The introduction of tit-for-tat tariffs on traded goods has led many economists to suggest that the U.S. and China are entering into a full-blown trade war. The costs associated with that could seriously hurt American businesses in sectors as varied as manufacturing, agriculture, microbreweries, and local bakers. 

"These tariffs make for a very uncertain environment," suggests Dean Baker, the co-director of the non-partisan Center for Economic and Policy Research in Washington, D.C. In particular, Baker notes that smaller companies may not have the capital required to weather the imposition of tariffs on Chinese imports over time, or to absorb the cost of the tariffs if they export goods to the Chinese market. "It's a pain for larger companies like Boeing, but for small businesses--or someone just starting out--this could be deadly," Baker adds.

Earlier this week, the Trump administration unveiled plans for tariffs on as much as $50 billion worth of Chinese goods across 1,300 categories, including 25 percent levies on aerospace and machinery parts, shoes, furniture, and batteries. These could make it more expensive for U.S. manufacturers that source parts from the country, including, say, airplane wings or electronics, with some suggesting that companies ultimately will pass the costs down to the consumer. In response to Trump's moves, Beijing threatened to impose tariffs of its own on more than 100 U.S. goods, ranging from soybeans and cars to whiskey, tobacco, chemical products, and brewing and distillation dregs. Analysts point out that the tariffs appear to target more rural areas of the country, including those that supported Trump during the 2016 U.S. election. By Thursday evening, President Trump threatened a new round of tariffs on $100 billion worth of Chinese goods--with Beijing responding hours later that it would not hesitate to reciprocate, according to the nation's Ministry of Commerce.

These moves could seriously impact entrepreneurs in sectors including agriculture and craft beer and wine, as they export some of their products to China, and would now need to pay a steeper premium to do so. Meanwhile, the ripple effects of these added costs could end up pinching retailers from Oregon to North Carolina, experts say.

Jacob Uhlenkott, an adviser to his family's Grangeville, Idaho-based steel fabricator and 5,000-acre wheat farm, is concerned that China's proposed tariffs on agricultural products will hurt his firm's bottom line. "The global [wheat] price is concerning," Uhlenkott says. "About 80 percent of what we grow is exported to China, and we're looking at potentially growing different crops that wouldn't be impacted by the tariffs," he says.

Uhlenkott points out that it's the small and medium-size enterprises, as opposed to larger manufacturers of automobiles and airplanes, that are likely to be put out of business in a trade war. Currently, he helps to run a Boise, Idaho-based startup incubator, BizSprout, which has launched more than a dozen distilleries the eastern Washington area. Those startups are now quaking at the prospect of Chinese tariffs on their exported products. "They're all freaking out," Uhlenkott says, adding that he and his business partner are looking to develop new markets for the distilleries to target--including Zimbabwe, where China has invested billions in recent years--should China become too expensive to penetrate.

For Jason Wilson, the founder and CEO of the Gadsden, Alabama-based brewery Back Forty Beer, his overseas business took a hit as soon as President Trump was elected back in 2016. In the fourth quarter of that year, Back Forty generated nearly $500,000 in Chinese sales, or around 10 percent of its total revenue. But by 2017, and thanks to the billionaire real estate mogul's tough talk on trade in the run-up to the election, Chinese retailers declined to continue peddling his product. "We sold $0 of beer into China last year because of the impact of that election, and the rhetoric the administration had laid down," Wilson tells Inc. Despite working hard to re-build those relationships, the more recent introduction of tariffs on U.S. exports makes China an off-limits market for the nine-year-old brewer.

Now, in an effort to recoup sales, Back Forty is shifting focus to new markets--including Malaysia and the Netherlands. "We had to offset the losses by drawing in revenues from markets that weren't as volatile, and would add some stability," says Wilson. Tariffs "really jerked the rug out from under us at a critical time in our growth."

To be sure, the Trump administration has said that the tariffs on Chinese goods are intended to curtail shady trade practices on the part of China. The CEPR's Baker, for one, concedes that China does appear to manipulate its currency to obtain an unfair trade advantage over the U.S., with whom the nation presently has a $375.2 billion trade surplus, according to the most recently available data. Yet Baker suggests that tariffs of this size and scope are likely to do more harm than good when it comes to international trade relations. "It's not clear what President Trump's goal is," he adds.

Many say it's important to consider the broader impact of a trade war, and how losses could be passed on to local businesses. "What you'll see out of the imposition of these tariffs is the likelihood of localized or regionalized impact on the surrounding economy," suggests David French, the senior vice president for government relations with the Washington, D.C.-based National Retail Federation, an industry trade group. The way he sees it, regional consumers will eat the cost of Chinese tariffs, which means that local retailers trying to sell to them will likely see lower revenues. "Let's use BMW cars as an example," explains French. "Products like sport utility vehicles may not sell in places like China [due to the new tariffs], and that means potentially lost jobs at the plant in Spartanburg, South Carolina," he says. "There are other suppliers somewhere down the food chain, and then the local retailers could get hurt too."

There may be workarounds for U.S. small businesses feeling the pinch, but they'll need to act fast, says John Scannapieco, a co-leader at the international law firm Baker Donelson. "I would start thinking about alternative sources of supply," he suggests, for companies that import products from China. Another resource could be the U.S. Export Assistance Center, which helps businesses expand into new markets by charging a fee to help entrepreneurs set up meetings abroad, in the event that Chinese tariffs make it too costly to export to Beijing.

Of course, it is conceivable that the Trump administration is able to mitigate damage done by hammering out a trade agreement with China, making the nation's retaliatory tariffs a non-issue. Nevertheless, experts say that to call the current state of play anything other than a trade war is disingenuous. "This is the standard textbook for a trade war," says the NRF's French. "Trade wars create a lot of casualties among innocent bystanders, and there are direct order effects as well as second and third-order effects."

Published on: Apr 6, 2018