Impact of Tariffs on the Economy and How to Prepare for Them

Although the benefits of free trade are indisputable, sometimes countries need to impose tariffs in order to reduce their trade deficit, protect manufacturing jobs, or strengthen their economy. In addition to those effects, a major positive impact of tariffs is that they bring in tax revenue. Although they cause disruptions in food and agricultural supply chains, for example, tariffs should be considered as a policy that has both pros and cons. In this post, we’ll shed some light on the positive and negative impacts of tariffs on businesses and the economy as a whole. If you’re preparing your business for potential risks caused by policies, make sure to check our posts on how to build a recession-proof business and what are the effects of economic stagnation.

Key takeaway: The impact of tariffs on businesses can be both positive and negative. Importers are affected the most by this economic policy, while local producers in the food and beverage industry or other manufacturers usually benefit from import tariffs.

How Do Tariffs Work

Let’s examine how tariffs work step by step.

1. A company or an individual imports goods (or services in some cases);
2. Customs officers check the type of product, the country of origin, and the value of the items in order to determine the tariff;
3. The tariff is applied and needs to be paid by the importer. Only then are the goods released and can be collected;
4. The importer usually passes the cost along in some way. For example, a company imports goods for a total of $1,000 and sells them for $1,500. If a 20% tariff is applied, the total cost of the goods will come to $1,200. The company can choose to reduce its profit margin and still sell them for $1,500 or to keep its 50% profit margin and sell them at $1,800. That’s why inflation is often a short-term effect of tariffs. Read more about the impact of inflation on businesses.

Impact of Tariffs on the Economy

Calculating the impact of tariffs on certain industries or the economy as a whole can be challenging. That’s because tariffs can have different goals and be used as a negotiation tool. Allow us to shed some light on the expected impact of tariffs on the economy.

1. Tariffs are likely to cause some type of retaliation, which might hurt businesses that export goods;
2. Tariffs usually lead to the disruption of various supply chains. That’s why some businesses prepare for them by stocking goods in advance;
3. The immediate impact of tariffs is usually increased prices. Businesses that import raw materials or goods from other countries have an increased cost of goods sold. These additional costs are often passed to consumers as it is much easier compared to establishing new supply chains from other countries or from local manufacturers;
4. Tariffs help governments as they are an additional source of tax revenue;
5. Domestic manufacturers usually benefit from tariffs as they are a protectionist policy. They make domestic production more competitive compared to imported items;

Benefits of Tariffs

The main reason why countries impose tariffs is to reduce their trade deficit and protect domestic manufacturers. Since tariffs are an additional tax on imported goods, consumers and businesses are incentivized to order local products or raw materials. In the long run, tariffs can increase manufacturing and create jobs in sectors like agriculture, steel production, and other secondary sectors of the economy.

Besides encouraging retail and wholesale sales of local goods and stimulating domestic manufacturing, tariffs can also bring additional tax revenue to governments. Large countries that have high purchasing power can use that to their advantage.

Sometimes, tariffs are used as a negotiation tool to leverage pressure on other countries that use non-tariff trade barriers or have a large trade surplus.

Negative Impact of Tariffs

Despite the positive impact of tariffs in some cases, these policies can also have a negative effect on both businesses and consumers. In order to prepare for upcoming tariffs, companies often need to invest in more inventory and storage of raw materials and goods. This puts a strain on their cash flow. 

Consumers are often affected more by the impact of tariffs compared to businesses. Importers often pass along additional costs, which increases both retail and wholesale prices of imported goods.

Imposing tariffs can lead to retaliatory actions from other countries. This can become a lose-lose scenario where both economies experience slower growth.

How Businesses Can Prepare for Increased Tariffs

Imposing tariffs is rarely done on a whim. Instead, it’s part of the pursuit of complex economic goals and efforts to restructure certain sectors. Here are a few ideas on how to prepare your business for such turbulent times.

1. Rely on short supply chains and order goods from local manufacturers and suppliers;
2. Have a well-structured risk management plan. Check out our post about creating a restaurant risk management plan;
3. Aim to have higher profit margins through automation and better efficiency;
4. Prepare for other consequences of tariffs, such as inflation and changes in consumer behavior. See our posts on how to deal with inflation in a business, the effects of low interest rates on businesses, and the effects of high interest rates on businesses;
5. Adjust your inventory and stockpile on imported goods;
6. Understand trade rules, the goals of the administration, and what changes in economic policies to expect.

Frequently Asked Questions about the Impact of Tariffs

From a guide on how to use QR codes for restaurant menus to information about wholesale janitorial supplies, entrepreneurs can find resources on various niche markets on BlueCart’s website. Below are the answers to some common questions regarding the impact of tariffs.

What Are Tariffs?

A tariff is a tax imposed by a country on imported goods or services from another country. In addition to bringing more tax revenue, tariffs can help reduce a country's trade deficit by encouraging businesses to buy locally manufactured goods. Tariffs can be imposed on a specific product, on one or several industries, or on all products and services imported by a country. In addition to tariffs, there are other ways countries can protect their industry or limit imports. That includes strict regulations, import quotas, subsidies for domestic products, and other non-tariff trade barriers.

Who Pays the Tariff?

Generally speaking, tariffs are paid by the company that imports goods from another country. Companies can choose to take full effect from tariffs by lowering their profit. Alternatively, they can pass the cost on to consumers or renegotiate prices with manufacturers. In most cases, a combination of these is used – the supplier takes some of the cost by reducing product prices, the importer also takes another part which lowers their profit margin, and some part is also passed on to the consumer. When the tariff is high, business owners usually need to search for local alternatives or import from other countries with lower tariffs.

Which Businesses Are Impacted the Most by Tariffs?

Depending on the type of tariffs and the goals of this policy, they can impact only a specific industry or the majority of the economy. For example, a tariff on textile products and footwear will primarily affect apparel retailers and manufacturers. It will also affect consumers as the prices of these products will likely increase, at least in the short term. On the other hand, broad tariffs imposed on multiple countries will likely affect all sectors of the economy. They might help some industries by making their products and services more competitive while damaging others by causing supply chain disruptions and inflation.

BlueCart: The Right Platform for Importers and Distributors

Since tariffs disrupt supply chains and cause price surges, companies need to use the right business analytics tools to manage wholesale orders. That’s why thousands of retailers, coffee shops, and businesses in the restaurant industry use BlueCart’s wholesale ordering platform. Thanks to our SaaS solutions, companies can easily compare prices and find suppliers. Distributors also have multiple reasons to use BlueCart’s marketplace. It has solutions related to the creation of catalogs, invoicing, and automation. Schedule your demo and see how BlueCart can help you increase B2B sales.