This Is How the Trade War Is Impacting Small Businesses
Andrew DiMino is bracing for the hit. Somewhere on the Pacific high seas, a shipment of some 1,000 plus-sized men’s shirts made from bamboo fiber is floating toward a US port where it will be off-loaded and trucked to DiMino’s offices in Las Vegas.
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They were ordered months ago, but by the time the shirts arrive, DiMino expects the import tariff line on the shipping bill to be bruising.
Apparel products like those sold by DiMino’s Big Boy Bamboo are among the thousands of consumer products on the Trump administration’s May 2019 list of items subjected to tariff hikes. The new import duty on many of these items increased to 25 percent.
This follows similar waves of tariffs since spring 2018, which hit bigger ticket consumer electronic items and raw materials like steel and aluminum. As of the summer of 2019, the trade war between two of the world’s biggest economic powers shows no signs of slowing down.
“These trade policies have injected more uncertainty into the international economy than anything I can remember,” Michigan State University economist Charley Ballard says. “There seems to be a lot of bluff and bluster on both sides. You have what seems like a game of chicken in which the drivers are not very predictable.”
What the trade war means for small businesses
President Donald Trump’s efforts are purportedly meant to level the playing field for US firms wishing to sell goods in China, but the reality is this tit-for-tat process is creating new challenges and dilemmas for many small business owners.
“Small businesses span the spectrum, giving them unique exposures to the impact of tariffs and trade agreements,” says Bill Dunkelberg, chief economist for the National Federation of Independent Business (NFIB). “It is clear that the small business sector, which represents half the economy, is being affected by changes in trade policy.”
Unlike major multinational companies that have some flexibility about where they buy, make, and ship their products, small business owners are left with few good options for coping, especially in the short run.
4 ways small business owners are responding to Trump’s tariffs
So what can you do if your business has been impacted by the trade war? Here are four ideas:
1. Cut other costs
“What do you do in practical terms when you see one of your inputs has gone up substantially?” Ballard asks. “You can try to squeeze greater efficiencies out somewhere else. Of course, most small businesses have been squeezed themselves to the point that there isn’t much low-hanging fruit left.”
Yes, this is easier said than done. Still, around the nation entrepreneurs are desperately seeking creative or strategic ways to save money.
In Iowa, the Black Cat Wear Parts factory, which makes blades for construction equipment, laid off 10 of its 17 manufacturing employees due to increased steel prices brought on by the tariffs. Accu-Swiss, a precision-part maker based in Oakdale, Calif., is making factory staff work in the dark to save money on the power bill. Ohio-based Gradall Industries, which makes parts for construction excavators, nixed an expansion it had planned that would have created 30 new jobs. And Michigan-based Trans-Matic, which makes auto and door lock components, told employees they can only work five hours of overtime instead of the customary 10 for the foreseeable future.
“There were some growth opportunities we have been looking at, with new opportunities for manufacturing,” Black Cat plant manager Josh Daniel says. “But the capital equipment that was planned, that’s been put on the back burner a bit until the tariff situation resolves itself.”
2. Raise prices
The most prominent outcome of the trade war is an increase in prices—for everyone. DiMino has yet to decide whether to raise prices because the currently impending shipment is a relatively small re-order of a few shirt sizes that ran out. But if the higher tariffs remain in place when he places his large orders for the holiday season, he says he will have to take action.
“I, as the manufacturer, pay these tariffs, and I then either have to eat the cost or pass them on to the consumer,” he says. “If I get hit with this on everything that comes in for the Christmas rush, I’m going to have to raise every price of every shirt I sell.”
That’s exactly what many businesses are doing, and American consumers are starting to feel it. As of March 2019, new tariffs had already cost American consumers $69 billion in annual costs. What’s more, economist Gary Hufbauer of the Peterson Institute for International Economics estimates the newest round of tariffs will cost the average family of three about $550 more per year.
To mitigate the impact, some experts recommend explaining to customers why prices are rising. Matthew Beckmann, managing director of Houston-based Ascent Consultants, says it’s important to be proactive “so that customers are aware of the challenges that exist in the supply chain.”
DiMino is hesitant to do that, fearful of offending and repelling some customers who may see the information as partisan slam. “I don’t want to turn my business into a political company,” he says. “If that means I raise my prices and don’t say anything, maybe I have to do that. If I have to tell people, ‘Listen everybody, I had to raise prices because of the Trump tax, I think some people will be turned off.”
3. Make or import products from elsewhere
Diversifying or altering your supply chain is not just a smart coping tactic during this trade war—but also a way to bolster your business for future ones, Beckmann says.
“Tariffs and quotas can have the effect of eliminating sources,” he explains. “Be proactive in working with substitute products that still meet quality-control standards. Do not wait for tariffs or quotas, but actively source and qualify these potential vendors as part of your regular job duties.”
Litty Mathew, owner of Los Angeles-based Greenbar Distillery, is considering just that. In 2018, Mathew bought nearly 150,000 customized glass bottles from a factory in China for the company’s organic spirits brand for 48 cents per piece. The recently increased tariffs, she says, will raise the import duty from about 5 cents to about 12 cents.
To counteract the issue, Mathew is considering relocating production of the bottles, made of special European glass, to Mexico. “It’s closer, so it’s not necessarily a bad thing for us,” Mathew says. “It’s just that now, with the tariffs in China, the pricing is going to be more competitive.”
But it’s not an easy or quick process, according to Dunkelberg: “The problem with small firms is that the employees wear many hats. It’s going to be more difficult for the little guys to find alternative suppliers.”
And unfortunately, this may not even be an option for some. DiMino sells a product that relies on a process of transforming bamboo into a cotton-blended fabric that he says is only done in China. “I couldn’t, even if I wanted to, make my shirts in the United States,” he says. “I’ve looked. There are no companies in the United States who process bamboo in clothing.”
4. Eat the increase and wait it out
Perhaps the roughest part of any trade conflict is that it introduces a new expense that entrepreneurs can’t control and that may persist for years or vanish by next week.
In central Kansas, for instance, Neal Beam’s fifth-generation family farm was already struggling because the US tariff increases in 2018 led China to retaliate with increased duties on soybeans. That seemed to be the worst of it, but then in late May 2019, China announced a halt on the purchase of American soybeans altogether in retaliation for the most recent White House action.
“Things are already tighter than a tick, and now it’s about to get even worse,” Beam says. “It’s frustrating when a commodity you raise is affected because of a political position on rural trade.”
With the 2020 election year looming, many believe Trump will find a way to resolve the standoff with China. But either way, trade disputes are tough to plan for.
“Best case scenario, this is a lot of ruffling feathers and we eventually work it out and everything’s OK,” Ballard says. “The worst-case scenario is devastating. So small business owners must decide whether they can take a hit to their profits and weather it for a year or two until it gets worked out.”
The majority of small business owners in the US actually don’t expect the tariffs to affect them, according to a Bank of America survey in May 2019. Almost 60% of the 1,504 small businesses surveyed said they don’t expect any impact, and only 43% named “trade tariffs and policy” as a top concern. Health care costs, the political environment, interest rates, the stock market, consumer spending, and the strength of the dollar all outranked the trade war issue.
Still, for those caught up in it, it’s a frustrating conundrum with little upside. That said, DiMino did offer one silver lining to look forward to: “It is my belief that these tariffs will stay for a while, but if it ever lessens and goes away, it is a reason to lower prices. That’ll be nice.”