Hedging Against a Trade War

Share
shipping containers crashing against each other, one with American flag and another with Chinese flag

As a small business owner, the words 'trade war' and 'tariff' can be unsettling. When cost uncertainty is on the horizon, you will want to be prepared as much as possible. Here are some ideas to help you navigate your business through a possible trade war.

Tariffs Defined

A tariff is a tax on imports imposed by a governing authority. The tax can be on specific goods and services, countries of origin, or both. The current tariff conversation appears to be centered around reducing the U.S. trade deficit with China and other trading partners. When a tariff is placed, often times the affected country will impose retaliatory tariffs to protect its own businesses and reset the balance of trade to their favor.

Ideas to Prepare Your Business

Identify At-Risk Areas

Remember, suppliers impacted by tariffs are sourcing some or all of your purchases from countries outside the U.S. So pay attention to which suppliers AND items are most vulnerable to tariffs. Currently this includes steel, aluminum, and imports from China. But don't overreact; the average tariff on all U.S. imports is still less than 2 percent with over half of the imported items having no tariffs. On the other hand, things like clothing and shoes could be subject to ever-increasing tariffs.

Seek Out Additional Suppliers

Once you have identified possible items that could be vulnerable to tariffs, determine the source of the item with your key suppliers. If the items in question are an important component to your business, research additional suppliers who obtain their merchandise from a non-tariff source. Create new relationships now to increase your chances of minimizing your added expenditures later.

Know Your Break-Even Point

The breakeven point for your business is where your total revenue equals your total costs. Knowing this point is helpful in forecasting breakeven sales and your ability to absorb price increases from key suppliers. This will help you identify if, when and how much you will need to raise prices.

Identify Areas with Potential to Cut Costs

Do an assessment of all your costs now and classify them as essential or non-essential. If a tariff is going to impact your margins, you may be able to salvage your overall profitability by cutting some of your non-essential operating costs.

Tweak Your Supply Chain Timing

There might be potential to manage your inventory to create a buffer to absorb a tariff, if you think the trade war will be short-lived. Consider creating a working capital account to allow yourself purchase flexibility to make your costs more predictable during your key selling season. You might even be able to negotiate a staggered delivery schedule with your supplier to manage storage concerns.

There are many factors that come into play when buying or selling an asset. Just make sure the tax implications are considered before you make the transaction. As always, should you have any questions or concerns regarding your situation please feel free to call.


Share
Disclaimer

The information in this article is written as accurately as possible and to best of the writer's knowledge. However, there may be omissions, errors, or mistakes. Because of this and changes in circumstances, the information in this article is subject to change. This article is for informational purposes only and should not serve as professional, financial, medical, emotional, and/or legal advice. Readers may rely on the information on this article at their own risk, but they should consult a CPA, financial expert, or other professional for advice. Givilancz & Martinez, PLLC reserves the right to change and handle this article series, and therefore, may remove or alter any part of this article or the comments section. Any comments inserted by readers are not the responsibility of G&M PLLC and do not represent the thoughts or ideas of G&M PLLC.