Implications of New Government Tariff
Dear Readers,
There has recently been a fair amount of discussion regarding the new government tariff imposed by President Trump on March 8 and that went into effect 15 days later. One of our readers, Martin, who owns a machine shop, asked about how small businesses will be impacted by this tariff.
Josh: That’s a longer question. Early last month, President Trump authorized a new tariff on imported steel and aluminum. As a result, levies on imports of steel will rise by 25 percent and aluminum by 10 percent for key trading countries (temporarily excluding two key trading partners, Canada and Mexico). The reason this question is tough though is because of the current international negotiations about exemptions for certain countries or materials. Figuring out a definite impact is hard because we don’t know the details. These tariffs are surely going to have an effect on the cost of materials being shipped to the U.S.
Pedro: I recently read that there was a “pay to play” discussion among the European and Asian markets where small businesses would pay a fee upfront in order to waive the tariff. I would encourage small business owners like Martin to really understand his supply chain: Where do his materials come from? How much of his unit cost is related to cost of the raw materials that are subject to the tariff? If that expense is significant, can he raise his prices, passing them along to his customers? If not, then can his vendors find cheaper alternatives for him?
Josh: I’m very concerned that this imposed tariff could force small business owners to make less profit. It’s harder for small businesses to afford bulk quantities of raw materials, like steel or aluminum. While protectionism appears to help some industries, at least in the short term, the total harm is usually greater than the benefit. That’s especially true if the international response is a “trade war.” And this is what worries me for Martin and others: small businesses are less able to withstand the disruption in supplies and are less likely to benefit from benefits that go to big legacy and shrinking industries, like domestic steel manufacturing and coal mining. Do you have any practical suggestions Pedro?
Pedro: Yes. Farmers and their ability to form co-ops comes to mind. The first question I would ask Martin and other small business owners is: Can you combine your buying with other fabrication shops to increase your purchasing volume? There is certainly value in the power of combined purchasing. In addition, small business owners tend to have more personal relationships with their suppliers and buyers, so I would also suggest using those relationships to your advantage. Can you leverage your business relationships to help keep your price competitive?
Josh: Those are great suggestions. A third idea I might add is to try to forecast your inventory. For instance, can you review the recommended maintenance schedule of your specialty equipment and try to get out in front of any tooling or product mold purchases? Or more generally, how far out can you forecast your inventory needs so that you can purchase in larger quantities to reduce your costs?
The new government tariff is something we are going to watch. Thanks again for the great question Martin. We’d love to hear from you. We are offering $100 gift card to the reader whose question is selected next. Please submit your business questions to together@lead.bank
