What the Burgeoning Trade War Really Means for Entrepreneurs
Entrepreneur's New Year’s Guide
President Donald Trump followed his announcement of steel and aluminum tariffs with a declaration that “trade wars are good, and easy to win” -- a stance economists and members of his own political party immediately challenged. Not long after the U.S. announced its tariffs, international trading partners threatened retaliatory fees against American goods such as bourbon, blue jeans and Harley-Davidson.
As governments clash in big battles, small businesses are left to worry about how they might be affected by a trade war. The White House claims it’s acting in the interest of American businesses and is willing to put tariffs on more than $500 billion of imported goods (per CNBC), but not all American companies benefit from nationalistic policies. The Washington Post reports that farmers, for example, will receive $12 billion in federal aid to offset any negative effects of this trade war.
Many companies will need to pass costs on to consumers, as reported by The New York Times. These increases might seem small at first, but small price hikes across the board will leave consumers' wallets thinner from every purchase. This will be particularly problematic for individuals who cannot afford to buy American-made products and instead purchase cheap goods from China, the Atlantic reports.
For entrepreneurs, trade wars create an uncertain and often problematic situation. Which endeavors will succeed, and which will feel the tariff squeeze? How can small business owners protect their livelihood? Thankfully, entrepreneurs don’t have to wait to find out. Through proactive management, entrepreneurs can persevere in an economically volatile climate.
Related: Trade Wars: Who Pays the Price?
Trade wars rarely follow the plan.
Like shooting wars, trade wars seldom pan out the way their creators intend. The global economy has become too complex for anyone to anticipate every turn. As economist Ludwig von Mises noted in the 1940s, every new regulation has two major consequences: It is ineffective in attaining the intended outcomes, and it creates new problems in other areas.
Consider something as simple as punitive fees at daycares. Many daycares charge parents a fee if they pick their children up after hours, but research has shown these fees actually cause parents to arrive even later. Why? Once they're a little late and have to pay the fee, parents no longer feel compelled to rush to pick up their children. In this case, direct economic regulation only makes the problem worse.
President Trump wants to impose tariffs on China (and everyone else, apparently) to benefit some American producers. These additional taxes on imports will increase the cost of foreign-produced goods for consumers, making U.S. production seem cheaper and steering money away from China and back to domestic producers. It comes at a cost, however, because the added production costs of American labor have to come from somewhere. In most cases, that means increased prices for consumers.
Businesses can move production to countries unaffected by tariffs, such as Mexico, to minimize per-item costs. That would solve part of the problem, but it wouldn’t accomplish President Trump’s goal of increased American production.
In a globalized economy, international cooperation is nearly inevitable. An American car might be built using parts from Japan, Germany, China and any number of other countries. American goods often contain a collection of international components, which means few American industries will escape the pain of these tariffs.
It’s not all bad news for everyone, though. Some domestic entrepreneurs who depend almost entirely on American-made goods or services will benefit from increased strain at the border. Companies that are politically entrepreneurial will obviously benefit as well.
Unfortunately, the primary effect of the tariffs will remain simple and unpleasant. Entrepreneurs who have contacts on Capitol Hill will win, and all other producers will lose -- if they don’t come up with a smart strategy. To navigate the minefield created by trade wars, entrepreneurs must use every weapon in their arsenal. Follow these tips to stay profitable no matter how the global climate shifts:
1. Leverage economies of scale.
Increased costs at the border mean entrepreneurs must scale smartly to balance production and profit. Consider whether moving your manufacturing to another country will soften the blow by reducing costs.
Vox reports that Harley-Davidson, for instance, plans to move production overseas for all the motorcycles it sells in Europe. The company claims that retaliatory tariffs from the EU will increase motorcycle prices by more than $2,000 if production remains in the US. To stay competitive, the quintessential American bike must seek an economy of scale abroad.
2. Solve the problems of hard-hit companies.
Trade barriers create new opportunities amid challenges. Previously expensive production processes and materials sometimes become cheaper relative to penalized materials. Entrepreneurs might consider approaching domestic businesses hit hard by tariffs and offering alternative solutions to their new financial dilemmas.
Automobiles, for instance, require a lot of metal. Many of those metals will cost more in a trade war, according to Time magazine. Since American automobiles contain foreign parts, domestic automakers will need to pay a premium or look for other options -- something an enterprising company could offer. Similar opportunities will crop up in all sorts of industries, and entrepreneurs who take advantage could find major profits.
3. Recycle, don’t purchase.
Producers hit by tariffs might be incentivized to recycle their existing materials rather than purchase new goods. Investments in recycling plants and research in new processes, once too expensive to justify, might now be profitable uses of small business budgets.
Fortunately, the infrastructure for a greater focus on recycling is already in place. Most American steel and aluminum comes from recycled scrap, according to PBS, yet only 65 percent of U.S. steel gets recycled after use. Instead of exporting that scrap, companies could slash production costs by keeping those materials at home and recycling them in-house.
4. Seek solutions that might seem far-fetched.
New solutions that were once too expensive or wasteful might suddenly become profitable during a trade war. It’s an extreme example, but alternative forms of transportation (gyrocopters, drones, etc.) might find market opportunities if they become cheaper options than automobiles. They don’t need to be cheaper in every possible use, but it's necessary that they are cheaper in a specific scenario or use case.
The New York Times reports that Accu-Swiss, a California-based precision-part manufacturer, is taking a few creative risks to keep its prices low. After workers shut off the lights and leave for the day, the company keeps its machines running unattended at a slower speed than usual. That might sound like a problem waiting to happen, but it allows the company to maintain its prices for a bit longer than competitors. Other companies should consider similar methods of shaking up their operations to retain customers, even at the temporary expense of profits.
Perhaps America will “win” this trade war and force the rest of the world to back down. Stranger things have certainly happened. But if the current economic climate is any indication, that’s not likely. Owners of small businesses cannot afford to wait 10 or 20 years to see how these new policies shake out. They need to act now, relying on all their innovative wit to navigate an increasingly treacherous economic landscape.