On July 6th, tariffs of 25 percent on approximately $34 billion of Chinese products will go into effect. While this is a fraction of the total amount of trade between the two countries, its impact could be measurable to many US-based emerging companies, even if the tariff does not apply to the products they sell.
The US is targeting about 1,100 categories of Chinese goods in industries such as tech, robotics and aerospace. China is retaliating with tariffs against agricultural, chemical and energy products. The US is targeting other countries, so we likely haven’t seen the end of this yet. Here’s how it can impact your business.
Your Costs May Go Up
If your supply chain includes targeted products, your cost just went up 25%. That’s very difficult for a lot of small companies to absorb. Passing on the full cost to your customer may not be an option. Many high-growth companies are under margin pressure as they build demand and create economies of scale to lower unit prices. Since a lot of these companies operate at a loss, their access to capital is restricted. A tariff places an unwelcome burden on margins and consumes precious capital.
Your Supply Chain Can Be Disrupted
If your supply chain costs increase, you’ll have to seek out other alternatives to meet demand. This is the purpose of a tariff: to encourage companies to invest more in suppliers located at home. The problem is that many companies plan out their purchases far in advance and simply cannot switch suppliers quickly. The additional cost burden is borne now and cannot be immediately offset, placing new pressure on the capital of a high-growth company. Its also an unwelcome sourcing project for a company that needs a focused and efficient supply chain to meet demand.
Uncertainty Drags Down Demand
The US economy has been humming along so far in 2018 – a rate of 2.3% annual growth through 1Q18. The problem is that nobody really knows what the impact of a trade war will be. They know it won’t be good. So people wait. Companies defer projects or purchases until they can get a feel for what will happen next. This has a cascading effect on the economy as those purchases are another company’s revenue. It can be very damaging to a small company that depends on that revenue. As the economy cools off, access to capital becomes more difficult for emerging companies. The risk appetite of investors and lenders declines as uncertainty grows on when and how their capital will generate sufficient returns.
A Tariff On Your Customer Can Tax You As Well
If your customer has to pay a tariff it could impact your business. Your customer may decide to absorb the cost increase until it can bring new suppliers online. During that time, your customer will likely be looking for ways to cut costs to absorb the increase. Usually this means suspending or terminating certain projects scheduled to commence this year. Service providers are particularly susceptible and many of them are small businesses. Survey your customer base to make sure their exposure to possible tariffs won’t impact your business with them.
What You Can Do Now
If you think your business is exposed to tariffs, there are some things you can do:
- Review your product line to see if any of your goods are subject to new tariffs
- Survey your vendors and customers to see what tariff exposure they have and how it will impact your business
- Minimize supply chain exposure by developing alternative product sources
- Ask customers subject to new tariffs what they plan to do with the cost increase and how it will affect their business with you.