The United States’s use of tariffs in international trade negotiations is not an entirely new idea. Tariffs have been around for centuries and, though there’s debate over how effective they can be, they are typically a tool that fits into a larger economic strategy.
President Trump’s policies on economics and trade were part of his 2024 campaign platform. His first-term administration also used tariffs extensively. In this article, we’ll examine the impact tariffs can have on small businesses—and what owners like you can do about it.
What you need to know
- Tariffs are taxes paid by domestic importers, not by foreign countries. These costs are typically passed on to retailers and consumers.
- Recent tariff policies include a baseline tariff of 10% on most imports and higher targeted tariffs on specific countries.
- A business line of credit can provide cash flow flexibility to deal with tariff-related price increases and supply chain disruptions.
What are tariffs?
A tariff is a tax on imports from other countries. Higher tariffs are typically implemented to address trade imbalances. The thought is that, ideally, higher prices on imported products will increase sales on domestic products.
It’s important to note that tariffs are paid by the domestic importer, not by the foreign country from which they’re importing the goods or services. This is a common misconception among American taxpayers.
More specifically, while Trump’s policies may be bringing money in from foreign trade partners, that money isn’t coming directly from tariffs. The economic impact of recent tariffs on China and other high-tariff nations is due to decreased consumer demand—because of the higher domestic prices in the United States.
Types of tariffs
There are four main types of tariffs that are commonly used:
- Ad valorem tariff – A set percentage of the imported goods’ value.
- Specific tariff – Charged based on units, weight, or volume instead of value.
- Compound tariff – A combination of ad valorem and specific tariffs—i.e., a set fee per unit, plus a percentage of the value.
- Tariff-rate quota – One rate applies to imports within a certain quota, but a higher tariff is charged on anything that exceeds that quantity.
Many of President Trump’s tariffs are being viewed as “retaliatory” tariffs because they’re a response to high tariffs charged by other countries on U.S. imports. These tariffs could serve as leverage in trade negotiations, but impacted countries have shown initial resistance.
Did you know?
Tariffs were first instituted in 1789 when President George Washington imposed a 5% duty on all materials and goods imported into the United States.
How do tariffs work?
Today, the baseline tariff on goods and services imported into the United States is 10%. Since the U.S. business doing the importing is responsible for paying the tariff, that cost is already factored into vendor and supplier agreements, as well as the prices at which the business sells its products or services.
When higher tariffs are implemented, that business is still responsible for the cost. If they work with international suppliers, those non-U.S. vendors may have no incentive to lower their prices to help the importing business cover the difference. So, that’s why many of these additional costs end up getting passed on to consumers—sometimes, there’s no way around raising your prices.
From a consumer perspective, prices are often the main driver for what and how much of it is being purchased. Imported materials and finished goods from China have always been significantly cheaper than their domestic counterparts because labor and manufacturing costs are much lower in China. Their costs haven’t changed, but U.S. tariffs have essentially raised the price that consumers and/or retailers pay for Chinese products.
When this happens, prices on imported goods should be comparable to prices on products made in the United States. Barring other influences, that should help boost sales on domestic-made goods—which is part of the reasoning behind tariffs in the first place. Unfortunately, many U.S. manufacturers are heavily dependent on imported materials and technology, so their prices are also going up at the same rate as import costs.
Tariff vs. tax
Though they are a form of tax, tariffs don’t serve the same purpose as the type of taxes you might be accustomed to paying. Domestic taxes are meant to generate revenue for government operations and services, and are applied broadly to citizens and businesses inside the country. Tariffs target imported goods and are intended to influence trade patterns and protect domestic industries from foreign competition.
The other difference between tariffs and taxes is how they’re determined. Income taxes are assessed using a progressive tax system. Sales and services taxes are typically a straight percentage. Tariffs, however, are embedded in product prices. They create a competitive advantage for domestic businesses that don’t rely heavily on imported materials or technology.
How do tariffs impact small businesses?
There are differing opinions on whether tariffs will provide the economic benefits the Trump administration, U.S.-based businesses, and the American people are hoping for. The biggest effect will be felt in the global supply chain that many domestic small businesses rely on. Higher prices on imports will force them to raise prices or cut costs by finding more cost-effective domestic suppliers.
The impact won’t be uniform across all industries. For example, local fishermen and farmers who’ve struggled for decades against international imports will likely benefit from the new policies. Domestic electronics companies—particularly those that make semiconductor chips—should also benefit from import tariffs. Domestic oil companies are already feeling the positive effects.
What can small businesses do to navigate tariffs?
As a small business owner, it’s a good time to check your supply chain for vulnerabilities. Imported materials and goods are likely to cost more for the foreseeable future, at least while Trump’s tariffs are in effect. Look for domestic suppliers or try renegotiating existing contracts, and stock up on materials while the tariffs are temporarily paused, if possible. Combine this with cost-cutting and process changes that streamline your operations to get as lean as you can.
Raising prices might be the only option for some companies. Try to do this strategically if you can. That means letting higher-margin products absorb more of the tariff impact, while keeping prices stable on more price-sensitive items. You could also look for ways to modify your products to facilitate domestic sourcing of materials.
How to use a line of credit to keep your business running smoothly
There’s a delicate balance between tariffs and interest rates. If interest rates are low, a business line of credit can be an effective way to stock up on materials and products. Typically, the best time to acquire a line of credit is before you need it—i.e., right after tariffs are announced but before they’re implemented, or while they’re paused.
A business line of credit can help you manage cash flow disruptions caused by rising costs. Flexible working capital can give you additional bandwidth if you need to change suppliers. If you’re aggressive, you could also use it to expand operations or business investments. And, what makes a line of credit truly unique is its flexibility: You can draw funds from it when—or if—you need them, and you only pay interest on money you’ve used.
Unfortunately, some businesses may not be able to survive a prolonged period of economic uncertainty. The best thing you can do is be prepared with an emergency fund or a line of credit that’s easily accessible in a time of need.
Are tariffs good or bad?
The truth is, tariffs aren’t inherently good or bad. But they could negatively impact small businesses, especially those dependent on imported materials and technology.
To prepare for this, your business can be proactive about changing to domestic suppliers or renegotiating existing vendor and supplier agreements. You can also look into a business line of credit to stock up on products or manage cash flow disruptions during periods of tariff-induced economic upheaval.
A business line of credit that’s there when you need it.
