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.
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)
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:
- Is there a way to negotiate discounts with your suppliers?
- Are there other expenses you can minimize to avoid a price increase?
- What level of increase would your customers tolerate?
- 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
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.