We have some ideas for small businesses dealing with the trade war. How we got here goes back decades. For more than 40 years, the United States has run a trade deficit against the rest of the world, meaning that we import more goods than we export. There are a lot of reasons for this, including the high standard of living (and cost of labor) in the US and the current strength of the dollar relative to most world currencies.
From the standpoint of a business trying to operate today, the size and causes of the trade deficit are not important. Nor does it really matter if it is a good thing or bad thing. Current US policy is aimed at reducing or eliminating the size of the trade deficit through tariffs on certain categories of imported goods. Many other governments are responding by placing their own tariffs on US exports. With the governments battling back and forth, the resulting trade war is a reality that businesses need to manage to. Because many of our customers have been affected, we wanted to share some ideas for small businesses dealing with this.
A tariff is a special tax paid by the person who imports a good from another country, and the goal is to make imported goods more expensive than domestic goods. This, it is hoped, will encourage people to buy goods made here rather than buying imports. In a trade war, nations try to affect trade—and hurt other countries—by imposing large tariffs, import quotas, or other restrictions.
The trade war and small business
The companies that benefit from a trade war are those that sell domestically made items and compete against foreign-made items that have a high tariff on them.
The big winners, of course, have been Asian exporting countries that are not China. Businesses in Bangladesh, South Korea, Taiwan, and Vietnam have found opportunities to enter or expand into the US market (and some Chinese companies are alleged to have slapped “Made in Vietnam” labels on goods to evade the tariffs.)
There’s less evidence that US companies are benefiting directly. In large part, that’s because the economy is already close to capacity, so it is difficult for companies here to expand. Many industries have little or no manufacturing infrastructure in the US, and that’s costly to build. It’s often cheaper and easier to find manufacturing facilities to take over production elsewhere in Asia than to build it new in the US.
There are US winners, of course. In many cases, they are companies operating in niche industries. These companies may not have pushed for trade sanctions, but they find themselves in a great position right now. Being a big winner can be a problem, even if it is a good problem to have. There are ideas for small businesses dealing with this, too.
Who is hurt
A trade war has winners and losers. Anyone who exports a good with a retaliatory tariff on it is hurt, most particularly corn and soybean farmers in the US. Anyone who buys an imported good, even if it is a part in something manufactured here. In fact, a recent survey reported by Inc. Magazine showed that a third of small businesses had an increased cost of doing business because of the tariffs. (Of course, this means that two-thirds either haven’t had increased costs or have actually had decreased costs.)
At an extreme, some businesses may close. Manufacturing companies tend to operate with very little slack, and retailers often have very little pricing power. It’s difficult to absorb or pass on tariffs. Furthermore, the current trade policy is designed to have an element of surprise, and that makes it tough for companies to plan and adapt.
There’s another irony: in economic theory, trade always makes everyone better off. In practice, that hasn’t been quite true, but we’re also seeing that in practice, trade wars make just about everyone worse off. Both the US and the Chinese economies have had large losses from their trade disagreements.
The small business ecosystem
We at Bento believe that small businesses are key to building communities, and the reality is that tariffs affect entire communities. Many rural areas in the Midwest have been hit hard by declining sales for agricultural exports. You don’t have to drive far from our Chicago office to see towns with struggling Main Streets; with farm incomes down and small manufacturing companies struggling, there isn’t enough demand to support other local businesses.
The effects have been good, bad, and indifferent. Some companies relied on imported materials to make their products, and now they are seeing costs go up. Other companies relied on domestic materials, but the domestic prices went up because there is now less competition. And many small businesses have found that their products are suddenly competitively priced and in demand, so they are dealing with the real challenges of growth.
Against this is the effect on consumers. In communities where businesses can charge more and have more customers, the Main Street small businesses are doing well. In communities where businesses are struggling due to tariffs, there is real pain. It’s creating a need for different ideas for small businesses to survive and thrive in this era.
Ideas for small businesses to try now
We have plenty of ideas for small businesses working through this trade war. They depend on how your company is affected.
If your cost of goods sold has gone up:
The purpose of a tariff is to make imports more expensive, making local producers more competitive. If you’re seeing your prices increase, a good first response is shopping around to find US companies that provide a substitute. Or, look for suppliers in countries that have not been targeted by tariffs. SCORE has some good ideas for companies looking to build international supply chains.
If you can’t find new sources of supply, look for cost savings elsewhere in the business. Bento for Business can help you reduce mistakes, head off fraud, and identify opportunities to negotiate better prices with data.
If you’ve lost your export market:
It’s time to find new markets. It’s almost like being a start-up all over again. What do you sell, and who needs it? Where are these people located? Invest in market research and networking. Take the time to be creative and brainstorm. Maybe you even need to do something like change the company dress code and have dogs running around the office to generate new ways of thinking. Obviously, this is not easy. A small winery has more opportunities to replace Chinese customers than a soybean grower. You can run the expenses for each experiment off its own Bento card to help to better measure return on investment.
If your business is growing like gangbusters:
Congratulations! Except for one problem. Unexpected growth puts real stress on operations. To help make this growth sustainable, make sure your team gets some time off and knows how much you appreciate their effort. Make sure that data collection is a part of your procedures. You may not have the time or energy to update your entire business information system, but choose one or two things that you can track.
And keep an eye on expenses. Small businesses often find that their periods of fastest growth are also their least profitable. Everyone gets too busy to pay attention to spending policies! We can help you set simple controls that run in the background, so you can focus on your business.
What the future holds
Historically, trade wars are long and complicated. In addition, the current US trade strategy is based on creating uncertainty among trading partners. People in other countries don’t know what we’re going to do next. We don’t know what we’re going to do next, either. Furthermore, the US is heading into an election year, the UK may be leaving the European Union, and China is dealing with pro-democracy protesters in Hong Kong.
Different countries have different priorities. For example, China has a huge population and an authoritarian government. The government wants to keep people employed. The UK is a democracy, and the interests of the voting public outweigh economic best practices.
It’s really hard to predict an outcome. Some trade wars created huge political changes. Why, England’s tax on tea imports kicked off the American Revolution! Others had no real effect on anything.
Because the current strategy relies on the element of surprise, it can be difficult for companies to plan. We believe that good data and good expense controls make small businesses more agile, so that’s one area you can address regardless of how you are affected today or tomorrow.
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