When you own a small business, government trade decisions can have a big impact on your business, both directly and indirectly. In 2017 and 2018, the United States and Canadian governments created tariffs on certain products that each nation imports from the other.
Although this may worry you, remember that there’s always an opportunity to turn lemons into lemonade. With great self-employed and small business advice, you can navigate these new tariffs and continue to grow your business.
How Tariffs Work
The aim of a tariff is to protect domestically produced goods by increasing the cost for foreign businesses to bring items into Canada. A tariff limits free trade and makes foreign products more expensive than comparable domestic ones. A tariff can promote domestic jobs and developing industries within Canada.
For example, say your firm manufactures clothing. Canada imposes an 18% duty on all clothing that comes from countries other than the United States. This allows your company to compete in terms of prices versus clothing from other countries.
Suppose you make a T-shirt that sells for $10. A T-shirt made in Vietnam, consisting of the same material and design, normally costs $9. Add the 18% tariff to the Vietnamese-made T-shirt, and the price rises by $1.62. Now, the Vietnamese T-shirt costs $10.62, plus sales tax.
Therefore, a tariff can help make your product more competitive in the marketplace and more appealing to consumers.
Understanding Tariffs and Canada Small Business Effects
Tariffs are taxes a governmental authority places on a specific type of imported or exported products. Governments may set tariffs on the raw materials businesses use to create goods, on finished products, or both. You might see tariffs on aluminum, which companies use to manufacture beverage cans and automobiles. Or, you could see taxes on automobiles and canned beer — two finished products that use aluminum.
There are two basic types of tariffs:
- Ad valorem tariffs: Taxes that change based on the value of imported goods or materials
- Unit tariffs: These taxes are charged in a specific dollar amount for a set number of products
Governments tax goods to protect their nation’s companies from foreign competitors and to increase revenues. When governments impose tariffs, it costs more to import the goods. If you’re selling those imported goods to customers, that means you might need to raise your prices.
The New Tariffs and Canada Small Business
After a lumber trade agreement between the United States and Canada expired in 2015, the United States set a tariff on Canadian softwood lumber in April 2017. This tax adds an average of 21% to the cost of lumber Canada sends to the U.S.
On June 1, 2018, the United States placed a 25% tariff on imports of Canadian steel and a 10% tariff on imports of Canadian aluminum. Canada responded immediately with similar tariffs. These taxes affect up to $16.6 billion in steel, aluminum, and other products it imports from the United States. This amount is the same as the Canadian exports that were affected by the United States’ tariffs in 2017.
On October 25, 2018, Canada set tariff rate quotas (TRQs) on seven classes of steel goods. What does that mean for you? If you’re importing certain goods from the U.S. without a valid import permit, you must pay a safeguard surtax of 25%.
Relationships Between Tariffs and Self-Employed Individuals
How do these tariffs affect your small business? Imagine that you own a food delivery and catering service. You use lots of single-use aluminum pans for delivering, serving, and selling food. You buy soft drinks and beer in aluminum cans for bulk and individual sales, and you purchase aluminum canisters to store your secret-recipe whipped cream. Your budget for next year includes money to purchase a new delivery van. After the government sets aluminum tariffs, all of these items get more expensive. Suddenly, you’re wondering if you have room in the budget.
When material costs increase, your suppliers may raise their prices. That means that your costs also get higher. This creates a dilemma: if you raise your prices in response, can you keep your customers? What’s more, is it possible to raise your prices enough to cover the increased costs?
If you do decide to raise prices, it’s a good idea to introduce a price increase to your current customers and clients without jeopardizing your important relationships. So, before you change those menus, think about other options for dealing with your supply chain issues. Ask yourself whether it’s possible to:
- Cut costs in other parts of your budget
- Renegotiate current contracts or negotiate new contracts with your current suppliers with better terms
- Look for new suppliers that use only aluminum produced in Canada
- Fine suppliers that source their aluminum from countries that aren’t affected by the Canadian trade countermeasures
- Stock up on goods or materials before prices get higher
- Explore new ways to bring in income and offset the higher supply costs
Another option? Take advantage of Canada’s trade agreements. Canada is part of the Comprehensive Economic Trade Agreement (CETA) with the European Union. This agreement makes it easier for you to buy tariff-free materials from suppliers in other member countries. Another option is the 11-country Comprehensive Progressive Agreement for Trans-Pacific Partnership (CPTPP). If this agreement takes effect as planned in 2019, it allows you to buy supplies from 10 Pacific Rim countries — without expensive tariffs.
Tariffs and Small Business Advice
As for tariffs and self-employed advice, it’s always helpful to be proactive. Rather than standing back and waiting to see how things shake out, take action — even if you don’t think the current tariffs affect you. After all, it’s always a good idea to save money and strengthen your business position.
Do you have long-standing relationships with suppliers? If they want to keep your business, you should be able to cut better deals. If you need to sweeten the deal, try offering added value. You might offer to refer your industry contacts to the supplier. If you buy raw goods or components, consider offering the supplier a discount on the finished product.
If your company depends on suppliers that are affected by tariffs, you might want to start creating relationships with backup suppliers. That way, if your current vendors are forced to raise their prices out of your budget, you have another solution. In an emergency, these backups can be a lifesaver — they can keep your operations running smoothly. Keep in mind that finding new suppliers may take weeks or months of research. You want to ensure that the vendor is reliable, and that they can coordinate with your shipping needs. What’s more, you need to make sure their products meet Canada’s regulations before you begin contract negotiations. By starting early, you can have a plan in place when you need it.
As a small business, your cash flow is the lifeblood of your company. Tools such as QuickBooks Online and QuickBooks Self-Employed can help you organize receipts, monitor income and expenses, and handle invoicing on the go. You can use the tool to check in on your profit margin and look for places to save money.
You might find opportunities to reduce variable and indirect costs. One option is to see if you can cut your utility bill by lowering the room temperature a few degrees when the ovens are on. You might also negotiate better insurance premium rates if you haven’t filed any claims in the last few years.
If you’re in retail sales, you might review your inventory to make sure you’re not carrying more than you need — overstock takes up storage space and is prone to damage. Then, stock more of the products that sell quickly. If you’re overloaded with old stock, consider having a sale to generate cash and rid yourself of unnecessary burdens. you might also make a charitable contribution that qualifies for a deduction at tax time.
Are you planning to make capital improvements or buy an expensive item that might be impacted by tariffs? It’s a good idea to talk to your accountant or tax advisor about possible tax credits and deductions. More importantly, don’t be shy about asking for help in negotiating the purchase price and repayment terms.
Understanding Tariffs in the Canadian Economy as a Whole
Governments can impose tariffs to discourage the purchase of a specific product manufactured by multiple countries or to discourage economic activity with a particular country. Tariffs typically result in higher prices for customers because they may increase costs of raw materials such as steel. However, countries that impose tariffs receive tax revenue from them, even if it means higher prices for consumers.
When you’re importing or exporting products, tariffs are a big issue. Fortunately, you have many options for dealing with the resulting price increases for material costs and finished products. Want to get ahead of the game?
Stay on top of business developments, communicate with the administration, and build relationships government officials who can keep you up-to-date on policy changes. When the tariffs end, your business may be in a better position than it was in the first place.
When governments create new tariffs, it’s even more important to save money wherever you can in your small business. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.