On April 2nd, President Donald Trump imposed a huge range of tariffs against a range of countries, meaning that U.S. companies that import goods into the U.S. have to pay a higher tax to the government. This had a huge effect on businesses around the world, and the stock market changes adversely affected everything from pensions to the value of the dollar.
What is a tariff?
When goods are imported into a country, the country importing the goods may have to pay a tariff. This is a kind of tax which makes goods that are imported from outside of the country more expensive, encouraging suppliers and businesses to purchase goods from within their country.
Tariffs are paid by the person, business or company who are importing the goods, not the person exporting the goods. The money generated by tariffs is passed onto the government of the country imposing the tariff. This money can then be put towards the government budget, or specific initiatives.
Tariffs can be used for a range of different reasons; to generate money for the country that is imposing the tariff, or to encourage businesses and customers to buy and sell locally. It can also be used as a political tool by imposing tariffs against countries where there is a poor political relationship, and reducing tariffs against countries where there is a good political relationship.
Tariffs in action
As an example, imagine you run a coffee shop in your local area, and you need to purchase coffee beans. You get these from a local coffee supplier, who roast the beans before passing them onto you. They get their coffee from an importer, who gets them from Brazil. To purchase these coffee beans, it costs £100.
Your government decides to impose a tariff of 10% on coffee beans that are imported to your country. Even though you’re getting your coffee beans from your local coffee supplier, they’re getting the coffee beans from an importer, who gets them from Brazil. As a result, the importers' costs go up, meaning it costs more to get them into the country.
The importer passes that cost onto you; so now, the bag of coffee beans cost £110, rather than £100. To keep running your coffee shop, you’ll need to pay £10 more for your coffee beans. You might then decide to increase the cost of your cups of coffee, essentially passing that cost onto your customers. That could mean that fewer customers visit your coffee shop.
What does this mean for UK SMEs?
Even though the UK government isn’t directly imposing the tariff, UK businesses can still be affected due to their supply chain for the products they offer. The supply chain is the organisations and businesses involved in getting products, or parts of products, to you. In our example above, the supply chain starts with the coffee beans from Brazil, which then go to the importer, which go to a local coffee supplier, which finally get to the coffee shop owner.
If the costs go up for organisations in your supply chain, this can result in higher prices passed onto you, or there might be disruption as suppliers change where they source their products in order to avoid tariffs. For businesses that export goods to countries which impose tariffs, these may make your products more expensive for customers in those countries, reducing your sales.
What can SMEs in the UK do about tariffs?
Whilst much of these tariffs are out of SMEs control, there are a couple of things that businesses can do in order to manage these changes.
Understanding your supply chain is crucial. Make sure you talk to your suppliers and review where your products are coming from, and where their products are coming from. Ask how they’ve been impacted by tariffs, and what they can guarantee in terms of pricing; find out whether the price is guaranteed for the next month, or the next three months, and whether it could change.
Talking to your customers is also beneficial. When you’re providing quotes to customers for products or services, make sure that they understand prices may change based on what is happening with tariffs and the U.S. Setting a limit on the quotes you give customers means that you can send a new quote across if your costs increase, without taking your customers by surprise.
