What is a tariff and what could it mean for the cannabis industry? Many of us need to familiarize ourselves with tariffs, what they mean, what they are for, and how they might impact us personally. Our current geopolitical environment has brought tariffs to the forefront of the news. For those in the cannabis industry, the establishment of new tariffs leaves a question about the potential impact these tariffs could have.
As global trade policies continue to evolve, understanding tariffs is becoming increasingly important for industries of all kinds, including cannabis. Could tariffs lead to higher costs for cannabis equipment or supplies? Could they potentially impact or slow product testing for safety and compliance? These are important questions for businesses, consumers, and the future of the cannabis industry.
In this article, we will look at the history of tariffs, the reasons why tariffs are used, and how these tariffs may impact the cannabis industry. If you are a stakeholder in the cannabis market or someone simply curious about the inner workings of global trade and the cannabis industry, this article will provide valuable insights into tariffs and help you prepare for the road ahead.
Understanding Tariffs
Definition of Tariffs
A Tariff is a tax that is applied by one country on another for goods and services that are imported from the other country. There are three types of tariffs used, they include:
– Revenue-producing tariffs
– Restricting tariffs to restrict imports
– Reciprocity tariffs
The Purpose of Tariffs
Tariffs are imposed by governments for a variety of reasons that include influencing other countries, exerting political influence, raising revenues, protecting competitive advantages, and protecting domestic industries. Read below to understand how tariffs are used to achieve these goals.
The imposition of a tariff will increase the costs of imported goods thereby encouraging consumers to buy domestic goods. Foreign countries may also have the ability to produce goods at a lower cost so increasing tariffs helps to level out the competition with domestic goods that have a higher cost of production.
Governments can use tariffs to increase their revenue, which can be used to increase domestic production by supporting industries with subsidies and grants.
Tariffs are useful tools in trade wars and to influence geopolitical negotiations. Retaliation may be a cause to impose tariffs, or they may be used to influence policy to support more favorable trade agreements. Used as leverage for negotiations, tariffs may also be used to strengthen alliances and increase national security.
The History of Tariffs
Historical Overview
In 1789, the first tariff law was presented to and passed by Congress. This was the second law ever to be passed by Congress. Introduced by James Madison, the first tariff was used after the Revolutionary War to increase revenue, provide economic stability, protect domestic industry, and also retaliate against Britain (and other European countries) for their high prices on American goods and level the playing field.
From 1861 to 1933, tariffs were mainly used for restriction purposes by protecting domestic industries from foreign competition.
After the federal income tax was established in 1913, tariffs were no longer needed to produce government revenue and were lowered for the remainder of the 20th century.
Modern-Day Tariffs and Trade Wars
Currently, tariffs are increasingly being used as tools for economic protection and geopolitical leverage. This is leading to trade tensions and shifts in the supply chain. The current trend illuminates the need for a balance between protecting domestic industries and maintaining healthy international trade relationships.
The current trade war with China started in 2018 when the U.S. imposed tariffs on China in retaliation for unfair trade practices and intellectual property theft. China responded with retaliatory tariffs that have put a strain on the relationship and also disrupted the supply chain, and increased costs for businesses and consumers alike.
The incoming administration is suggesting new tariffs to be imposed on Canada and Mexico. These new tariffs may contribute to rising costs for many industries, including the cannabis sector.
Potential Impacts of Tariffs on the Cannabis Industry
Increases Costs for Equipment and Supplies
Cannabis businesses and testing labs are dependent on imported equipment and supplies. These can include:
– Analytical equipment and instruments (ex, chromatography system, and mass spectrometers).
– Lab consumables like pipettes, beakers, test tubes, and filtration paper.
– Safety equipment
– Microbiological testing supplies.
– Environmental control systems such as HVAC units and fume heads.
– Centrifuges and separation equipment.
– Trimming supplies
– LED Lights
– ETC…
In the cannabis industry, over half of the ancillary businesses rely on imported goods. As the cost of these goods goes up, the increased cost of the operation eventually makes its way to the consumer.
Delays and Bottlenecks
With tariffs, the supply chain can be disrupted and potentially cause delays in the industry. If you are looking for a Los Angeles cannabis testing lab, finding a lab that is already established may keep these delays shorter.
The bottleneck effect or the delay in, for example, testing could potentially affect product safety and compliance. The potential of a product hitting the market before testing is completed puts the consumer at risk for exposure to pesticides, heavy metals, and microbiological pathogens.
The bottleneck effect also puts the manufacturer at risk for non-compliance, fines, and legal issues.
Competitive Challenges for Cannabis Testing Labs
Tariffs that cause delays in product imports or increased costs will put a strain on smaller cannabis testing labs and startups.
With increased costs, cannabis testing labs may need to consolidate testing facilities. With fewer testing labs, turnover times are likely to be delayed, with decreased customer service capabilities.
Preparing for the Future
Strategies for Mitigating Tariff Impacts
– Now is the time to find domestic alternatives for your materials and equipment.
– Before future tariffs are applied, purchase an adequate amount of any supplies or equipment that you know is needed or in high demand.
– Be an advocate for favorable trade policies affecting the cannabis industry. Engage with policymakers to address trade barriers that affect your business and make your voice heard.
– Educate your consumers or business partners. Make them aware ahead of time of the potential increase in cost (or turnover time for lab-related businesses) due to tariffs.
The use of tariffs has broad implications, and the cannabis industry is no exception to this fact. From increased costs of essential equipment and supplies to supply chain delays, tariffs can significantly impact the ability of cannabis businesses to maintain efficiency and affordability. Understanding the history and purpose of tariffs provides a foundation for addressing their potential impacts. By proactively sourcing domestic alternatives and educating stakeholders and consumers, the cannabis sector can work through these challenges and continue to thrive. As trade wars and global economic shifts continue, staying informed and prepared will ensure continued growth and integrity in the cannabis industry.
