Tariffs and the Potential Impact on Small Businesses
Commercial Credit, Small Business Credit
The ongoing trade rhetoric with China and threats of new tariffs on Mexico have the potential to negatively impact not only our largest corporations but the 30 million small and mid-sized businesses (SMB) in the United States. These SMBs, which fuel economic growth on Main Streets across the country and employ half of all working Americans, have reasons to be concerned.
Slower GDP and Hiring
Bank of America recently warned of a "sizable slowdown" in the US economy due to the trade war. The bank slashed its forecast for US GDP growth for the second half of 2019 to 1.2%, compared with 1.8% previously. At the same time, estimates show Mexico tariffs will also be a big drag on employment, with a potential loss of 400,000 jobs.
Critical Trade Partners
Mexican exports as a percentage of GDP are the largest of any major Latin American country, according to the World Bank, and about 80% of them go to the U.S. SMBs dominate trade with Mexico. Most of the imports and exports are driven by US businesses with fewer than 20 employees. The U.S. International Trade Administration notes that of the 57,098 U.S. firms that export to Mexico, 57.7% have less than 20 employees.
SMBs across the US can be at an even greater risk if trade tensions continue. Here are three reasons why:
- Lower Confidence: When small business leaders are uncertain about the future, they go into defensive mode. They tend to hunker down, stop hiring and take a pessimistic view of their future prospects. While most 2019 confidence indexes have shown small business owners are optimistic about the direction of their business, that can easily reverse course as new threats like tariffs emerge.
- Higher Costs: Rising costs for SMBs are much more of a shock to their bottom lines compared to larger companies. SMBs are already operating on razor thin margins and don’t have the luxury of looking at other cost centers for reductions. Rising prices for imported parts or exported products, are a direct financial hit. SMBs are typically hesitant to pass these costs to consumers in fear of losing their business to lower cost competitors.
- Slower Investments: Our recent small business lending index, a key measure that tracks SMB borrowing trends, hit an all-time in April and is now up 11.4% compared to year-ago levels. When SMBs stop borrowing, they slow investments back into the business. They stop buying equipment, reconsider expansion plans and save rather than spend. That has a ripple effect across the entire Main Street economic landscape.
While tariffs and trade wars have significant downside outcomes on businesses of all shapes and sizes, the reality is the impact is far greater on Main Street economies. Uncertainty about the economic future, navigating higher costs, and slower investments can take a much higher toll on SMBs. Larger companies tend to have more flexibility and have room to navigate these types of business shocks. With summer approaching and Americans readying themselves for beaches, BBQs and baseball games, small businesses are hoping trade tensions don’t put a chill on their bottom lines.