CEO To Rainmaker
CEO To Rainmaker
Episode # 86, Tariffs: Global Chaos and Small Business Survival
Amid the chaos of current tariff policies, international law expert John Tulac provides crucial insights on how small businesses can navigate trade uncertainty and supply chain challenges. His straightforward analysis cuts through political noise to offer practical strategies for survival in a rapidly changing global trade landscape.
• Current tariff policies have created "pure chaos" in global trade, making risk assessment nearly impossible for businesses
• Small businesses face disproportionate harm from high tariffs as they lack the financial cushion of larger corporations
• "Pivoting" supply chains away from heavily tariffed regions requires substantial capital that many small businesses cannot access
• Trade deficits aren't inherently negative—they reflect America's economic strength and purchasing power
• Case studies show various industries facing unique challenges, from cosmetics to specialized audio equipment
• Regular supply chain reviews and resilience testing are essential for business survival
• Businesses should negotiate with suppliers to share the burden of increased costs
• Contract reviews and proper product classification for tariff purposes can prevent costly mistakes
• Developing backup plans for supply chain disruptions is crucial in today's uncertain environment
Hunker down, don't panic, and don't do something you will regret later. Try to figure out how to ride this out in the short term. Don't be afraid to negotiate with your suppliers and say we're both getting hurt. We've got to share some of the hurt.
And we are ready to roll. Good morning folks. Welcome to episode 86. I have a very timely and, I believe, impactful show for you today on the subject of tariffs. Have you heard that been going around lately? Tariffs, the ramifications of our current government policy, is not just impacting large global organizations but small US-based privately-owned companies, which is essentially, as everybody knows, or you should know, the backbone of our economy. I am pleased to announce that my guest today is John Tulek, who is eminently qualified to discuss this topic. John is an international and general business attorney and has been in private practice since 1977. So if you want to backdate that, you probably figure out what his age is. He is recognized in the Bar Register of Preeminent Attorneys as an expert in international law. How would you like to have that label? He advises on all aspects of doing business with China, mexico and other countries. He has also advised client judges and regulators on certain aspects of international law. So, john, let's bring him out. Mr Tulak, welcome. Thanks for showing up on the show.
Speaker 2:Thanks for having me, Gene. It's good to be here.
Speaker 1:Okay, john, I got to ask you a very hard-hitting question. Your bio and resume is too good to be true. Was it actually written by AI and are you a freaking robot written by AI?
Speaker 2:and are you a freaking robot? Sometimes I think it'd be nice to have an avatar or six cloned, like Dolly the Sheep. I'd get a lot more done. But no, I write all my own material and I do use artificial intelligence for preparing for a number of things.
Speaker 1:Okay, all right. Well, john, let's get to the meat, and I realize this is a day-to-day thing, but what is happening globally as we speak today, in your world? So what we have right now is pure chaos.
Speaker 2:Okay.
Speaker 1:Can't put a finer word on it than that If there's a plan, nobody can see it. Okay, I'm sorry, I wasn't expecting that answer Go ahead.
Speaker 2:One thing that is just terrible for a business any business, large or small, or, for that matter, a country is uncertainty, and the tariff policy has plunged the entire world into uncertainty, so that is much more difficult to assess. Risks associated with where this may finally sort out. Sure, sure, we've already seen flip-flopping. According to the folks who are not supporters of Donald Trump, it's backtracking, flip-flopping, you're screwing up, you're recognizing backtracking where supporters of terror policy oh no, there's a plan here, it's a transactional kind of thing, to literally change the way global trade will be viewed and managed going forward.
Speaker 1:Okay, what do the Euros think about this? They think we're crazy In every language we can think of right, right.
Speaker 2:You know I don't pull any punches.
Speaker 1:Yeah, I know I call you the Muhammad Ali of law. So what is the impact on US small business owners in general and what business advice would you have for them?
Speaker 2:So the harm and I do think that this kind of terror policy causes serious harm that can be enduring will fall disproportionately on smaller business. Now, if you're Apple, you can weather this a whole lot better, even though it may cost you hundreds of millions of dollars, but you can weather that better than a small company that, let's say, depends on intermediate component parts that need to be imported from places like China in order to make a final product.
Speaker 1:OK, OK.
Speaker 2:You look at 145 percent tariff on such goods coming from China and that really hurts. So small business is not in the same position to weather that kind of storm, and the Chinese manufacturer that makes those parts may be another kind of small business mom and pop type of operation. And so who's going to absorb all of this? You're going to have to negotiate with your supplier about sharing the burden or you both may go under.
Speaker 1:Well, that was my next question. What should the small business owner do?
Speaker 2:So you've been hearing, perhaps in some circles, certainly in supply chain management, you're hearing the word pivot. You need to pivot and that's easy to say but it's a lot harder to do. You can't turn on a dime. If you are heavily invested in tools and equipment and molds and so on in China, you may not have the capital to just say you know what? I am going to just start it all up again in India or Malaysia or Indonesia. You may not even get the capital to do that, so you may.
Speaker 2:Exactly OK so you have to pivot. Resiliency is something I've been preaching for years. Don't be sole source. Rely on one company or one country for your critical needs.
Speaker 1:OK, I'm going to ask you to be a judge in this fight. I have a lot of my friends says well, china needs us more than we need them, or vice versa. What side of the fence are you on? What's your comment on that? Who needs more?
Speaker 2:I think that's the wrong way to phrase the question. Okay, I could answer it and justify that China needs us a whole lot more, but let's look at the relative pain Both countries will suffer with this trade war. But in the United States we have a democracy, we have people who can go to the polls and vote in 2026. But you don't have that in China. So China with an autocratic, imperial type ruler like Xi and the Communist Party firmly in charge, can tamp down any kind of resistance or opposition to their policies. It's autocratic, so they're not accountable to the people in the same way that politicians are here in the United States.
Speaker 2:It could be longer term in China and far more acute, and there's nothing that the people can do about it.
Speaker 1:All right, so let me take a step backwards. John, Can you just give me some basic definitions of international law? I'm thinking like exchange rate, balance of trade deficit, just kind of like give my listeners an overview of these commonly used words in international trade.
Speaker 2:Sure. So that's economics, which is a favorite topic of mine, since that was my undergraduate degree and I paid attention in class. Let's talk about the one that's always in the news today, especially because of terror policy, and that's the balance of trade deficit. We've been running a balance of trade deficit with China. That's been substantial. We've been running a balance of trade deficit with the world as a whole, as part of the global economy. That's not a bad thing. What does that mean? It means we can afford to buy goods that can be made more inexpensively somewhere else, because we have accumulated the ability to buy, because we have grown our wealth here, not entirely because of manufacturing Manufacturing is less than 20% of our economy but because of our capital markets we're the biggest in the world because of our productivity and so on. So what we have done is we have lifted 2 billion people out of poverty by our ability to buy things that are made somewhere else.
Speaker 1:We'd be really proud of that. That's a great insight. All right, okay, so what's happening with Mexico?
Speaker 2:Well, okay, or we can talk about some more of those definitions. Whichever you want to do.
Speaker 1:Oh, let's do a couple more definitions, if you have them.
Speaker 2:Okay, so the deficit. The next thing I want to talk about is the other thing that we are seeing back in the news. Finally, again, we spent a lot of money during COVID lockdown, or we allocated a lot of money with fiscal stimulus that we haven't even spent yet, but that money has been put into the system and it's added to our federal budget deficit and it's a loan essentially. It's a loan where you're essentially going to get it back over time for the American people and it's grown to what? $35 trillion and as a part of GDP, that's a huge number and we haven't been addressing that. And we continue to look at running up big deficits and historically we know no country has survived long-term deficits without addressing them. They collapse, the economy collapses. So to me, these two things globalization and our place in the world economy and solving getting a hand on the federal deficit are related. The stronger we are relative to the rest of the world, the more we're able to grow and we can address that deficit problem. But it's mostly a political problem right now.
Speaker 1:No will to do something about it by either party right now, no will to do something about it by either party. Okay, what's the prevailing exchange rate? If America wants to go to a foreign country to buy stuff? What's happening there?
Speaker 2:So we have a strong dollar right now and the Trump administration wants a softer dollar. Now what the softer dollar means is that when we then go to buy goods from overseas or we travel to Paris or London, we're going to pay more for our vacation. We're go to buy goods from overseas or we travel to Paris or London, we're going to pay more for our vacation. We're going to pay more for goods. Whether you have a strong dollar or a soft dollar, and whether that's good or bad, depends on a lot of other factors. It's not inherently good or inherently bad. It depends on the context in which you have a rising or falling dollar.
Speaker 1:Okay, so then let me get back to my other question, before I so brutally interrupted you what's going on with Mexico? Are there parallels between China, or is it just a totally different market?
Speaker 2:So there are some parallels. That's a good question, gene. The Mexican economy could be a whole lot stronger than it is if Mexico had better internal economic policies. But the open-door administration was hostile to foreign investment, wanted to reclaim what it thought were glory days of government regulation of key businesses such as the energy sector oil and gas and electricity and what that has meant is that those two sectors have stagnated. But those are key to economic growth in any country. So Mexico is also wary of China. Chinese investors would come in. They'd take the risk because politically there is something to be gained by getting their money into Mexico on a much bigger scale. But Mexico has been resisting that. But at some point it may have no choice.
Speaker 2:So what's good about Mexico's economy? Well, the Biquilador program, the vibrancy of manufacturing, not only along the border in that program, but elsewhere in the major cities where there's a lot of manufacturing, like Monterey. Like Monterey, these are companies that have grown substantially because of trade with the United States. That has been mostly free trade, which the Trump administration is trying to rip up First administration renegotiating NAFTA. To USMCA, there were some improvements. There are also some things that were not so smart, and Canada, the United States and Mexico have all, in different ways, in different sectors, have cheated on parts of NAFTA and have cheated on USMCA, and so, yeah, I'd like to see something more comprehensively negotiated that makes economic sense and the countries would actually follow. I'm not going to take my breath.
Speaker 1:So I don't know if I understood you correctly. Is the situation that, let's say, we're having with Canada maybe before the tariff and after is there a major impact?
Speaker 2:Where do you see that going? So Canada and Mexico are two big trading partners. They're also our neighbors and our friends. To me, it makes no sense to pick fights with your friends in my opinion, needlessly Now, if you say I want to address the following items that I think are creating an imbalance in our economic relationship, that's one thing. To just start with ad hominem attacks and suggesting that Canada should be the 51st state and stuff like that, I just don't see that that's good negotiating. I think that's needlessly antagonizing an entire people, which we saw in terms of Canada's recent election. The Conservatives, after Trudeau announced his resignation, are widely expected to trounce the Liberal Party and in fact, the Liberals came from behind and eat out what is a pretty impressive historic win. Yeah, and Canadians are ready to fight back on this. This is our country and our way of doing things and you need to treat us with respect.
Speaker 1:Makes sense. So, without giving the names of any companies, john, can you tell me a client that you work with that was doing business with some country, some foreign country, and what their challenge was and what you advised them that they should do?
Speaker 2:Okay, so I can give a couple of examples. One is a large and fast-growing cosmetics company, and all the cosmetics are designed here in the United States and manufactured in China, so it's the Apple model. Okay, these tariffs are punitive to them because they're in stores where they are competitive because of price, yes, and now they're not as price competitive with anybody who's sourcing their cosmetics somewhere else. So that's a problem, and right now there's really nothing that they can do about it other than to determine how much they can absorb, how much can they push back on their Chinese suppliers, and so on. And so we have been talking about building resiliency for the future. Can you get this made to quality standards somewhere else? By looking ahead to the future?
Speaker 1:That's kind of scary, though it seems like it's in a no-win situation. There's only so much expenses that you can absorb and not pass it on to the customer. But, as you said, if they're in a competitive pricing module, they can't pass on the price. They either have to get leaner or meaner, cut expenses or do something.
Speaker 2:Right, another client that I have also heavily reliant on China. Everything is designed in the United States. It is a very specialty kind of audio equipment that is used in large venues and they have a global reputation. But they're in a better position because they can actually ship from China to their customers elsewhere in the world. So that negates against the tariffs to some extent for their substantial foreign market. But for stuff that's still coming here, which is their major market still they have to deal with the same problem.
Speaker 2:Let's look at a third example. This one is in Mexico. This is a small company with a really neat little product that is unfortunately about 60% made with aluminum has a 25% tariff put on the aluminum component of the product on top of the 10% countrywide tariff that was imposed on Mexico. So you're looking at a 35% increase in the cost. Now here's the problem that they have. They're supplying the aluminum from the United States, have? They're supplying the aluminum from the United States, but the executive order on the tariff on aluminum says it has to be both smelted and refined in the United States and they don't know where it was smelted. Most of the smelting of aluminum is done either in Canada or in Mexico, there are only two smelters left in the United States. Really Wow. In Canada or in Mexico, there are only two smelters left in the United States Really.
Speaker 2:Wow, even though they bought the aluminum here, it was refined here. They may not get the exemption from that 25% tariff unless they can prove it was smelted. Now we expect that. That will be modified. That order will be modified.
Speaker 1:All right, john, so you're picking my interest here. You may have already answered this question, but where do you see the future going in the next two to three years?
Speaker 2:Yeah, I think we solve some of this chaos. The question is how long does it take us and over what period of time? At what expense? I should say and I don't know. I don't think anybody does I do know the longer this goes on, the more uncomfortable it's going to be, the more economic hardship it's going to create and the greater likelihood that we will have a recession sooner than later?
Speaker 1:Are there any industries, John, that are more impacted by the tariff situation than others, or is it just across the board?
Speaker 2:It's not across the board and anything that has aluminum or steel content has that extra tariff on top of it. And then there are certain sectors where, for whatever reason, there's another tariff because of the nature of the product. So high-end watches from Europe, particularly from Switzerland, have been even before this current round, have been subject to a tariff on the contents and also on the band. So an aluminum or a steel band would be subject to the higher tariff. And of course you're looking at precision parts that are hand assembled and so on. That's why some of these watches are so crazy expensive and, depending on the materials, that could really be a substantial amount of that watch on the component parts subject to the higher tariff.
Speaker 1:Okay, so do you have any additional insights or comments? John, where I haven't specifically asked you a question, is there something that you think is really important that my audience should hear?
Speaker 2:I think that, yes, that's a great open-ended question and, of course, I can go on and on and on.
Speaker 1:I'll just hit the button and you're off such power.
Speaker 2:So, yeah, the thing that I tell my clients is that you constantly need to be conducting a review of your supply chain, testing it for resilience, testing it for quality control, testing it for price and whether or not there are good alternatives to what you currently have. What's your backup plan? What's your plan C? If your goods are held up on the water because a choke point like the Suez Canal is a choke point, or piracy causes choke points in the Straits there of Indonesia, or let's say we have an incident in the South China Sea and your goods are held up, what are you going to do? So I have what I call an international legal audit that looks on both sides of the import and export side of the equation, or the selling in the United States. How good is what you are sourcing from abroad? How good is your system? And checking it regularly, including contract review, because over time, laws can change, regulations can change. Then you do the same thing with your sales. If you're exporting, you have to constantly be aware of changes to export regulations. Make sure you're in compliance. You can say, oh, that's not my problem, you know, that's up to the importer, the party that buys my goods. Well, I'll give you an example.
Speaker 2:Client had a specialty lighting effect that was used in the theater industry. Okay, it was about a $30,000 item, but they didn't know how to classify it for tariff purposes because they never bothered to look. Had they bothered to look, that 100% tariff that the British imposed on it by classifying it in a different way than they could have classified it meant that the $30,000 item was a $60,000 item. Guess what Theaters can't afford that kind of doubling of costs and they never bought anything else from this company. Now you could say they should have looked. Yeah, they should have. But we could have caught that and classified it in a way that the British customs people would have accepted. So you can't just rely on somebody else and say it's not my problem.
Speaker 1:I get it. So I had heard that the current terror policy is tenement to a national sales tax. Do you agree with that statement?
Speaker 2:You know a really smart guy that I've known for a lot of years and I respect his work. Jay Prag from the Drucker Institute here at the Claremont Colleges has argued that the effect of a tariff is like a national sales tax and I hadn't thought of that. I do think there's truth to that. But a national sales tax is inherently regressive. But a national sales tax is inherently regressive, so that means that your poorest people are going to disproportionately bear the burden on their consumption. So what do you do with that? Then you say, well, we'll have a government policy that allows them to draw that back, or we'll give them a stamp like a food stamp, or we'll give them something to cover some of that. But then that's more government, you know, interfering essentially with what you know market pricing would determine in a better way. I'm a firm believer in free trade. The United States has never had true free trade, but we have had freer trade historically for most of our existence than most of the rest of the world.
Speaker 1:But one of the things that I don't understand and I'm not heavily into politics, I'm just a businessman but it just seemed like, with all the negative feedback that the Trump administration is getting from all corners of the world, all types of people, Maybe they're backing off a little bit, but it just seems like they're digging their heels in.
Speaker 2:I don't understand that I don't either. I really don't.
Speaker 1:Are all these people wrong?
Speaker 2:Well, okay, I'm an equal opportunity basher. I don't play politics. If a policy is bad, I'll say so. If a policy is good, I'll say so. And to give you an example, in the first Trump-Obama administration and we had a whole lot of them to help US companies export, and the goal was to double the size of our exports within five years. And we were well on our way to achieving that, with the help of literally 22 government agencies providing resources, and then, abruptly, he canceled the program. Never did quite figure out that, but here was a situation where government action was actually helpful. To be fair, we have a lot of government programs that do work. Yes, also have a ton of them that don't or don't work very well or work at a very high cost relative to what they achieve.
Speaker 1:You know, I think, as an American citizen and I would think that a lot of people would probably have the same thoughts that you know I can't control what the federal government does. As long as it doesn't impact my personal life, I'll just live with it. But it is impacting my personal life because my personal portfolio has eroded because of the skittiness of the stock market. It's costing me money.
Speaker 2:It is indeed me money. It is indeed, and of course, the unsophisticated investor, the folks that do their own investing and will follow the herd. They're the ones who get burned the most. It's the burning match. The smart money can recognize a peak or very cratering is likely and say here you hold this, so somebody else's fingers get burned by holding the match, Right, right. So buy and hold is a good strategy if you're Warren Buffett, and it's also a good strategy if you're a small investor and you can't guess better than the market Right right Better off holding and let it come back than to panic, sell, take a loss and then try and rebuild that loss from scratch.
Speaker 1:All right, John, I know I already asked you this question, but I'd like for you to answer it again, if you would be so kind. What is the main takeaway that my small business owners should adhere to after this episode ends?
Speaker 2:adhere to after this episode ends. So hunker down, don't panic and don't do something that you will regret later. Try to figure out how to ride this out in the short term. Don't be afraid to negotiate with your suppliers and say we're both getting hurt. We've got to share some of the hurt. I can't bear it all myself. Uh, you know can. Can you make up with other things with your customers? Uh, a way to keep them, besides the fact that they're going to have to absorb a price increase, you know, what else can you do for your customers? I mean, these are common sense things. Right, right, right Are just part of the whole experience of serving your customers and having good supply chain relationships. So kill them with kindness is my view. I'm a firm believer in win-win, and sometimes you are dealing with bad stuff, and so it's hard to see the win-win, and so it's a matter of how can we minimize the harm?
Speaker 2:Right, if you minimize the harm in a way that makes sense. That's a win to me.
Speaker 1:Well, john, unfortunately I've run out of time. You were awesome, as I expected, so what I want to do is thank you and hope you'll come on again and hopefully our economy will get better and the trade situation will get better, and with that you can check out the show and all the major podcasts and YouTube. Ceo to Ray maker, jean Valdez, do that search and I will see all of you next month, and I thank you all for listening and thanks again, john, for your pearls of wisdom. You are the only attorney I know but I know a lot of them that actually laughs and has a sense of humor.
Speaker 2:Best way to live in the world. My pleasure to be here, Gene.
Speaker 1:See you later, John. Bye-bye.