The global economic landscape is constantly shifting, and recent tariff impositions on goods from Canada, Mexico, and China are making small business owners nervous. We want to provide clarity on what these tariffs are, who ultimately bears the brunt of them, and, most importantly, what you can do to mitigate their impact on your bottom line.
What is a Tariff, Exactly?
Simply put, a tariff is a tax levied by a government on imported goods. Think of it as an extra fee added to the cost of products coming into the country. This tax makes imported goods more expensive, theoretically encouraging consumers and businesses to purchase domestically produced alternatives. While the intention might be to bolster domestic industries, the reality is often far more nuanced.
Who Really Pays the Tariff?
While the importer technically pays the tariff at the point of entry, the burden of this cost rarely stops there. It’s often passed down the supply chain, affecting small business owners and ultimately consumers. Businesses importing materials or products from affected countries face higher costs, which can translate to:
Increased Production Costs
If your business relies on materials sourced from these countries, expect to pay more for them.
Higher Prices for Consumers
To maintain profitability, many businesses may be faced with a difficult decision to raise prices on their goods and services, potentially impacting sales volume.
Reduced Profit Margins
Some businesses may choose to absorb part of the tariff costs to remain competitive, shrinking their profit margins.
How These Tariffs Impact Small Businesses
Small businesses, often operating on tighter margins than larger corporations, are particularly vulnerable to these fluctuations in the import market. The increased costs associated with tariffs may increase the costs of goods that you purchase from suppliers. Supply chains may be affected, which means that you may experience challenges or delays getting your imported materials.
The uncertainty surrounding ongoing trade negotiations further complicates long-term planning. Counter-tariffs are likely - this means the countries affected may respond by issuing their own tariffs. In fact, we’ve already seen this with Canada and China.
Five Actionable Steps to Minimize Tariff Impact:
While navigating these challenges requires careful consideration, here are five proactive steps you can take to lessen the impact of tariffs on your small business:
1. Evaluate and Diversify Your Supply Chain
Now is the time to thoroughly examine your sourcing practices. Can you get your materials from somewhere else? Identify which products or materials are affected by the new tariffs. Ask your suppliers which products you order from the regularly will be impacted and ask if they are offering less expensive alternatives. Explore alternative suppliers, both domestic and international, in countries not subject to these tariffs. While this may involve upfront costs in researching and vetting new suppliers, the long-term benefits of diversification can provide stability and reduce reliance on vulnerable supply chains.
2. Renegotiate Existing Contracts
Review your existing contracts with suppliers and customers. Determine if there are clauses that allow for price adjustments due to unforeseen events like tariffs. While renegotiation can be challenging, open communication with your partners is crucial. Consider sharing the burden of increased costs where possible to maintain mutually beneficial relationships. Be prepared to document everything.
3. Evaluate Your Inventory
It may take months for your existing inventory to sell out. Understand what you’ve got and when you’re going to need to order more materials; plan appropriately and take the time to get your finances in order, which leads us to . . .
4. Cut Costs Where You Can
Assess your entire operation. Is there somewhere else you can streamline and cut costs? Review your overhead and eliminate any non-critical costs.
5. Adjust Pricing Strategically
Don’t raise prices all at once. Step up slowly in tiers. Communicate with customers so they understand what’s happening and why. You were hit with a tariff- your customers shouldn’t be caught off guard.
Moving Forward
The implications of these tariffs are complex and ever-evolving. Maybe today’s tariffs go away tomorrow. But tariffs as a whole aren’t disappearing anytime soon. So prepare accordingly. Don’t be a victim. Let your competitors do that part for you.