I thought I’d take a look at how the current trade war could affect the small business community here in the U.S.
First , let’s look at some numbers. There are 33.27 million small businesses in the U.S. with fewer than 500 employees. These businesses employ 61.6 million people, which is 45.9% of the U.S. workforce, and account for 33% of the country’s imports.
For those that don’t know, the tariffs that we have implemented so far this year are levies, or fees, on imported goods to the U.S. that have to be paid by the company that imports them. These tariffs are hitting small businesses particularly hard, since they almost all rely on some quantity of imported materials. Unlike large corporations, small businesses often lack the financial cushion to absorb rising costs, forcing them to either raise prices or take a financial hit. Also, many small retailers and manufacturers are struggling with uncertainty, as tariffs have been fluctuating, making it difficult to plan ahead.
Here’s a detailed breakdown on how the imposition of tariffs can significantly impact small businesses:
Increased Costs of Goods:
- Imported Materials and Goods: Many small businesses rely on imported raw materials, components, or finished goods. Tariffs, being taxes on these imports, directly increase their cost. For example, a local furniture maker importing wood or hardware will face higher expenses.
- Reduced Profit Margins: Unless small businesses can pass these increased costs entirely to their customers, their profit margins will likely shrink. Small businesses often operate with tighter margins than larger corporations and have less capacity to absorb these additional expenses.
- Cash Flow Strain: Higher upfront costs for imported goods can strain the cash flow of small businesses, potentially affecting their ability to manage day-to-day operations and invest in growth.
Price Increases for Customers:
- Passing on Costs: To maintain profitability, small businesses may need to increase the prices of their products or services. This can make them less competitive compared to larger businesses that might absorb some of the tariff costs or domestic producers not subject to these import taxes.
- Loss of Customers: Price-sensitive customers might opt for cheaper alternatives from competitors, leading to a decrease in sales volume and customer loyalty for the small business.
Supply Chain Disruptions:
- Difficulty in Sourcing: Tariffs can disrupt established global supply chains, making it harder for small businesses to obtain the necessary goods or materials. This could lead to production delays, an inability to fulfill orders, and a loss of customer trust.
- Finding Alternative Suppliers: While businesses might look for domestic suppliers or suppliers in countries not affected by tariffs, this shift can be time-consuming, costly, and may not always offer the same quality or price. For instance, a small electronics repair shop that relies on specific imported components might struggle to find suitable local alternatives quickly.
Reduced Competitiveness:
- Against Larger Businesses: Larger companies often have more leverage to negotiate with suppliers, find alternative sourcing, or absorb tariff costs due to their scale. This can put small businesses at a significant competitive disadvantage.
- In Export Markets: When the U.S. imposes tariffs, other countries often retaliate with their own tariffs on U.S. exports, which we have already seen. This can harm small businesses that export their products, making them more expensive for foreign buyers. For example, a local artisan food producer exporting to a country that imposes a retaliatory tariff will see their goods become pricier in that market.
Uncertainty and Investment:
- Difficulty in Planning: Fluctuating tariff policies create uncertainty, making it difficult for small businesses to plan for the future, make investments, or forecast their financials accurately.
- Hesitation in Growth: The unpredictable economic climate caused by tariffs can make small business owners hesitant to expand their operations, hire new employees, or invest in new equipment.
To summarize, tariffs pose significant challenges for small businesses, primarily through increased costs, potential price hikes, supply chain disruptions, and reduced competitiveness. Finally, as history has taught us, there are no winners in a trade war. Hopefully, we can get that message through to the Trump administration sooner rather than later.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
