Here's why tariffs are extra-bad for smaller businesses

A large company like Walmart or Target can adjust to changes in its supply chain much easier than a small business can. Yes, it can sometimes be hard to steer a larger ship, but money solves a lot of problems.

That's why in the face of looming expanded tariffs on goods imported from China, retail's biggest players are well positioned. Prices will go up -- Walmart's and Target's CEOs have already offered warnings on that -- but these retail giants can take steps to protect their supply chain that small businesses can't.

Why is it harder for small businesses?

Walmart and Target have the cash to buy more inventory before the Trump administration's tariffs on Chinese goods kick in. They can monitor the situation and front-load purchases to have goods already imported before the cost of doing that increases.

That, of course, does have some cost itself. Warehousing and lengthening how long something sits in inventory costs money, but not nearly as much as paying an extra 25% in tariffs on imported items.

A small business might be able to increase inventory slightly, but it's not likely to have the free capital to make big buys ahead of the tariffs being implemented. In addition, smaller companies that make those big advance purchases may put their survival in jeopardy if consumer demand shifts before the items can actually be sold.

Large retailers also have the buying power to change their supply chain. If Walmart or Target want goods made in countries not being impacted by tariffs, they have the muscle to take supply away from smaller players.

Ticker Security Last Change Change %
WMT WALMART INC. 59.52 +0.28 +0.46%
TGT TARGET CORP. 168.28 +1.74 +1.04%

That's not particularly fair, but it happens quite often when demand for an item exceeds supply. The big boys that can place larger orders get served first, and small business gets what's left.

"The Administration's decision to announce a tax on every product coming from China puts America's entire economy at risk," according to a statement from the Retail Industry Leaders Association (RILA). "No product category will be spared if this latest threat materializes. Food and home goods, clothing and shoes, toys and electronics -- Americans' entire shopping cart will get more expensive."

It's a tax

Target CEO Brian Cornell is the chairman for RILA, which counts Walmart as a "premier" member. The group has made it very clear that it's against tariffs, and it takes a bolder stand than most individual chains do -- likely because a trade association does not have to fear political fallout in the same way a brand does.

"Retailers have long held out hope that President Trump would negotiate a trade deal that checks Chinese anti-competitive practices and intellectual property theft. But a massive increase in tariffs does not correct Chinese bad behavior, it punishes American families," RILA said in its statement. "Tariffs are taxes, and if this latest threat takes effect, this will likely be the largest tax increase on consumers in American history."


These are taxes that even the biggest players in retail can't keep from impacting their customers. Small business owners will have an even harder time because they don't have the buying power, cash, or flexibility that their giant competitors do.

If these tariffs are implemented, then small businesses importing goods from China will suffer. That suffering will be magnified by companies like Target and Walmart being able to avoid some of the impact, creating an even greater price divide. In that scenario, it's easy to see how some smaller players may get priced out of existence.

And this won't just hurt mom-and-pop stores. It could be the tipping point for retailers like J.C. Penney and Sears that are already fighting for survival.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.