Does Tariff Affect Small Business?

Discussions about tariff have been all over the news recently ever since the growing tension between the U.S. and China was pushed into the limelight because of trading policy disagreements. Although this may sound like the type of news most normal working people would ignore or forget about, those who run businesses – especially small business owners – may actually be affected and dragged into this economic ruckus, whether they like it or not.

What Are Tariffs?

In layman’s term, tariffs (also referred to as import tax, customs duty, or levies) are taxes imposed on all products and services that are purchased or imported from another country. Tariffs are levied as a percentage of the transaction cost between consumer and dealer. The main purpose of a tariff is to restrict the flow of imports by increasing the prices of goods that come from overseas, therefore making it unattractive to buyers. In return, it provides a higher demand and price leverage for domestic producers or locally made products against its imported counterparts and at the same time, helps generate more revenue for the government. Tariff is considered to be a form of trade protectionism which dates back to the 18th century, serving to safeguard domestic industries and jobs from foreign competitors.

Does Tariff Affect Small Businesses?

Short answer: Yes, if the business relies on purchasing goods or acquiring raw materials that cross from one country to another, then it will be negatively affected by import tax and trading policies. As a result, small businesses could face a surge in material costs, be forced to jack up the prices of their goods, and even lay off some employees to account for other expenses, including tariffs.

On the other hand, small businesses that deal only with domestic production and local acquisition of goods and materials may enjoy far less competition, and therefore, higher profits. However, this only constitutes a small sector of the industry.

Overall Impact of Tariffs

Tariffs do not only affect business owners of all sizes, but also consumers. While it seems like imposing tariffs on imported products may benefit a country’s government with increased revenues and domestic producers gaining more profit minus the competition from imported products, it can actually pose problems in the long run. Some of these disadvantages include:

  • Consumers paying higher prices for goods and services subject to import tax, resulting in the decline of the purchasing power of a buyer
  • Drop in consumer spending because of less disposable income
  • Artificial price inflation
  • Reduced opportunities for suppliers and manufacturers to export their products in case of tariff retaliation
  • Trade wars between countries, e.g. trading partners striking back with their own imposed tariffs
  • Job loss for people working in the export industry (in the case of tariff retaliation from another country)
  • The possibility of decreased or poor product quality when businesses cut down on costs of production to be able to pay tariffs
  • Restricted competition, encouraging local businesses to remain open and run despite inefficiency as they would not perform essential improvements if tariffs were not available.

The enforcement of tariffs on imported products has its upside and downside, as well as unforeseen consequences for business owners, consumers and the country as a whole. Although it may help promote the growth of local firms, economists are saying that it could do more harm than good, especially when a country’s economy relies a lot on international trade.