The news cycle is fast and furious these days, with many of the headlines focused on President Trump and his concentrated efforts on shoring up worldwide trade. One method of choice is the dreaded tariff, and with so many new announcements happening at once, it may be hard to know what’s up – and what’s down. So, what exactly is the deal with tariffs? How will it affect your company? While the answer will depend somewhat on where you are located and what you do, here are the basics on this somewhat confusing trend.
What are the Tariffs?
As of this writing, several new tariffs have been imposed under President Trump. These could change at any time, but the most significant and wide-reaching are those imposed under Section 232 of the Trade Expansion Act as a 25 percent tariff on imported steel and 10 percent on imported aluminum. These new fees, often referred to by opponents as just another kind of “tax,” have been unwelcome by many in the trade and manufacturing sectors, but how do they make life different for the average small business?
How Mom and Pop are Handling It
It makes sense to hear complaints from businesses who work directly in steel. Auto manufacturers, building companies, and other suppliers have speculated that there will be no easy way to incorporate the added cost of raw materials into their existing operating costs. As they pay more, consumers pay more, they say. The result could be a significant loss in sales from existing domestic customers who just won’t have more in the budget to overcome the increase.
And while price hikes almost always roll downhill, some have favored the tariffs from the standpoint that there just simply is no reason to continue to buy steel from places like China, they claim, where an oversupply in the metal industry has pushed the mega-producer to essentially “dump” their surplus. Until this point, North American production was around 111 million metric tons, although we were able to export about 25 million of that. Compare that to Asia, who exports around 200 million metric tons (50 million or so going to us), and you can see that there is enough steel to go around from just our own domestic production methods.
So, if we have the means to provide our own steel interests, what’s all the fuss about? Simply put, small companies don’t have the same flexibility as bigger ones to course adjust. Where large distributors can pick and choose from a variety of steel sources, tiny mom and pop manufacturers and resellers have only so many channels they can go through. If those channels are hiking prices in response to tariffs (whether due to actual cost challenges or pure market speculation), it will eventually hit the little guy, who has little choice in where to bid for steel.
Revenge Taxation
There’s another concern, however, and that’s with our foreign allies. The Golden Moon Distillery, for example, is reeling from a potential loss of business in the amount of $225,000 or more from sales he fears he won’t now be made to customers in the EU. Why the drop in revenue? As U.S. tariff news became widely-publicized, those in the European Union and other countries, fought back with tariffs of their own. These new tariffs may already be working, if the end goal is to punish the U.S. by slowing the purchases of products we create. The products affected by these somewhat hodge-podge taxes include everything from bourbon to motorcycles to dish detergent. Therefore, if given a choice to buy a motorcycle from Harley Davidson (who was a victim of tariffs imposed by the EU) or a home-grown cycle, Europeans seem to be favoring locally-made. As of July 24th, Harley is blaming tariffs for over $150 million in projected losses and the motivation behind their move to send some production operations overseas. This affects not just Harley, but resellers and those who deal in the brand’s motorcycle-related goods.
Agriculture Gets a Break
While news of steel and those retaliatory tariffs are still being processed (and subsequent losses projected), another conversation surrounds the trade war’s effect on farming. Recent news reveals Trump’s plan to give the agriculture industry a $12 billion boost through a relief package, most likely in response to reports that farmers, in particular, are feeling the painful pinch of the trade war. Among the items Beijing recently started taxing from U.S. farmers were pork and soybeans. Dairy farmers were already struggling, as well, in a time when milk isn’t the staple commodity it used to be, and Canada’s trade system does a good job of protecting its own dairy farmers by taxing a few select imported dairy goods at high prices. While payouts from this farm package could be seen as early as September, may not reach all smaller agricultural producers, co-ops, or single-family operations.
The Future of Business under Trump Tariffs
Even with the fear or tariffs possibly expanding into more territories, some economists aren’t worried, at all. With the surplus of steel, prices could eventually even out, and a vocal minority of farmers are claiming the relief package is unnecessary in a time when soybean surpluses are creating a natural market dip (not tariffs, as some would claim.) But, even with these optimistic projections of how the trade war isn’t much of threat to our economy, it’s still the small businesses that tend to get hurt in all this.
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The bottom line for small businesses is that it’s often very difficult to create new processes, find new suppliers, and rebrand as needed to handle the seemingly turbulent conversation around trade. Companies often have no time to prepare against the backlash some tariffs are causing, and when large corporations (such as Harley Davidson) are seen in the news packing up operations and heading for foreign hills, it can seem impossible for a tiny manufacturing start-up to know where to go next. Hiring could be put off in industries where manufacturing protocol is uncertain under new steel trade rules, as well, which means a delay in new product launches and ad campaigns to push steel-based product lines.
While U.S. small businesses have been the definition of nimble, these next few months – and years – have the potential to cause chaos, especially for those serving foreign markets. More tariffs are likely, both from home and abroad, giving many companies a reason to sleep a little less at night.
This article was originally written on July 26, 2018.
Presenting a tax on foreign imports is always a tricky way to control market share. If the tax is paired with a reciprocal for purchasing domestic goods, it allows the world market to regulate itself and tariffs can be reduced or eliminated over time. For example a 25% tax on foreign steel could be paired with a 26% subsidy or rebate on domestic steel purchases made by domestic industries provided those industries can demonstrate that they did not increase prices to consumers.
This allows for an increase in domestic production, provides an incentive for businesses to buy from domestic sources, helps keep existing manufacturing on shore and protects the consumer from inflationary pricing.