Mandula Moments: Impact of trade wars and tariffs on SMEs in the UK and EU (Part 2)

Continuation from Part 1

Market and Competitive Impacts
Tariffs often can alter the competitive landscape for SMEs in both domestic and export markets. When a trade war erupts, SMEs that export can lose access to key markets or steep price disadvantages abroad. For example, when the U.S. imposed tariffs on UK goods (10 per cent on most products, 25 per cent on steel, aluminum, and autos), some UK exporters found their products suddenly far less competitive in the U.S. market. This was reported online by www.independent.co.uk.

And a recent article in www.credit-connect.co.uk noted that even those who continue exporting often see demand fall – 38% of small UK exporters to the U.S. reported dropping U.S. orders, and 16 per cent had to cut product offerings for that market due to the tariffs.

This bevy of data illustrates how quickly a trade dispute can shrink SMEs’ market opportunities. Domestically, SMEs might face increased competition or shifting demand as trade flows readjust. If an SME’s country imposes retaliatory tariffs, imported goods may become pricier, which could help some local SMEs compete on home turf. However, the overall slowdown in trade can dampen economic activity, reducing demand even in home markets. A broad trade war can have economy-wide effects: for example, Reuters reported that over 80% of German manufacturing and tech firms expect U.S. tariffs to have a negative impact on the German economy, with almost half anticipating direct negative effects on their own business. It also noted that such pessimism isn’t limited to exporters; 42 per cent of German companies with no direct U.S. exports still foresee harm from the wider fallout of tariffs.

This underlines that SMEs in any industry can be indirectly hit by a trade war’s ripple effects (e.g., higher input costs, general economic downturn, or downstream effects if their clients are impacted). Finally, trade wars tend to raise uncertainty and dampen confidence, which itself is harmful to SMEs. When firms are unsure if a key trade agreement will be held or if new tariffs loom, they often hold back on expansion plans. By early 2025, global SME optimism had begun to ebb due to such tensions – after a period in which over half of internationally active SMEs aimed to expand exports, sentiment fell nearly 3 percentage points as businesses grew cautious with the return of trade barriers, again according to Grant Thornton.

Many of these challenges individually are difficult for many SMEs to manage, but when faced simultaneously, they can be overwhelming. This uncertain climate makes it critical for SMEs to proactively adapt; those that manage to navigate tariffs successfully can even find opportunities where competitors falter. The next sections detail strategies and practical steps for SMEs to weather these challenges, with considerations for varied sizes of enterprises.

Strategies for Micro, Small, and Medium Enterprises
SMEs are typically categorized into micro, small, and medium-sized enterprises, and each category faces unique constraints and opportunities when responding to trade wars. Below is a breakdown of strategies suited for each group, recognising their differing operational capacities:

Micro Enterprises (0–9 employees)
Micro-enterprises often have extremely limited resources, making them especially vulnerable to tariff shocks. Many micro firms export or import only occasionally or operate in local markets, but they can even feel the indirect effects of trade wars (like rising costs of supplies). Strategies for micro businesses include:
1. Leverage collective resources: Micro firms should tap into external support networks to compensate for their small scale. This can mean joining business associations or cooperatives to gain collective bargaining power when sourcing materials (potentially securing better deals with suppliers to offset tariffs). It also means using government-provided advice services – for example, the EU and UK offer portals and helplines with practical information on importing and exporting for SMEs.
2. Focus on core products and local markets: In the short run, micro-SMEs may choose to concentrate on their most profitable or essential products/markets, avoiding overextension. If certain export markets become unviable due to tariffs, a micro firm might temporarily pull back to its domestic market or a few dependable customers to stay afloat. Indeed, many SMEs facing trade barriers have opted to halt sales to high-cost markets and refocus on markets with better margins.
3. Flexible pricing and cost control: Micro businesses should remain agile in adjusting their pricing and cost structure. Some can pass a portion of the tariff cost to customers if their product/service is differentiated enough, while simultaneously finding internal cost cuts to absorb the rest. They must communicate clearly with customers about price changes to maintain trust. Equally, micro firms should scrutinize their expenses for any inefficiencies, given that every extra cost hurts more at micro scale. In practice, micro-importers facing tariffs have reported they would both raise prices and absorb some costs themselves to stay competitive. This for most SMEs is at best a daunting task and will require it to figure out the right balance between two tough choices.
4. Investigate using intermediaries and simplify trade processes: Because micro enterprises lack in-house logistics or customs teams, they should carefully and cautiously use third-party services to oversee trade complexities. Freight forwarders, customs brokers, or online platforms can take on the burden of documentation, ensure the correct tariff codes, and find the cheapest shipping routes. This helps micros avoid costly mistakes or delays at borders. Government programs like trusted trader schemes or simplified customs procedures for small traders (e.g., deferred duties, streamlined declarations) can also be a lifeline if accessible. The goal is to minimize the operational strain of dealing with tariffs so the micro-business owner can focus on running the business.
5. Even without tariffs, all SMEs need to stay informed and agile. Even tiny businesses must keep an ear to the ground on trade policy changes. A sudden tariff announcement can catch micros off-guard unless they follow industry news or government alerts. With limited capacity, a micro firm should designate at least one person (often the owner) to track relevant tariff news and quickly decide on responses (like rushing a shipment before a tariff kick in or securing an alternate supply).

To be continued in Part 3.