliminating unnecessary expenses  and capitalizing on discounts can certainly help keep your small business afloat through this storm of trade wars.

You can’t control tariffs, but you can cut costs

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Understand how different industries are being impacted

There are over 28 million “small businesses” in the United States (meaning: businesses that earn less than $25 million in annual revenue). So the “tariff toll” that businesses and consumers are paying has yet to be fully evaluated. Some sectors have already been hit hard while others have yet to see an impact. Check this space from time to time to get an up-to-date assessment of how different industries are feeling the squeeze of tariffs. 

Tariff Impact on Manufacturing
All industries within the U.S. manufacturing sector import at least 10% of their materials internationally. Some are even importing up to 30%. []

As the import costs increase for raw materials and parts, manufacturers are pinched. Even though these tariffs were instigated to boost U.S. manufacturing, many businesses are inversely impacted.

Tariff Impact on Retailers
Tariffs increased by 10% on September 1 with additional tariff increases planned. Clothing retailers are hit especially hard by the trade situation, especially since so many of them import finished goods or materials from China.

Tariff Impact on Household Goods & Appliances
Ranging in tariff increases of 20-50%, washing machines, along with solar panels, have seen intense price increases. []

Categories such as bicycles, toys, smartphones, computers, apparel, and footwear are affected by implemented and planned tariff hikes. [CNBC

Tariff Impact on Construction
Import tariffs on steel and aluminum increased the price of steel products by nearly 9% last year, raising costs for steel buyers by $5.6 billion, according to a study by the Peterson Institute for International Economics. [Rueters]

Tariff Impact on Agriculture
In 2018, farm income nationally was $63.1 billion, the second-lowest total in a decade. In addition to overall income being down, farmers are being hit by China’s retaliatory tariffs, limiting profits on crops like soybeans. The dairy farmers are hit hard as well, due to a significant decline in exports.

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