Author’s Note: This is a developing story; as such, some details may have changed from the time this post was written. Consult trusted, reputable news sources for real-time reporting.

Last weekend, the United States imposed tariffs on imported goods from major trading partners, including China, Mexico, and Canada. In response, Canada has already imposed retaliatory tariffs and China and Mexico promised similar responses—though as of this writing, tariffs on Mexico are reportedly delayed a month pending a deal with the U.S.

What does this mean for farmers and other small businesses? Let’s explore how these tariffs could potentially affect the agricultural and other business sectors.

How tariffs work

Tariffs are a “protectionist” tax on imports, meaning they seek to protect domestic production and manufacturing industries. By increasing the cost of foreign goods, they are intended to support the purchase of domestic goods.

For example, if Canadian lumber costs $600 per thousand board feet but comparable American lumber costs $700, the Canadian lumber would likely be the more attractive purchase. A 25% tariff on Canadian lumber, however, would increase its cost to $750, making the American product cheaper. While this benefits U.S. lumber producers, it also raises the price on U.S. consumers who would have previously paid $600 instead of $700 or more.

For decades the trend in global trade—often led by the U.S.—has been toward free trade, with countries agreeing to more bilateral or multilateral treaties to reduce or eliminate tariffs, with the U.S. generally reserving tariffs to address bad trade behavior such as dumping (selling goods below cost to drive competing producers out of business) or intellectual property violations. The U.S. has generally moved away from protectionist tariffs on the condition that other countries do the same.

Now it has drastically changed positions with some of its largest trading partners, and those partners are responding in kind.

Retaliatory tariffs

As of this writing, Canada had announced retaliatory tariffs on U.S. goods it imports, including:

• Poultry, poultry products and eggs
• Milk and milk products
• Honey
• Tomatoes and tomato products
• Nuts and fruit
• Grains such as wheat, rye, and barley
• Beer, wine, whiskey, and other alcoholic beverages
• Wood and wood products
• Oil and oil products

Just as U.S. tariffs tend to reduce sales of exports to the U.S., retaliatory tariffs from those countries will likely reduce our sales to them. Moreover, while Canada’s tariffs are (currently) only on specified goods, U.S. tariffs seemingly apply to all Canadian, Mexican, and Chinese imports.

These tariffs were imposed under the International Emergency Economic Powers Act, a law typically used to address national security threats through sanctions rather than trade issues. In fact, this is the first time it has been used to impose tariffs. This novel approach will almost certainly result in legal challenges, and while those may take months or years to work through the courts, it’s possible a judge might impose a more immediate injunction preventing U.S. tariffs from going into effect either on a limited basis or more broadly.

Finally, the executive orders imposing these tariffs discussed the possibility of increased tariffs in response to retaliatory tariffs. This could be just the first battle in a longer trade war.

The economics for farmers, small biz

While the tariffs’ most direct impact will fall on businesses that produce, import, or export listed goods, the entire economy will feel their effects. Here are some basic likely outcomes:

• Prices on tariffed goods will rise, which will benefit U.S. producers but also raise costs for domestic consumers. Industries that rely on imported raw materials for manufacturing will see increased expenses as well, potentially reducing their profit margins.
• While higher tariffs on imports could boost demand for U.S.-made products here, this benefit is offset by rising costs for inputs such as fuel (see below) and raw materials. And prices for U.S.-made goods on which other countries have imposed tariffs will drop as their consumers’ demand drops.
• Producers of poultry, poultry products, and inputs for poultry (such as poultry feed suppliers) are likely to bear the effects of reduced export opportunities. The same goes for milk producers and producers of affected grains, fruit, nuts, and tomatoes.
• Since the U.S. has also placed tariffs on imported oil, fuel prices will likely rise, which will increase prices and/or decrease domestic profits overall, since fuel is a common production and sales input. Too, other inputs produced outside the U.S. will cost more to import.
• Expect some of your e-commerce orders to cost more and take longer to arrive. Previously, many small-dollar imports were excluded from tariffs, since the amount at stake was seen as too minor to justify the regulatory hassle of imposing a duty. That exclusion has been removed.

The economic theory behind free trade is that everyone, overall, does better when countries compete on price without protectionist trade measures. This is tough on domestic producers when foreign producers can out-compete them on cost, and can inspire calls for protectionist policies.

In short, free trade does promote wider economic growth, but its benefits are often widely distributed, while its negative effects—such as job losses in some industries—are concentrated. This makes trade policy a contentious issue.

For most farmers and other small business owners, the current tariff situation presents challenges. Perhaps U.S. duties will benefit some operations, but many farmers are likely to see increased costs and potentially reduced sales of goods. This economic situation might also reveal underlying fiscal problems in your business.

If you are struggling with managing debt, or financial planning, the attorneys and financial strategist at Ag & Business Legal Strategies can help you figure out a plan. Give us a call sooner than later—let’s find out together how we may best assist.

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At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.

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