Tariffs can erode profit margins, drive up prices, make it harder to sell overseas, and put pressure on small businesses like yours to find new suppliers and markets. In this blog, Airwallex explain what tariffs are, how they can impact your business and how you can take steps to reduce
What are tariffs?
Tariffs are a tax on imported goods. A tariff increases the price of an imported product, making it more expensive than a similar domestic product. When a government imposes a tariff, businesses importing affected goods will have to pay the tariff, eating into their margins.
Governments usually impose tariffs to raise import revenue, protect domestic industries from foreign competition, or gain leverage in trade negotiations.
For example, the United States' recent tariff changes aim to steer US consumers and businesses towards domestic products. This protective stance isn't unique to the US. Many countries employ tariffs to protect local industries, preserving jobs and economic stability.
When a government imposes a tariff, importers of the affected goods are responsible for paying the tariff. However, this cost can often be passed on to the end consumers in the form of higher prices. If you’re a business selling goods that are subject to trade tariffs, you may have to cover some of the additional costs of the tariffs.
How do tariffs affect prices?
Tariffs raise import and export costs and put pressure on your margins. Some businesses may choose to absorb these costs to maintain competitive pricing, but this comes at the cost of reduced margins. Large corporations often have the financial cushion to manage these costs, but small and medium-sized businesses need more strategic solutions.
Small businesses face the dilemma of sustaining a very slim margin or raising prices. If they choose to pass on costs to their customers in the form of higher retail prices, they may end up losing price-sensitive customers. When customers find themselves paying more for the same products, it can reduce their confidence and loyalty to the business.
Tariffs can also spark a cycle of escalating costs and prices. When one country imposes tariffs on another country’s imports, the affected country may retaliate with its own tariffs, resulting in a trade war. Not only does it become more expensive for you to import goods, it also becomes more challenging for your products to remain price competitive in high-tariff markets.
How do tariffs impact small businesses?
Tariffs can drive up costs, disrupt supply chains, and reduce global competitiveness. Besides higher export costs, you may also face delays in shipments and supplier shortages, which can slow down operations and strain your cash flow. If you sell to high-tariff markets, you risk losing customers if you decide to charge them more to cover the higher costs.
Higher cost of goods
Small businesses often operate with tighter margins and less pricing flexibility, making them more vulnerable to tariff increases. Even a modest rise in export costs can significantly erode margins and strain cash flow. While some companies may be able to pass increased costs onto customers, doing so risks losing price-sensitive buyers, especially in highly competitive markets.
Supply chain disruptions
Tariffs can disrupt the global supply chain, making it more difficult for you or your suppliers to get the goods you need. New tariffs can cause delays at customs, changes in shipping routes, or even supplier exits from certain markets. If this happens, you may have to find new suppliers quickly and could end up with longer lead times and higher costs.
Reduced global competitiveness
Tariffs can also impact your imports. If your government responds to a tariff by implementing a reciprocal tariff on goods from that country, it may make those imports more expensive. Higher import costs could force you to accept lower profit margins, raise customer prices, or source new suppliers from low- or no-tariff countries.
How to mitigate the impact of tariffs
With higher tariffs, you need solutions to mitigate the impact of tariffs on your costs, supply chain, and global competitiveness. Here are some ways to stay competitive in the face of tariffs.
Reduce currency risk with a multi-currency account
Widespread tariffs can cause trade tensions and currency fluctuations. Making multi-currency transactions means dealing with frequent currency conversions, and conversion fees can add up quickly. Unfavourable FX rate movements can make conversions more expensive, further eroding your margins.
Opening a multi-currency account can help you manage currency risk and reduce FX costs. When you receive, hold, and settle payments in the same currency, you eliminate unnecessary currency conversions.
Source from suppliers in low or no-tariff markets
Sourcing from low or no-tariff markets is a direct way to avoid higher import costs. If switching suppliers entirely isn’t feasible, consider diversifying your supplier base across different markets. This approach spreads your exposure to tariff risk and builds a more flexible, resilient supply chain.
Find the right payment solution
Choosing the right payment solution can simplify the payment process while keeping costs low. Look for a payment provider that lets you pay suppliers like a local business, using local payment rails. This way, you save on international transfer fees, skip costly intermediaries, and settle payments quickly. Timely supplier payments can strengthen supplier relationships and keep shipments on track.
Look out for a solution that also offers business debit cards linked to multi-currency wallets, with no international fees. You can use these cards to pay international suppliers in their local currencies, avoiding the high fees that some local banks charge.
Diversify risk by expanding to new markets
If tariffs are shrinking your margins in certain markets, growth opportunities may lie elsewhere. Expanding to markets with lower or no tariffs can reduce your reliance on tariff-heavy markets. You can maintain competitive pricing, protect your margins, and unlock new revenue streams amidst global uncertainty.
Offer consumers their preferred payment options
Succeeding in new markets isn’t just about logistics – it also requires understanding local consumer behaviour. Different customers will have their own spending habits and payment preferences. Data from our recent research with Statista shows that a majority of customers in Asia and Europe prefer digital wallets like Google Pay, while customers in New Zealand prefer credit and debit cards.
Providing a checkout experience that feels familiar can reduce checkout friction and drive higher conversions, helping you to succeed in new markets. Customers will also expect you to display prices in local currencies, offer local payment methods and flexible checkout options.
To deliver these experiences, it's essential to partner with a payment service provider that lets you offer a localised experience tailored to each market.
How Airwallex can help protect your margins and stay resilient
There’s never been a more important time to keep your business running smoothly. Airwallex offers a comprehensive suite of financial solutions to help you manage the impact of tariffs and stay resilient amidst changing economic conditions.
With a single Airwallex Business Account, you:
- get access to local bank details, allowing you to operate like a local business in 60+ countries
- can receive, hold, and settle funds in multiple currencies
- can reduce FX costs by settling your funds like-for-like into a multi-currency wallet
- can pay international suppliers in 150+ countries
- can make global payouts with 0% foreign transaction fees with a multi-currency Visa debit card
This post was inspired by and made possible by Airwallex. You can read the original article on the Airwallex website.
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