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This Is Why Small-Business Owners Are the Unintended Victims of the U.S.-China Trade War

Corporate giants can withstand tariffs more easily than small and medium-sized businesses.

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The U.S.-China trade war is taking a heavy toll on the nation’s small firms and indicates that small and medium-sized firms across the country have been severely affected by higher tariffs.

What are tariffs, and why does the government impose them? These are essentially a tax on goods that are being brought into the country. They are meant to serve several purposes. One, they make imported items more expensive. When that happens, it is expected that consumers would prefer to buy locally manufactured goods instead of expensive imported products.

So, one purpose of an import tariff is to get people to buy goods made by domestic manufacturers. Another is to protect local companies that make these goods. If there is greater demand for domestic products, more jobs will be created, and the economy will benefit.

However, it may not quite work that way.

The problem with tariffs is that when they are imposed, the affected countries introduce retaliatory tariffs of their own. This can be a disadvantage for exporters. It can also lead to a trade war  with negative consequences for all the countries involved.

Related: Three Surprising Business Lessons From the U.S.-China Trade War

Small businesses are more vulnerable than large corporations

There are strong trade linkages between China and America. Many of the largest U.S. corporations have extensive business dealings with the world’s second-largest economy. Consequently, the ongoing trade war will affect some of the biggest corporate names in America.

Take the example of Apple. The iPhone manufacturer, which has one of the largest market capitalizations in the world, earns over a quarter of its operating income from Greater China, the area that comprises the mainland, Hong Kong and Taiwan. The top three American car companies, GM, Ford and Chrysler, have extensive operations in China. There are dozens of other big U.S. corporations that do business there.

Ironically, it’s not these heavyweights that will be most affected by a trade war. These giants have large financial reserves and access to bank loans and other forms of capital. Additional tariffs may hit their profitability, but it probably won’t threaten their existence.

Related: Should American Entrepreneurs Favor Tariffs? (Opinion)

With small and medium-sized businesses, the story can be entirely different

Consider the retail sector in the U.S. According to government statistics, the retail industry has about one million establishments in the country, and total sales stand at $5 trillion. The National Retail Federation (NRF), a trade body, holds the view that import tariffs can do immense harm to the country’s retail establishments. NRF says that as a consequence of the trade war, “Prices will rise and the economy will suffer.”

That isn’t the only problem. China has a virtual monopoly on many of the goods imported to the U.S. A recent article in Quartz identifes 11 product categories for which China supplies 95% or more of U.S. imports.

What small businesses can do to minimize the impact of tariffs

It seems that import tariffs are here to stay and that the trade war isn’t going to end anytime soon. Many small businesses could face higher input costs, compressed margins and lower demand for their products.

What can small firms do? The most obvious solution seems to be to raise prices. Companies that sell to other businesses could have a slight advantage here. Business owners could speak to the purchase manager at the buyer and explain the reason for increasing prices.

But firms that operate in a B2C environment could find it challenging to adopt this strategy. It’s difficult to convince hundreds or thousands of retail customers that prices are being raised for a valid reason. This is especially true if the customer has the option of taking his or her business to the competition.

Related: What Tariffs Mean for Small Businesses

What if increased costs can’t be passed on? Business owners could consider some of the following options:

  • Cut costs. Reducing expenses is always a good idea. But when profits are down, it’s a necessity. The focus should be on non-productive costs or those that don’t contribute to the bottom line. Don’t make the mistake of slashing marketing expenditure. Although this could give net income an immediate boost, it may lead to sales dipping over the medium to long term.
  • Try to identify new suppliers. Switching over to another vendor may not be easy. Even if it is possible to find a domestic company that can provide the products or intermediate goods that are needed, they may be more expensive. Another option is to look for suppliers in non-tariff countries. In any case, it’s likely that small businesses will pay a higher cost for the goods if the supplier is non-Chinese.
  • Reduce employee expenses. In most circumstances, this step should be considered as a last resort. Finding good employees and training them costs a lot of money. A small-business owner who fires an employee may be looking for a replacement in a few months or a year. Instead of reducing the workforce, it may make more sense to reduce employee-related expenses like overtime. Outsourcing some work may also help in cutting costs.

The bottom line

The last year and a half has seen a great deal of uncertainty around import tariffs. As a result, the profitability, or even existence, of many small firms could be in question.

What should business owners do? Those that are dependent on Chinese imports could try to develop alternate suppliers. Exporters to China could attempt to identify new markets for their products. While these steps could cause some short-term pain, they may result in increasing the resilience of American firms and make them less dependent on a single country.

Ekalavya Hansaj

Written By

Entrepreneur Leadership Network Contributor

Ekalavya Hansaj is founder at Quarterly Global, Indie MM and various other companies. He is a serial entrepreneur, author of How to Grow Your Startup and Small Business, a show producer and a MarTech and AdTech investor.