Over recent months, President Trump has waged what many consider to be a trade war against a handful of nations with which the U.S. exchanges goods and services. Part of those actions include heavy tariffs on certain goods the U.S. imports from China, Mexico, Canada, and other trade partners. Those countries, in turn, have raised tariffs on some goods they import from the U.S. It’s a cycle with, as yet, an unsure ending.
If you own or manage a small business, you may be wondering: Just what is a tariff? And how might the current trade war affect my small business?
Tariffs Are Taxes
Tariffs are essentially taxes on goods imported into a country. They tend to raise the prices of those imports, which makes domestically manufactured goods more attractive to consumers. This action protects domestic companies while also generating revenue for the government.
A tariff may be a fixed dollar amount imposed on each item coming into the country, or it can be calculated as a percentage of the value of the good. Either way, it’s a powerful economic tool that tries to balance out trade.
How Tariffs Affect Small Business
While it’s not too hard to see how tariffs might benefit some larger corporations that export lots of goods to international customers, the impact of tariffs on small businesses is more subtle. First, many businesses rely on imports from other countries in order to make what they do. If the cost of making products rises, then so (usually) will the cost of the products to consumers. There’s an entire list of goods – like clothing, fruit, furniture, and fabrics – that are expected to be more expensive for U.S. consumers, thanks to the current trade war.
But what if raising prices hurts the business. Take, for example, a hypothetical beer can manufacturer in Scranton, Pa., that sells products to craft breweries around the U.S. A tariff on aluminum imports from Canada effectively raises the cost of making each can – a cost that could be passed along to the consumer. But what if the craft breweries get a better deal from a can manufacturer in, say, Luxemburg. (Don’t laugh – one of the largest container manufacturers is actually headquartered there.) Faced with stiff competition, the Scranton manufacturer might be forced to keep prices down in order to retain business.
When Raising Prices Isn’t an Option
When businesses can’t pass along higher manufacturing costs to consumers, they have another option. They can reduce expenses. Manufacturers might do so by raising efficiency, introducing new technology, cutting jobs, paying employees less, or discovering other cost-cutting measures.
In the end, it becomes increasingly important for businesses to more closely watch their cash flow. The smaller your business, the more important it is for you to monitor money in and out of your company, especially if you rely on imported materials. Keeping a handle on expenses while paying attention to pricing and sales should be top of mind.
An experienced accountant can help your business with cash flow issues. If your small business is affected by international tariffs – and even if it’s not – you might benefit from the objective advice an accountant can offer you.