Tariffs and Their Impact on Small Business
Uncertainty in vendor relationships.
Welcome to life in the age of heightened tariffs.
When the Trump administration announced new tariffs with China in August of 2018, I was optimistic that this was a short-term problem that would resolve itself in short order before many of my clients felt any significant impact. Regrettably, we’ve had no such luck. The administration seems to be digging in its heels, announcing successive waves of new tariffs that have expanded both the scope of goods affected and the degree to which they’re affected.
Small businesses are beginning to feel the crunch, so I’m diving in to help decode the impact these new tariffs are having on our community.
WHAT IS A TARIFF?
Tariffs are a kind of tax leveraged on a particular category of imported goods. The amount of the tax depends on many factors, including the type of products you (or your suppliers) are importing and the country in which those goods originated. These charges are collected by U.S. Custom and Border Protection agents at all U.S. ports of entry, and the funds are deposited into the U.S. Treasury.
Tariffs aren’t some new taxation scheme. They were first introduced by the U.S. government in 1779, but 2018 saw a flurry of new tariffs assigned to Chinese goods in an attempt to “level the playing field” while renegotiating international trade agreements.
That might sound good in theory, but tariffs aren’t generally welcome news within the small business community, and economists have been putting in some serious overtime to analyze the current situation and fact-check the administration. No matter where you fall on the political spectrum as a voter, these tariffs are likely coming home to roost for you, too. I surveyed my community this week and discovered that 46% of my clients have already felt the squeeze.
WHICH PRODUCTS ARE AFFECTED BY TARIFFS?
There have been several waves of new tariffs enacted by the administration, with the most recent taking effect on January 1, 2019. Many basic supplies used by artisans were included in recent tariff expansions, including:
- Cotton Fabrics
- Glass containers
- Metal containers
- Citric acid + many common personal care ingredients
- Pigments, dyes, inks, paints
- Glass beads
Many of us mistakenly believe that we’ve dodged a bullet because we don’t import directly. Unfortunately, the tariff system is in motion regardless of whether you source directly from China or purchase from a vendor that does. It all trickles down in the end, and so many of the raw materials we use in our creations originate abroad.
If you haven’t yet seen price jumps, it’s too soon to exhale. Large suppliers typically order in significant bulk, planning their purchase orders months in advance, so the inventory they have on-hand before the tariffs were implemented remains unaffected. And many of those same suppliers absorb the extra expenses until it’s no longer sustainable, so the trickle down isn’t typically immediate. More food for thought: Though the roll-out of tariffs has been in motion since summer of 2018, many of the product categories that makers and artisan designers rely on have only gone into effect in the last few weeks, so our community has yet to feel the effects fully.
If you know the applicable HTS classification (a number assigned to a specific class of goods in international trade), then you can search the entire database of products affected by these tariffs.
THE IMPACT OF TARIFFS ON SMALL BUSINESS
Anne-Marie Faiola, CEO of Bramble Berry (one of the country’s leading suppliers for artisan soap and apothecary companies) recently shared with me that the tariffs are directly affecting the company’s raw materials sourcing and much of the packaging they offer.
“Many of our vendors have single line items on every single bill that simply is called ‘Tariff Fee’ or ‘Tariff Passthrough’ or some other euphemism. These range from 5 to 15% on a variety of our products. So far Bramble Berry has been holding the line on raising prices, even as we’ve seen our margins painfully erode in a non-sustainable way. However, we have been reluctant to pass any increases along to our end customer with the hope that the trade negotiations produce positive results and these ‘tariff tax’ line items are removed.”
Dharma Trading Co., a popular supplier of apparel blanks and dyes, dispatched an email to their customers in September announcing that many of their offerings would rise by 25% as of January 1, in direct coordination with the fresh wave of tariffs.
Jill Soltau, CEO of Joann Fabrics has been particularly outspoken on the issue. In an August email to Joann customers, she stated: “Your ability to continue creating at an affordable cost is in jeopardy. Proposed tariffs on many of the items we sell will inadvertently place a tax on the made-in-America products you make, which will hurt millions of individual crafters along with charitable organizations and small businesses.” Soltau estimates that 60% of the 40,000 SKU’s carried by Joann will be directly impacted. Despite both her testimony before Congress and rallying the customer base to lend their names to a petition, the proposed tariffs ultimately took effect in October.
Since that time, I’ve been hearing rumbles amongst the Lucky Break community of unexpected price increases and unnecessarily complicated shipments. Christy Rose of KB Shimmer has been on the receiving end of multiple price increase announcements from her suppliers.
Angie Chua of bobo design studio ran smack into tariffs as she developed her new Wanderlust Passport. “I had samples shipped to me earlier in the year and was quoted a shipping price. When it came time to ship my final order, it was nearing the end of October/early November. I was told that the tariffs had impacted my cost and they were now subject to a 10% tax. If I received my goods in January, that tax would rise to 25%.
I had two options for shipping from China. I could ship by boat, working to secure my own shipment once it landed in the U.S. While that would be significantly less expensive, the products could take six weeks to arrive, pushing them into the January timeframe and the heightened 25% tariff structure. I ultimately decided to ship by air, even though that option was significantly more expensive. I received the order in just ten days, but I ended up paying the higher fees for the air freight, plus a 10% tariff on the entire order.”
MINIMIZING THE IMPACT OF TARIFFS ON YOUR BUSINESS
While the future of the actual tariff system lies in the hands of politicians, there are several proactive steps we can take to ensure stability within our businesses.
MAKE A “PLAN B” LIST OF SUPPLIERS. It’s always wise to have multiple vendors for every raw material and/or finished product in your inventory, but that “Plan B” becomes increasingly important in times of escalated trade tensions. Carve out some time to price shop and discover alternatives.
DOUBLE-CHECK YOUR PRICE STRATEGY. If you’ve been operating on too-slim margins, then the increased costs will quickly drain all traces of profit. I recommend keeping a close eye on your product costs, auditing them quarterly to ensure that you have ample markups for both retail and wholesale distribution. Need help tracking product costs? My Price-O-Matic software will help you get that project under control. Even better? When one of your supplies increases, you can update it in one spot and POM will search your entire collection, automatically updating the cost schemes for every product that incorporates that raw material.
CONTACT YOUR REPRESENTATIVES. This is, essentially, a political game. If you’re displeased about the country’s new take on international trade, then make your voice heard. Share your personal story and provide as many specifics as possible to help legislators understand the real impact of their policies.
STAY AHEAD OF YOUR INVENTORY. By their very nature, tariffs cause the supply chain to slow, and more complicated paperwork only amplifies the effect. Closely monitor your own inventory and plan to order further in advance than you’re accustomed to in order to prevent lags in availability.
Have you felt the effect of tariffs on your small business? If so, I hope you’ll share your story in the comments!