Tariff Survival Strategies for Small Businesses

WHAT IS A TARIFF?

A tariff is a tax on the import of goods between countries as a form of foreign trade regulation. The simple explanation of the goals behind tariffs are:

1. Raise revenue

2. Protect domestic industries by increasing the price of imported goods, which provides domestic products with a price advantage.

3. Address unfair practices, such as when the exporter is subsidized by their government, thus artificially lowering the cost of production.

There are three primary methods of assessing tariffs:

1. Ad valorem – a percentage of the value of the import

2. Specific – a fixed amount on each imported good

3. Tariff-rate quotes – tariffs that are triggered or increase significantly after a certain amount of imports is reached.

What tariffs are coming?

Although nothing will be finalized until the new administration is in place, they have made a lot of pronouncements regarding tariffs. As reported in Barrons, “On the campaign trail, Trump pledged to increase tariffs on Chinese imports to the U.S. by 60% and implement a 10% duty on imports from all other countries. Postelection, he said he intends to impose an additional 25% tariff on Mexico and Canada.

And in late December, he threatened the European Union with tariffs if member countries don’t increase their purchases of U.S. oil and gas to reduce the ‘tremendous’ trade gap with the U.S.

If all of these tariff proposals go into effect, the average tariff rate will rise from 2.4% of the value of imported goods to 17.7%, according to estimates from the Tax Foundation.

That would be the highest level enacted since 1934, during the Great Depression.” 

How Much Do We Import?

Imports of goods to the U.S. from China totaled $426.9 billion in 2023, a 20.7% decrease from 2018, according to the U.S. Census Bureau. Imports from Mexico totaled $475.2 billion in 2023, up about 38% from 2018.

Mexico accounted for almost 16% of imports as of October 2024, according to the U.S. Census Bureau.

How Can Your Small Business Protect Itself?

·     Don't be an ostrich. Burying your head in the sand and thinking you won’t be affected because you are not an importer or an exporter won’t work. Pretty much everything you buy for your business is most likely imported. This includes office supplies, electronics, vehicles, and even the food in your cafeteria.

·      Lock In Rates with Suppliers. Since your suppliers will be in the same boat as you, they may be willing to sign contracts that guarantee a stable source of revenue.

·     Stock up on inventory. Purchasing future inventory at today’s prices can be a hedge against rising costs. However, if the recessionary impact of tariffs affects future sales, you may be stuck with unused inventory. To avoid this, review demand forecasts, evaluate storage options, and ensure adequate financing (see below).

·     Purchase bigger ticket items now. Electronics, vehicles, appliances, and other “steel-heavy” goods could be impacted by Mexican tariffs (many vehicles and appliances are produced at least in part in Mexico).

·     Look for American Suppliers. This is what the imposition of tariffs is intended to do – create demand for American-made products. Initially, the cost will (most likely) be higher, but you’ll have established a ‘local’ supply chain and have a hedge against rising costs. Additionally, look for suppliers who are not targets for tariffs and establish relationships with them now.

·     Take Out Loans with Fixed Interest Rates. At least initially, tariffs are likely to cause a bump in inflation, which will cause interest rates to rise. Securing it now would be best, especially if you know or think you will need capital.

·     Increase Your Line of Credit. If you don’t want to borrow now or are unsure whether you’ll need capital but want the reassurance of having it available, this is the way to go.

·     Find New Markets for Your Export Goods. If you are an exporter, and your primary markets are tariff-targeted, it would be good to find non-targeted markets.

·     Execute Strategic Price Increases. Although unpopular, your customers know your increased costs will need to be passed on to them. The best way to do this is to communicate transparently. This maintains trust and rightly frames the reasons for price increases. Also, the increases can be spread out by implementing tiered pricing or waiting until contracts come up for renewal. Let your customers know what is coming. You can also bundle products, creating greater value for your customers, which lessens the impacts of higher prices.

·     Offer Value-Added Services. Differentiate your products by offering services such as warranties and maintenance agreements. This will have the added benefit of increasing customer loyalty and generating tariff-exempt revenues.

As explained by Lj Suzuki, writing for CFOshare, “As tariff policies take shape under the new administration, small businesses have a window of opportunity to prepare. Proactive steps today can mean the difference between weathering short-term disruptions and thriving in a new economic landscape.

But remember – each strategy has its own risks, too. Make sure you understand each playbook before choosing a strategy to execute.

No matter the tariff environment, there is no substitute for teamwork and collaboration. Work with your managers and Fractional CFO to ensure your business is poised for success in 2025.”

How Can ASN Help?

Although we don’t have a crystal ball, our professionals are constantly monitoring the dynamics of the business environment and how the changing landscape may influence our clients. We consider all of this when advising you on the best strategies that will protect and grow your business. If you want to discuss any issues raised here or your goals and strategies for facing the challenges ahead, just give us a call.