By: Neil Donetti

Introduction

The word “tariff” has been thrown around quite a bit recently. To some, tariffs are key aspects of international trade policy and the focus of heated debates. To others, however, tariffs seemingly have little to no impact on everyday life. Regardless of how one might feel about the subject, recent tariffs imposed by the Trump Administration, specifically on Chinese goods, have significant implications for American entrepreneurs and small businesses as China serves as the United States’ largest supplier of imported goods.[1] Over 40% of small businesses indicate their costs will rise as a result of these tariffs, with 20% of small businesses anticipating failure if they continue to be imposed on Chinese imports for another year.[2] Understanding what tariffs are and how to navigate them, therefore, is important to maintain entrepreneurial success. This post will briefly discuss tariffs and their effects, how tariffs on Chinese imports specifically affect entrepreneurs and small businesses, and possible ways that entrepreneurs and small businesses can respond to them.

What are Tariffs?

Generally, tariffs are taxes imposed on imported goods and services by the importing country. While the Constitution expressly grants the power to collect taxes and duties, Congress has historically left tariffs to the discretion of the President.[3] While the policy reasons underlying any given tariff may vary, the basic motive for imposing tariffs is protecting domestic welfare from foreign competition.[4] Increasing the cost of importing foreign goods and services may make domestically produced goods and services more appealing to consumers in comparison.[5] President Trump has embraced the use of tariffs for this purpose, notably imposing tariffs on imported Chinese goods to reduce the trade gap, or the difference between imports and exports, between the United States and China.[6]

Despite the intentions of those supporting tariffs, taxing imports does not come without unwanted consequences. While the cost of imported goods increases, domestic producers of goods are not required to lower the prices of the goods they market.[7] Domestic consumers and retailers are deprived of cheaper substitute goods from abroad, ultimately left to bear the cost of the tariffs imposed by their own government.[8] Accordingly, the tariffs imposed by the Trump Administration on imported Chinese goods diminish the ability of domestic consumers and retailers to minimize their costs and ultimately hit American wallets.[9]

How Do Tariffs on Chinese Imports Affect Entrepreneurs and Small Businesses?

For entrepreneurs and small businesses that directly rely on Chinese goods for use in their operations, the possible consequences from imposing tariffs on such imports are clear. Companies that bear the brunt of the Chinese tariffs will likely experience higher tax burdens and be forced to adjust their business strategies accordingly.[10] If a direct importer is not willing to simply accept lower profit margins, the direct importer may need to resort to cutting other costs or passing the cost of tariffs on Chinese goods to their customers by raising prices.[11] For some entrepreneurs, however, raising prices is not a viable solution.[12] Companies like E-Blox, an Illinois-based importer of toys from China for assembly and packaging, have profit margins that are too narrow to withstand lost sales that would result from price hikes.[13]

Further, entrepreneurs and small businesses that do not directly rely on imports from China may nevertheless be affected by tariffs imposed on them.[14] The large amount of Chinese products bought by other companies nationwide and the subsequent passing of tariff costs to consumers likely means that those consumers will simply have less disposable income to spend.[15] It has been predicted that, on an annual basis, current and anticipated Chinese tariffs will cost American consumers a total of $259.2 billion by the end of 2019.[16] In other words, Chinese tariffs will cost the average household $2,031 per year.[17]

How Can Entrepreneurs and Small Businesses Respond?

While the potential negative consequences of Chinese tariffs may be substantial for entrepreneurs and small businesses, there are methods by which their impact might be mitigated. A clear solution for direct importers of Chinese goods is to seek alternative suppliers either within the United States or in countries not subject to significant tariffs.[18] Doing so might mean higher prices initially but could be beneficial in an uncertain future where even higher tariffs are possible.[19] Entering into contracts with suppliers at fixed rates might achieve this same end.[20]

Further, any small business or entrepreneur should pay special attention to profit margin and cash flow when tariffs become significant.[21] Being aware of the extent to which one’s business can absorb additional costs and conserving cash can help entrepreneurs navigate uncertain times.[22] Finally, communication with customers should become a priority.[23] When passing on the costs of tariffs becomes inevitable, it is important to know what customers are willing to accept and that they understand the reasoning behind price increases to avoid driving them away and exacerbating the problem of higher operating expenses.[24]

Conclusion

The tariffs on imported Chinese goods may come to pass in the not-too-distant future if the United States and China are able to come to an agreement on trade, but the principles above will continue to be relevant for small businesses and entrepreneurs. Tariffs come and go, but an increasingly protectionist government may continue to make them even more relevant in the business context. Entrepreneurs ultimately should be prepared to navigate them and mitigate their effects.

[1] https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

[2] https://www.usatoday.com/story/money/usaandmain/2019/06/05/small-business-tariffs-protection/1344194001/

[3] https://www.nationalreview.com/2018/03/tariffs-congress-handed-president-power-to-levy/

[4] https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp

[5] Id.

[6] https://www.npr.org/2019/03/06/700650144/despite-trumps-promises-the-trade-deficit-is-only-getting-wider

[7] https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp

[8] Id.

[9] https://www.reuters.com/article/us-usa-trade-china-tariffs-explainer/explainer-trumps-china-tariffs-paid-by-u-s-importers-not-by-china-idUSKCN1UR5YZ

[10] Id.

[11] Id.

[12] https://www.cbsnews.com/news/china-tariffs-a-big-problem-for-small-businesses-in-u-s/

[13] Id.

[14] https://www.inc.com/jason-aten/heres-what-300-billion-in-new-tariffs-on-china-really-means-for-you-your-business.html

[15] Id.

[16] https://nfap.com/wp-content/uploads/2019/09/Tariffs-and-Regulations.NFAP-Policy-Brief.September-2019.pdf

[17] Id.

[18] https://www.usatoday.com/story/money/usaandmain/2019/06/05/small-business-tariffs-protection/1344194001/

[19] Id.

[20] Id.

[21] https://www.businessnewsdaily.com/10931-small-business-tariff-impact.html

[22] Id.

[23] https://www.inc.com/ari-zoldan/4-steps-to-protect-your-business-amidst-global-tariff-showdown.html

[24] Id.