Mandula Moments: Impact of trade wars and tariffs on SMEs in the UK and EU (Part 1)

Introduction
Since the outset of the current trade war and tariffs being proposed and imposed globally, there has been a great deal of reporting on the probable impact on economies on a macro basis across the world and on larger corporate enterprises. But what about SMEs, who according to the 2024 World Economic Forum account for the lion’s share of GDP both in the EU and the UK? As you are likely aware, small and medium-sized enterprises or “SMEs” are pivotal to the economic landscapes of both the European Union (“EU”) and the United Kingdom (“UK”). In the EU alone, SMEs constitute 99.8 per cent of all enterprises and are responsible for over 100 million jobs, contributing more than half of the EU’s gross domestic product or “GDP”. Similarly, in the UK, SMEs account for 99.9 per cent of the business population, employ 61 per cent of the private sector workforce, and generate over half (53 per cent) of the private sector turnover.

As a result, it is imperative that we and policymakers globally understand the magnitude of the challenge that trade wars and tariffs pose for SMEs. In recent years, geopolitical tensions – ranging from the U.S.-China trade war to Brexit and other tariff disputes – have created a less predictable trade environment. SMEs, which account for 99 per cent of companies in the EU and similarly dominate the UK’s business landscape, are particularly vulnerable due to their limited resources and bargaining power. Surveys show that 80 per cent of European companies rank sudden changes to duties and tariffs as a top risk to their supply chains in 2025. In addition, 92 per cent of European businesses expect higher import/export costs amid today’s volatile trade climate.

The goal of this series of articles is to provide a detailed analysis of how trade wars and tariffs affect SMEs across all industries and outline strategies that are tailored by enterprise size to help micro, small, and medium businesses remain competitive and financially sustainable in both the short and long term.

Economic, Supply Chain, and Market Impacts on SMEs

Economic Impacts
Tariffs directly increase the cost of imported materials, components, or goods, which squeeze SMEs’ already narrowing profit margins. Unlike large multinationals, smaller firms often cannot easily absorb these extra costs within their margins or “just pass them on” to their clients. As a result, they have to choose between raising prices or absorbing costs, both of which hurt their competitiveness. For example, when faced with a new round of UK–US reciprocal tariffs, 61 per cent of affected small UK importers said they would raise prices to cover higher costs, while 34 per cent expected to absorb some of the costs themselves.

Higher input costs can lead to lower profitability, reduced cash flow, and delayed growth plans for SMEs. In some cases, if tariffs make final goods too expensive, SMEs may see demand drop as clients turn to cheaper alternatives or forego purchases altogether. SMEs also tend to have less cushion to withstand these hits as they almost always operate on thinner margins and have smaller financial reserves than large firms.

Tariff-related uncertainty further exacerbates economic impacts. Unpredictable trade policy makes it difficult for SMEs to plan investments or pricing. Businesses may delay capital expenditures or hiring due to fears that a sudden tariff hike could render a venture unprofitable. Additionally, trade wars often spur currency volatility (as seen in past U.S.-China disputes), which can raise costs for SMEs importing goods priced in foreign currencies. Overall, tariffs act like an external tax on SMEs’ operations, increasing costs and depressing sales, thereby threatening their financial stability if not managed carefully.

Supply Chain Impacts
SMEs are highly exposed to supply chain disruptions from trade wars. Tariffs and retaliatory measures force companies to reconfigure where they source materials and how they ship products. Many SMEs rely on global supply chains for raw inputs or components; when tariffs hit a particular country or product, those supply lines can be thrown into disarray. For instance, European SMEs have increasingly made supply chain disruption preparedness a priority, with as many as 25 per cent of European SMEs reported focusing on this by late 2024 amid rising trade barriers, according to the global accounting firm Grant Thornton.

When import duties are imposed, SMEs in many cases have to find alternative suppliers (potentially in non-tariff countries) or face production delays. In the UK, anticipation of U.S. tariffs pushed 41 per cent of surveyed small importers to seek non-U.S. suppliers for affected products in order to keep their businesses, according to www.credit-connect.co.uk.

Another often-overlooked supply chain impact is the increased administrative burden. Tariffs usually come hand-in-hand with complex customs procedures, documentation, and compliance rules. Smaller firms struggle with the complexity of tariff codes, customs paperwork, and applications for exemptions, lacking dedicated trade compliance teams.

Border delays are also an issue: after Brexit, even with zero tariffs on UK-EU goods, new customs checks and rules of origin requirements have slowed shipments, causing headaches for SMEs. According to research published on www.business-money.com, about half of UK SMEs report that trading with EU customers/suppliers has become more expensive and less profitable, largely due to tariffs, customs, and other trade barriers introduced post-Brexit.

Such delays and red tape force SMEs to hold more inventory as a buffer or risk stockouts, tying up capital and raising warehousing costs. In summary, trade wars often disrupt the smooth flow of inputs and outputs, requiring SMEs to rapidly adjust coordination and supplier relationships.

To be continued in Part 2