Like ‘em or hate ‘em, trade tariffs are part of the business equation and have been since 1789. Tariffs have been both a source of revenue for the government — at one time representing 85 to 90% of all federal revenues — and as a negotiating tool for opening foreign markets to U.S. exports. But for businesses large and small, tariffs present impediments to growth, forcing owners and their customers to “take one for the team.”
In today’s global economy, where the U.S. service sector dwarfs manufacturing, the effects of tariffs, particularly on small and medium-size businesses, can be especially crippling. And while the most current round of tariffs takes effect under a Republican administration, Democratic presidents have resorted to the tactic as well. The bottom line is that everyone pays the price in a trade war. But there are some things you can do to insulate your company from the damage. Let’s take a look.
“When the elephants dance, everybody gets shaken up. In this instance, [small businesses are often] dealing with the supply chain asking for higher costs that cannot be quickly passed on to customers. It means more time thinking about pricing, renegotiating and managing cash flow.”~ LYNEIR RICHARDSON, Center for Urban Entrepreneurship & Economic Development, Rutgers Business School.
Getting Help with Exemptions
The good news is that, if you believe your company will be significantly affected, you can apply for an exemption with the United States Trade Representative’s office. If approved, this eliminates any tariffs that apply to the imported products specified in your application. The bad news is that getting your request for exemption approved is not easy. When it comes to cutting through all the red tape, your local Congressional representatives can be both responsive and helpful. But before they can go to bat for you, you need to get on their radar.
Whether Republican or Democrat, every politician wants to be involved in job creation or job preservation. Bringing your representatives to your company so that they can see the jobs you've created and understand what’s at stake makes a big difference. It also helps them better understand why they need to help you fight for an exemption.
While they’re visiting, take the opportunity to make your case: maybe you produce a product that few others make; perhaps you employ a high percentage of disadvantaged or disabled people; maybe you support an important local non-profit that will suffer if your revenue shrinks. Share your plans for growth. If you’re a young company doing $4 million with 25 employees and are on track to double revenues and add ten more employees in the next three years, that’s important to them.
Believe it or not, most local politicians do care. They may not share your political views, but every one of them wants jobs. And even if you have to grit your teeth to do it, making a small contribution to the representative’s campaign can go along way towards building that relationship. However, the contribution must be made by one or more individuals, not by the corporate entity.
Instead of, or in addition to, cultivating a relationship with your local representative, you may even want to look at bringing in a lobbyist to help you make your case and navigate the process of applying for an exemption. That may sound expensive, but if you’re doing $10 million a year in sales and stand to lose $100,000 due to tariffs, spending $25,000 on a part-time lobbyist may be a great investment. You have to think of it in terms of a cost/benefit analysis. How much will the tariffs cost you? How much are you willing to spend to avoid that cost?
Re-evaluate your supply chain
Look at the countries that you’re importing products from and think about two things: where else can you get it and what is the real cost of importing those goods?
Right now, there are a number of emerging markets where manufacturing costs are relatively low and there’s little risk of a trade war with the US. These include Vietnam, Malaysia and India. Smart owners will reassess their supply chain regularly to make sure they’re not missing opportunities. Of course, you have to realize that switching suppliers from one country to another will cause some disruption in your production but it may be worth it long term.
As you’re considering possible changes in your supply chain, it is important that you look at the real cost of that move. For example, we (Kaplan CFO) recently had a client who moved to a supplier in China based on the per unit price quoted. As it turned out, what they received from that supplier were inferior goods that had to be reworked. It got to be so bad that our client needed to employ their own people in the factory to do nothing but quality control. The real cost of importing those goods was much higher than anticipated.
Your total cost of production should also include the cost of extended lead times. Our clients who are importing from the far East have to allow two to six months for delivery. That dramatically reduces their ability to respond to market conditions and customer demand. This is not to suggest that exporting from other countries is necessarily bad. Far from it, you can significantly boost your margins and steer clear of tariffs by partnering with the right suppliers; just do your homework.
To Absorb the Cost or Not?
If you can’t get a tariff exemption or find a different supplier in time, you’ll need a strategy for how to handle the increased cost. Do you eat it? Do you pass it along to your customers? If you choose the former, you must understand how that will impact cash flow. If the effect will be nominal, you may be able to get by with minor cost-saving measures until the tariffs are removed. If the impact will be more severe, you may want to consider passing the cost along to the customer. Proposed tariffs are typically headline-making, so customers understand that they may need to expect higher prices, softening the blow so to speak. Another option, is to split the cost with your customers. This tactic can go a long way toward strengthening your relationship with them and building goodwill.
Whether you decide to absorb the cost, pass it along or split it with your customers, it is a good idea to seek a credit extension from your bank. You don’t have to use, but it’s nice to know that it’s there as a fallback if things get tough.
Be the Ant, not the Grasshopper
For now, it appears that the escalating trade war with China has been reduced from a near boil to a slow simmer. But history has shown us that it’s only a matter of time before tariffs are back in the headlines. The time to prepare for them is now, and regardless of your strategy(ies), you can’t do it alone. It all comes down to building the right relationships — with bankers, congressional representatives, lobbyists, suppliers and customers. As a rule, we council our clients to: “never go to your bank when you need money.” The same holds true for cultivating the other relationships you’ll need.
The hard truth is that everyone suffers in a trade war. But by developing and working with our allies, those with whom we share a vested interest, we can weather the storm together. The time to lay the groundwork is before you need it!
About the author
Ken Kaplan is the Managing Partner for Kaplan CFO Solutions, which provides embedded, interim CFOs for fast-growing companies and those in transition. At 29 he became one of the youngest General Managers of a Fortune 500 subsidiary. In 1998, as VP/CFO of a national medical supply manufacturer, he led a successful ownership transition by raising $16.5 million in debt and equity, negotiating the successful sale of the company three years later. Since then, Ken has engineered successful turnarounds at two multi-generation, family-owned companies and managed exponential growth as the CFO of a solar design & installation company, which was ranked as Inc. Magazine's 46th fastest growing company for 2011. Today, Kaplan CFO Solutions features 11 CFOs who work with more than 20 clients across Western North Carolina.