Hey, Lucas Walker, the Business Consultant here.
I’m trying to help entrepreneurs understand exactly what these tariffs mean for their small businesses.
On February 1st, President Donald Trump put out executive orders that added tariffs to goods from Mexico, Canada, and China, and it’s been a bit confusing to try to figure out what that actually means for small business owners.
So my goal here is to try to not be political but to give clear ideas and information that can make it understandable for small business owners. They know exactly what they should do and how to strategically plan. I’m not an expert on this.
I’ve just done some research. So if I’ve got anything wrong, please let me know in the comments. And again, let’s avoid political discussions when possible.
What Is A Tariff?
So the first thing to really know is what is a tariff.
A tariff is a fee paid on imported goods.
For example, if I were to import maple syrup from Canada on a pallet.
Previously there were no tariffs prior to this executive order from Mexico and from Canada. That was because we wanted to encourage trade back and forth across the border.
This would now add a 25% tariff. So a pallet of maple syrup, maybe I got for $1,000 before, now at one of the 328 points of entry all across the US, the Customs and Border Protection agents there would now collect this tariff of 25%.
As opposed to paying $1,000 for the pallet, I would now pay $1,000 to the people who sent it to me and an extra $250 to these agents who would then deposit that to the US Treasury.
That’s how a tariff works in general.
Common Use Cases
Some of the use cases of a tariff can be to artificially raise the cost of goods coming from overseas.
That can make local goods seem more appetizing and can help make them easier to produce locally, as opposed to relying on imported goods. That’s one use case.
Also, it can help try to penalize countries to put leverage on them to do things that you would like them to do. That’s another common use case of tariffs.
Current Tariffs (As of 2/3/2025)
The current tariffs that are in place as of this video, (which could totally change)
- For Canada a 25% tariff on all goods, except for oil, only a 10% tariff on Canadian oil, (which apparently is a big source of oil in the Midwest)
- A 25% tax on all goods from Mexico,
- And a 10% tariff on all goods from China.
That’s as things sit right now. The executive orders, which I’ll link below again, leave room for retaliatory tariffs and adjusting and changing that later.
The above info is just a snapshot in time as of the recording of this video.
The Effects Of Tariffs/Duties On Small Business
Now that we’ve talked about what a tariff is, we’ll talk about the direct and indirect effects of the tariff.
Direct Effects Of Tariffs/Duties On Small Business
Currently, a tariff will directly affect anyone who is actually receiving imported goods directly from one of these three countries.
Likely, you will have a good idea if that is you or not. It won’t affect a ton of people directly. It’ll affect most people in the second-hand market.
If you’re someone who directly receives goods from these places you will pay the tariffs of course.
Some of the highest-output products from these regions include
- From Canada, which would be things like oil and lumber.
- From Mexico, it’d be things like produce, clothing, alcohol, and auto parts.
- And China has a giant slew of items.
If you’re directly receiving those, you’ll be the one paying that tariff tax, typically.
(Something surprising that popped out in this research I was unaware of is in 2023, for example, the amount of goods we imported from Canada and Mexico was almost three times as much as from China. It was like 1.8 trillion versus 650 billion if I remember correctly!)
There’s a significant amount of goods that could be affected, but typically, again, just to the initial person who receives that, that’ll be the direct effect.
The Indirect Effect Of Tariffs/Duties On Small Business
The indirect effect, I think, will be a bit broader scale and applies more to the average small business owner. So again, if you’re receiving imported goods directly from Canada, you’ll be paying those agents there at that time.
Most other people will be buying from someone who imported that good.
How Do Importers Manage The Tariff/Duty Expense?
Now here is the fallout.
The initial importer had to pay that 25% tariff, right?
The initial $1,000 pallet they paid $1,250 for.
What do they do with that? They have to manage their Cost of Goods Sold (COGS).
Either
- They are going to pass on that entire 25% to you, the next buyer.
- They are going to entirely eat the 25% saying, hey, we have some profit margin. We want happy customers that are used to this exact cost and we’re going to just absorb that into our profit margin if they were able to.
- Or three, I think, is more likely a hybrid of the two. Maybe out of the 25%, they can absorb some of that into their profit margin to try to not let prices jump too much, but they’re probably going to have to pass some on to the next buyer in the chain.
How Do Business Owners Manage The Tariff Duty Expense?
That’s the first domino that falls. The next domino that falls is now you’re the business owner.
You have bought this imported good that has gotten marked up slightly from the tariff.
My guess is, again, most will have to pass on some of that to a next-level consumer.
Now as this next-level business owner, you have to make the same decision as that tier above you.
- Are you going to mark up your pricing and get the entire tariff paid by an end consumer?
- Are you going to absorb the entirety of it?
- Or do a hybrid model?
I expect at this level, more owners will decide to actually pass on a majority of this tariff cost to the end user.
The reason is that these tariff dollars can actually adjust and fluctuate.
If you “eat it”, then there’s a chance that later on, if it were to go to 30 or 40 percent or to fluctuate up higher, you might not have the ability to do that anymore.
Versus accidentally collecting a little bit extra now, it gives you some wiggle room for if things change.
That’s a slightly more secure thing, especially coming out of kind of a post-COVID, post-employment crunch economy where things are a bit tighter.
As a business owner, this is where it’ll affect most people, is that your cost of goods sold that you’ll be buying, there’s a chance that some of those, costs will have gone up. And you’ll have to make the determination of do you eat that cost, pass it on to the end consumer, or a little bit of a hybrid of both where you eat some and you pass some on to stay competitive in the marketplace.
How Might Tariffs/Duties Affect Consumer Spending
The third really important indirect effect is it is expected that this will affect some discretionary spending money that the general market in the U.S. has.
I’ve seen estimates of between an extra $1,000 to $1,200 per year the average American household will pay towards these tariffs by increased goods costs.
Again, at this point, this is all conjecture, who knows what actually happens, but I do think that there will be at least some uncertainty in the market where people might be a little bit more tentative about spending their money not knowing how things are going, or they might actually not have it depending on how the tariffs rollout.
That just means that they’ll be very selective on what they spend their money on, and it’s important that you differentiate your service as a connected important service that they should purchase.
The Unknowns About The New Tariffs/Duties For Small Business Owners
Okay, so we’ve talked a bit about what’s known. Now the next big thing is the unknowns.
There are some things we don’t know about these tariffs. This is something to decide in your own head how you feel about what might happen.
1.) Duration
Number one, and this is to me one of the most important, is the duration of these tariffs.
An executive order has to have a reason that an emergency is being called.
In this case, these tariffs were directly related to an emergency of drug problems, and so the executive order says that these are to combat drug concerns from drugs coming across the southern border, the northern border, and supplies coming through China.
Because of that, it is unclear exactly which terms would have to be met for these tariffs to be lifted.
If instead say it was due to a trade deficit of country A was trading giving more to B and not buying enough back, and that equalized the tariffs would drop out, it’s easier to see a metric of exactly when those would be met.
In this case, it would be possible that in a week or two there are departments set up in these other countries that the U.S. feels comfortable are going to combat the drug problem. The tariffs go entirely away in a week or two.
It could be in four years or 20 years they’re all still in place.
So there’s an unsureness about the duration, and it’s important that you as a business owner come to your own conclusion about what you expect might happen based on your belief in the current administration and what they are doing, and how that might affect your business.
So the duration is one of the unknowns.
2.) Retaliations
Number two is retaliations. So already after releasing it, there have been talks that other countries might have retaliatory tariffs.
So now not just goods coming into the U.S., but goods that you’re sending overseas also will have then a tariff. Then your goods will be marked up overseas, maybe reducing your competitiveness in that marketplace. And so again, there’s a direct and indirect effect of that.
With retaliatory tariffs, and then if they retaliate, do we raise it higher?
There is kind of a game here to be played. It’s unsure exactly how those pieces fall.
China has, as of again the time of this video, filed a lawsuit with the World Trade Organization.
It’s unsure how that will actually fall out, what that would actually mean. So there’s kind of some next pieces flying. It’s unclear what will happen.
That’s another unknown in this scenario.
3.) Customer Loyalty
And then the third is the shifting market allegiances.
It’s unclear exactly how these tariffs might affect market allegiances later because once you have a customer that’s loyal to you, they’re likely to keep using you.
It’s hard to get someone to change to a new potential buyer.
But in this type of situation, it’s possible that tariffs might discourage certain people from doing business with others and allow new people to enter a market and become the preferred vendor.
There is some unsureness as far as how the loyalties might shift and adjust over time.
And I would say it’s definitely a time to be an agile business owner.
What Actions Should A Small Business Owner Take To Deal With Tariffs Strategically
So we’ve talked about
- what tariffs are,
- what the direct effects are expected to be,
- what the indirect effects are expected to be,
- and what the unknown variables are.
The big thing now is what should you as a small business owner really focus on.
1.) Clearly Write Your Expectations For The Future
Number one is I suggest you just take some time with a piece of paper and actually write out what you expect the future to look like.
You don’t have to be right. You don’t have to be psychic. But it’s important for you to make a plan of how you see things playing out.
Do you see this all blowing over in three months or six months?
Do you expect it to be here for the next four years, 10 years?
What is your general idea of how you expect things to play out?
By having it clearly on paper, when it happens, you can start to shift and make adjustments and say, well, I thought that based on a 25% tariff. Now it’s 40%. Now it’s 5%.
You can make those adjustments in real-time to improve your strategy.
Number one is actually writing out how you think the future will go just so you can compare what’s happening to that prediction. It’ll cause things to be less anxious because you have a general plan or idea.
2.) Focus On Providing Value And Quality Customer Relationships
Number two is to continue to focus on your value and your customers. Continue to be focused on relationships with customers and not transactional. If you are a product that typically has relied only on being cheap, then it will be hard to remain competitive here.
If you are someone who your customers have really connected with on a personal level, they feel that extra value from every interaction with you, there’s a higher chance that you make the cut with their discretionary earnings being lower or price competitiveness in the marketplace.
Focus on those relationships and not transactional customer interactions.
3.) Know Your Numbers
Number three is to know your numbers.
It’s really important that you’re very clear on your numbers, and what your cost of goods sold are because these are going to fluctuate possibly on a daily or weekly basis.
They definitely have jumped up for some people by as much as 25% here from one day to the next.
Having these numbers mapped out clearly so you can reflect those adjustments and prices and manage accordingly is going to be really, really important.
4.) Streamline Supply Chain (if applicable)
And then number four, this doesn’t affect most small business owners, but streamlining the supply chain will be a very important part of this next stage.
There are reports of many auto manufacturers, for example, that maybe have an engine manufactured in Mexico, shipped to the U.S. for assembly, and the car is completed and shipped to Mexico for sale. So in that case, they would have paid a tariff on the engine coming over and the car coming back the other way.
It would definitely lead to excessive stacked tariffs, so streamlining that would be a way to cut costs. It’ll become very, very important. Again, that won’t affect most people, but it’s an extreme use case.
So I feel like I’ve covered the bulk of these concepts.
If you have some questions in the comments, let me know.
Again, let’s try to keep it civil, focused on the facts of what are the rules of the game that’s being played right now, and not what’s right or what’s wrong.
Best of luck to you. Hang in there. You’ve got this.
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