Trade Wars: Who Pays the Price?
The news cycle is nothing short of busy and erratic. Good or bad, much has changed in the last year; and, now we’ve added "trade wars" to the mix. Recently, China enacted tariffs on U.S. goods that total $34 billion in retaliation for our administration’s 25 percent tariff on Chinese goods.
In fact, China actually accused the United States of setting off “the largest trade war in economic history to date” and violating World Trade Organization rules.
Even Russia introduced extra duties on U.S. products, ranging from road-building equipment and oil and gas industry products, to mining tools.
The first wave of U.S. tariffs was announced back in late May and targeted steel and aluminum exports from Canada, Mexico and the European Union (EU), traditionally our allies and partners. The United States also added tariffs on Canadian lumber and mentioned doing the same on cars made by EU countries.
Proponents of the tariffs argue that they make American-made goods more competitive as tariffs give people an incentive to choose American products. Detractors argue that tariffs will only increase prices, which will then be passed along to consumers.
But, what exactly is a tariff?
A tariff is “a schedule of duties imposed by a government on imported, or in some countries, exported goods,” such as lumber, soybeans, aluminum and consumer goods. A unit tariff is a fixed-dollar amount on a specific item -- whereas an ad valorem tariff is proportional to the value of the imported goods.
Whether you believe tariffs are or aren't the best way to make American companies more competitive, it’s consumers and small businesses that are affected the most.
In the United States, small businesses make up 99.7 percent of employer companies and 48 percent of the private workforce. The well-being and survival of small businesses is essential for our economy to thrive. So, how do these tariffs affect small businesses and eventually consumers?
Here are some industries that have begun to feel the pinch.
In 2015, the agriculture and food industry contributed $992 billion to the U.S. gross domestic product (GDP), while the output of American farms contributed $136.7 billion – about 1 percent of the GDP, according to the Department of Agriculture. These industries are also responsible for providing 11 percent of total U.S. employment.
According to statistics from the American Farm Bureau Federation, one U.S. farm feeds 165 people annually here at home and abroad. As the global population continues to increase, to 9.7 billion by 2050, farmers will need to grow approximately 70 percent more food.
Those are eye-popping numbers, and the ag industry is rightfully concerned as tariffs begin to take effect.
In Lincoln, Nebraska, a corn and soybean farmer admitted to CNBC that he and other farmers were scared about the effects tariffs will have on their livelihood. In Utah, the industry is bracing itself for a $103 million impact, mostly from trading partners. In order to break even, dairy farmers now need to make close to $20 worth of pounds of milk -- though farmers, currently, are making approximately $14. It doesn’t take a math genius to know these numbers are not good.
The whiskey/bourbon industry
Kentucky is famous for a couple of things, but few are more distinguishable than bourbon. According to the Kentucky Distillers Association, whiskey is worth $8.5 billion to the state and supports more than 17,000 jobs. Mexico’s retaliatory tariffs on bourbon (and other goods) range between 15 and 25 percent. The EU is rebalancing its import tariffs on U.S.-made products in Europe, impacting 2.8 billion euros (more than $3.2 billion).
According to the Distilled Spirits Council, since 2008, exports on American whiskey have grown by almost 43 percent -- from $791 billion to $1.1 billion. U.S. bourbon sold in France is currently taxed at the same rates as liquors distilled there, benefitting bourbon distilleries in the U.S. Another plus? That country's growing demand for bourbon.
Bourbon-makers here are keeping a close eye on the trade wars. They remain optimistic, but with a healthy sense of trepidation. The CFO of Brown-Forman, a publicly traded, family-controlled company, said recently, “It’s premature to comment on the potential impact of our business; we are on top of the situation and have undertaken measures over the last few months to mitigate risk …”
Whatever happens, the big distilleries won’t be forced to close their doors, but distilleries in Spokane, Wash., or Brooklyn, N.Y., might. Kings County Distillery in Brooklyn has been selling specialty whiskey to the U.K. and Canada for some time; and the tariffs, its leaders feel, makes their company “uncompetitive” in the market.
The same applies to Dry Fly Distillery in Spokane -- which saw its scheduled delivery of 2,000 cases of whiskey to Ontario cancelled. That’s $200,000 in whiskey (or 10 percent of the distillery's business). To put that in perspective, the entire state of Washington exported $96,000 in whiskey last year.
The U.S. manufacturing industry is the largest in the world, producing 18.2 percent of the world’s goods. By comparison, that’s more than the entire economic output of Canada, South Korea and Mexico. Manufacturing is also essential to our GDP -- in 2016, total revenue was $2.25 trillion, driving 11.7 percent of our economic output.
Despite the current strength of our economy and steady expansion, our leadership in this industry is at risk due to higher operating costs.
The Institute for Supply Management has said its manufacturing index rose to 60.2 percent last month -- from 58.7 percent in May. However, this growth may soon slow down due to bottlenecking from the tariffs. Moving these supplies might also be affected by delays and an insufficient number of trucks to carry the load. This puts more pressure on the Federal Reserve to raise interest rates – which currently are at 1.75 percent, the highest level since 2008.
Already, the tariffs are having an impact: A nail company in Poplar Bluff, Miss., Mid Continent Nail Corp., has already laid off 60 employees and could potentially let go of 200 more this month because of the new tariffs being imposed on aluminum.
Tariffs might be beneficial for a small group of people, but in the long run they end up hurting small businesses, small companies and trading partners. The costs are passed down to consumers. What can small businesses do to prepare for this tariff onslaught? Here are four things to keep in mind:
1. Stay attuned to your profit margin. Ask yourself the following questions: Which costs could you absorb? Which ones need to be covered? Can you reduce expenses to offset increase in goods affected by a tariff increase? Could you renegotiate a deal?
2. Re-examine your price. While sometimes a prize hike is necessary, you could also end up keeping customers away. Understand the prize within the market and how customers value your product and the increases they might tolerate
3. Manage your inventory levels. This one, while a given, becomes much more important when costs are on the rise and uncertainty is high. Prioritize replenishment only of inventory that moves; otherwise you’ll have a full warehouse and nowhere to move your inventory to.
4. Communicate with other import/export businesses. See how you might help one another out. If they’re lacking in one area where you have a surplus, use that to your advantage, and vice versa. Form an organization or some type of council where all of you can brainstorm solutions for this common problem.
While many remain hopeful that these tariffs are nothing more than hot air, the trade wars show no signs of slowing down. If anything, it has the potential to ramp up, given the volatility of the rhetoric. So, prepare, be wise -- and where others see road blocks, look for opportunity.