Trade wars have been in the news recently, mainly thanks to President Trump and his continued obsession with starting them.
The basic definition of a trade war is that it’s when a country decides to create tariffs or put restrictions on certain imports.
Using the Trump example, he imposed a 25% tariff on steel imports and a 10% aluminum one. As a response to these tariffs, other countries start putting their own restrictions on imports to protect their economy.
Needless to say that trade wars aren’t a great thing for international trade. But, how do small businesses get affected by them?
If you own a small business, you’ll definitely want to know the best course of action during trade war periods.
Should you just batten down the hatches, or do you even need to worry about anything?
Is it still possible to grow your small business during a trade war, and will you fare worse if your business is in the USA vs the UK?
All of these questions, and more, will be answered in the following article. If we take a deep dive into the whole trade war situation, we’ll slowly be able to see how small businesses are affected and whether or not you should be worried.
Trade Wars Raise The Cost Of Imported Products
One of the most visible consequences of a trade war is that it raises the cost of imported goods as soon as the tariffs are in place. What does this mean for a small business? Truthfully, it can be both a good and a bad thing.
Local vs Imported
If your business only uses locally sourced materials to create products, and you never use imports, then you’ve now got an advantage over companies that do the opposite. You have no additional costs to pay to obtain your resources, so you can sell products for a lower price and potentially grow your business.
On the other hand, if you’re heavily dependent on imported items, then you’re instantly going to suffer. The cost of procurement goes up, which means you have to do something to try and remain profitable. One option is to raise prices, which may lose customers as they don’t want to pay extra.
Another option is to cut down on your staffing costs to try and compensate for the additional expenses – which could result in your business becoming less productive and efficient.
So, you can possibly benefit from trade wars if your small business either already uses domestic materials or actually manufactures things with tariffs on – like steel and aluminium. But, it will have a negative effect if you rely on any foreign imports that are tariffed.
Can Make Exporting Products More Expensive Too
As a reaction to the tariffs set on foreign imports, the countries that are being penalized will start to put their own tariffs on imports from the US. So, if your small business really depends on exporting goods, then you could be in trouble.
Again, your only options are to try and raise prices or reduce costs to try and remain competitive. Ultimately, this is likely to end in your small business going under.
Trade Wars Will Threaten Innovation
You can clearly see that trade wars will directly impact small businesses concerning imports and exports. But, another consequence of these conflicts is that innovation is under threat.
Think about it like this; when there’s plenty of competition between domestic and foreign businesses, it tends to drive standards up.
A domestic manufacturer that’s trying to compete with a foreign one will have to innovate to try and gain customers and make sales.
The foreign offering is cheaper, so it immediately seems more attractive. This is how we see things like technological advancements to try and make domestic offerings better than the cheaper foreign ones.
Yes, putting a tariff on foreign imports means that domestic businesses can thrive without the competition. However, it also means that they have no need to innovate anymore.
Why Invest In Innovative Measures When You Now Offer The Cheapest Product?
On the contrary, the foreign countries may have higher-quality goods as they’re the ones that are trying to innovate and make their offerings more attractive and worth the extra price.
How Should Small Businesses React To Trade Wars?
The big question is; how should your small business react to everything that’s going on? For one, you need to evaluate if you will be negatively affected by things or not.
If you sell products, then there’s every chance that someone you work with will have to pay import tariffs somewhere down the supply chain, and it may hit you. But, if there’s one sort of industry that your small business should focus on, it’s probably the services industry.
Choose To Sell Services
Small businesses that offer services aren’t really going to be affected by a trade war. If you provide something like marketing consultancy, then your life isn’t going to change that much.
So, if you’re thinking about how to grow your business during a trade war – or just avoid being badly affected by it, then considered offering services either instead of or alongside the products you sell.
Move Your Headquarters
Another idea could be to think about moving your headquarters to a country that’s not affected by trade wars. I know it’s a long shot, but businesses in the UK will be better off than ones in the USA because the trade wars on things like steel and aluminium aren’t present. By operating in a different country, you can bypass specific tariffs that are present in this country.
The trading landscape is constantly changing…this news is just in:
US and EU have just announced they’ll work together on lowering tariffs with the aim of averting an all out trade war.
“We agree today, first of all, to work together toward zero tariffs, zero, non-tariff barriers, and zero subsidies on non-auto industrial goods,” Trump told reporters.
Quote from The Guardian
To conclude, trade wars affect small businesses in many ways. They can raise the price of foreign imports as well as exports to foreign countries. This may temporarily benefit small companies that manufacture products being tariffed or bought from domestic manufacturers. But, the long-term effects are somewhat detrimental in the sense that innovation will suffer substantially.
What’s more, service-based businesses have very little to worry about as they rely on knowledge and skills to make money. So, if you’re looking to grow a business during a trade war, the services industry is the place to be. Have you heard of drop-servicing? See this article.