President Trump is “playing with fire.” That’s how a new report from JP Morgan characterizes the president’s threat to impose 5% tariffs on U.S. imports from Mexico and the 25% tariffs already in place on $200 billion worth in Chinese imports.
“We’re saying this is risky business because you’re going to be basically affecting U.S. consumers,” says JP Morgan strategist Dubravko Lakos-Bujas. “U.S. GDP – 75% of it roughly is consumption-driven – and that’s an extremely important part of the U.S. engine.”
Tariffs have been Trump’s favorite tool for forcing new trade deals with China, Japan, Mexico, Canada, and Europe. However, last week, the Trump administration entered a new phase, threatening tariffs on Mexico as a way to deal with illegal immigration.
Impact of tariffs on small businesses
The trade war with China has subjected $76 billion in capital goods, $47 billion in consumption goods, and $124 billion in intermediate goods to tariffs, according to JP Morgan. While S&P 500 companies are in a better position to absorb some of these higher costs by passing them on to different parts of their supply chains to protect their margins, small businesses are more limited.
Small businesses account for 45% of GDP and 48% of the U.S. labor force. And if higher costs associated with tariffs forces small firms to shutter operations, cut back on spending, or lay off people, that will have a direct negative impact on the U.S. economy.
Compared with retail behemoths like Walmart or Target, smaller business “don’t have nearly the same pricing power that the larger businesses have” because of their low margins, says Lakos-Brujas. “They are the ones that don’t get nearly the same amount of attention as… the S&P 500 companies get, however they play an important role.”
Restaurants have the lowest cash buffer at 16 days, followed by repair shops at 18 days, retail at 19 days, and construction at 20 days, according to the report.
Another challenge small businesses face is their constant need for liquidity. On average, small businesses hold a cash balance of only $12,000 according to JP Morgan. The small business category with the least liquidity is professional services with a cash buffer of just $5,300, followed by the construction business with just $10,700 in cash held in checking and savings accounts.
Many small-business owners rely on personal credit cards and lines of credit, making them more vulnerable to lenders who could respond to declining profits by tightening credit standards.
Tax on lower-income households
The trade war with China is estimated to be costing U.S. households $600 a year and could increase to $1,550 if Trump follows through on his threat to put additional tariffs on $300 billion in imports from China, according to JP Morgan.
President Trump has announced 5% tariffs on imports from Mexico starting on Monday (and will escalate until they hit 25% in October). If 25% tariffs on imports from Mexico are implemented, U.S. households could face an additional $1,000 cost, bringing the total impact of tariffs to $2,500, JP Morgan says.
Median U.S. household income is $61,372.
“The lower you go down this earning spectrum, the [less amount of] savings that the household has [and] the less cash they have on the balance sheet. Every additional dollar they make goes into the economy and every additional dollar [tariffs] could take away from them comes directly out of the economy,” Lakos-Buja says.
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