The Trump Trade Wars: What It May Mean for Your Company
On July 6, 2018, President Donald Trump’s tariffs on $34 billion worth of Chinese goods kicked in, representing the culmination of mounting economic tensions between the United States and China.1 China retaliated with $34 billion in tariffs on American goods, and neither party seems afraid to hike those amounts. This newest economic chess match comes on the heels of President Trump’s imposition of similar tariffs on the European Union, Canadian, and Mexican steel and aluminum imports. These countries hit back with tariffs on Kentucky bourbon, farm products, and metals, respectively. The Trump Administration believes that tariffs are needed to create more business and jobs in the United States. Although many global companies have been responding and changing strategy in response to the tariffs, many small and mid-cap may also be affected.
Firstly, since tariffs are a tax on foreign imports, if any product or component that is being used by your company is subject to a tariff, then the 20 or 25-percent additional tax on those goods will immediately impact your bottom line. The tariffs cover a wide variety of items such as lumber, industrial parts, chemicals, aircraft components, communications technology, and vehicles. Even if your company is not directly using goods that are subject to a tariff, your suppliers might be, which may result in higher prices to you. Generally, trade wars result in higher prices across industries. This could be beneficial to domestic businesses that make competing products and are able to pick up new customers by offering lower prices. In either case, staying apprised of the goods covered and the new tariffs being proposed will allow businesses to seek alternative suppliers or be prepared to increase production.
Another impact of the trade escalation results from the retaliatory tariffs that the targeted countries have and will impose on U.S. imports. For example, China’s retaliatory tariffs have targeted U.S. produced soybeans, passenger vehicles, and seafood. Accordingly, the affected farmers and manufacturers need to be ready for a reduction in overseas orders. Similarly, Canada has retaliated to the U.S. tariffs on Canadian lumber by imposing tariffs on U.S. ketchup, pizza, and laundry detergent. While larger companies may be prepared, smaller businesses may not be as well positioned to find new customers under pressure. Additionally, because President Trump plans to escalate the import taxes over the coming weeks, it is possible that your industry is unaffected now, but may be targeted by retaliatory tariffs in the near future. Continuing to follow the news and checking the updated (and likely growing) list of products subject to the tariffs will be extreme important in the months ahead.
One avenue for smaller companies to protect themselves is to create new agreements with producers in smaller countries and regions that are not expected to get caught up in this trade war. These markets may have been overlooked in the past because they were not the best partners. However, getting a 20 to 25 percent savings on your cost of goods should be well worth the additional trouble. Small businesses are also able to pivot more easily into new markets since their requirements are usually much more manageable than a larger enterprise. Exploring alternative markets or raw material sources before your industry is affected will serve you and your small business well.
Small businesses across the country are already feeling the effects of President Trump’s multi-front trade wars. National Public Radio recently published the transcript of an interview with Jeff Padnos, co-owner of a small metal recycling and resale business in rural Michigan. Padnos explained that his firm was locked out of the Chinese market—one of their largest consumer bases. The 25-percent tax on aluminum scrap forced Padnos and others to sever ties with their distributors and consumers in China and seek new markets.
While tariffs will likely serve some of their purpose of promoting certain American manufacturers, they will come at a cost to many businesses and consumers as the increases in raw material costs trickle down. This might be the a good time to join an industry association or chamber of commerce that can provide information on anticipated activity and help you stay ahead of the war games.
Business Insights is hosted by the Law Firm of KPPB LAW (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB LAW, practicing in the area of corporate law and governance.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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