SMEs in the Trade War: Dealing with Tariffs and Uncertainty

The U.S. administration has finalized the first part of the trade deal with China, but that doesn’t end the trade war. Especially small businesses continue to suffer from global trade tensions. 

Small businesses suffer from higher business costs

43% of small business owners in the U.S. said a 25% increase in tariffs in the U.S.–China trade war would increase their business costs, according to a survey by BizBuySell. 

64% of the 1,700 survey participants said they would respond to the higher costs by raising prices, and 65% said they would consider switching to suppliers outside of China.

Getting out of China, however, is not that easy. Resources are more limited in other low-cost markets, there’s not as much infrastructure and experience, and the manufacturing areas that do have the required infrastructure are quickly being snatched up by big-box retailers. As a result, suppliers request high minimum order quantities that small businesses cannot afford.

Industries with global supply chains are most affected 

The effects vary from industry to industry. Business with China-exposure and, in general, companies with international supply chains are affected more severely. 

Electronics companies, for example, are relying heavily on suppliers from China. Companies like Apple produce vast amounts of their products in China and face increasing tariffs during the trade war. Large-caps like Apple are more capable of absorbing the additional cost, though, while smaller companies might end up going out of business. 

Apart from electronics, manufacturing goods such as auto parts, machinery, petrochemical, and chemical products have seen tariff exposure. These are goods that are integrated into the U.S. and Chinese supply chains and have high linkages to many countries such as Taiwan, the Philippines, or Malaysia. Thus, businesses in these countries have suffered from the trade war as well. 

Limited positive effects on suppliers outside of China 

That said, some businesses have also benefited from the trade war – at least to some extent.

Demand for North American supplies has gone up. Machinery was up 75% year-over-year, plastic recycling services and lumber were up 70% and steel 35%. On the flip side, while those suppliers may now have full order books, many of them also use Chinese suppliers – thus, they feel the trade war on the buy-side as well. 

Real winners of the trade war may be export markets that offer an alternative to China. Thailand, Vietnam, and Cambodia, for example, have seen increasing demand from U.S.-based buyers. But again, there is a flip side as well: China may dump products that were not exported to the U.S. to their neighboring markets at low prices, hurting the domestic economies.

For more information on the current status of negotiations between the U.S. and the Chinese governments, read: U.S. Administration Addresses Digital Trade in Trade Deal Phase Two.