From the Supply Chain Front Line

Launching a CPG company during an escalating trade war

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Getting caught in a Trade War
From the frontlines of launching a business

Launching a small consumer packaged goods (CPG) business is always challenging. But launching in a time of geopolitical instability, labor shortages, and trade wars presents an entirely new level of risk for small businesses in America. High-stakes negotiations and punitive trade policies are inherently risky, but acute risks to startup business models endanger one of the key sectors of the economy that our current policy makers aim to protect.

Supply chains are already complex in the best of times , and hiccups can single handedly destroy even the most well established businesses. My co founders and I are figuring this out as we go, and I’d like to share a bit about my endeavor with launching a savory-focused, internationally spiced baby food company: Petite Palates.

We’re in the thick of the pre-launch period, and I thought I’d share what I’m worried about as a small business owner in the CPG space and as an entrepreneur launching during this period of massive policy uncertainty.

We planned as best we could to lock down our initial supplies and we did ultimately secure supplies for our first production run, but beyond that, we’re exposed.

Here’s what I’m worrying about and why:

Farm Labor and the Current Administration’s Immigration Stance. I’ll limit this to practical economics here. Based on a 2019-2020 survey by the U.S. Department of Labor’s National Agricultural Workers Survey

• 68% of farm workers are foreign-born

• 44% are undocumented (over one million farmworkers)

• 34% are female

• 50% have children

• 41 is the average age of the farmworker

• 17 is the average years of experience

That is just staggering to think about. A few days after the new administration took office, ICE raids near Bakersfield, California had an immediate and chilling effect.

In a stunning quote, Casey Creamer, President of the California Citrus Mutual estimated that “75 percent didn’t show up” to work. (To be fair, I cannot verify this number).

Also worth highlighting is that Bakersfield is located in California’s Central Valley which produces about a quarter of our nation’s food. Our food is subsidized by the labor of undocumented immigrants.

What if we lose half of the labor that produces our domestic food supply? The market math says the cost of labor will spike and that will be passed on to consumers.

A 2014 Farm Bureau study showed that an enforcement-only approach to immigration (i.e. strengthened border security, strict enforcement of existing laws, and aggressive use of deportation) could lead to a five to six percent increase in food prices for consumers, with fruits and vegetables hit the hardest.

To be clear, I’m not advocating for the exploitation of undocumented workers. Rather, I want to acknowledge the clear and direct benefit that Americans and American food businesses receive. There seems to be a myth that they’re “taking American jobs” and the reality is that they are not. We are taking their cheap labor and exploiting their undocumented statuses.

According to a June 2024 report from the American Immigration Council, Americans don’t want these jobs.

Because of the hard conditions and low pay of most farm labor work, we’ve seen that these jobs do not get filled by American-born workers. A consequent shortage would compound the already-severe labor shortage in the U.S. agricultural sector, which has come about due to an aging agricultural workforce and a recent shift in agricultural production to more labor-intensive crops like fruit and vegetables.

But labor shortages are only one piece of the problem.

The second, equally damaging factor, is the tariff war(s). A double doozy for a CPG small business to navigate. I want to apply a bit of light “business” school-ish analysis of whatever the art of this disastrous deal is.

The best I can gather, Trump seems to be mixing up his game theory. He looks like he’s applying a single-shot approach to negotiations when a geopolitical environment almost always calls for a multi-shot approach.

[In a single shot] the focus [is] solely on maximizing their immediate payoffs rather than building relationships or trust with others. As a result, they may be more inclined to pursue dominant strategies or take risks since there is no concern about long-term consequences or retaliation.

A single-shot strategy works only when you're willing to permanently sever ties. It’s an aggressive approach with long-term consequences.

This is Trump’s style. Trump does not care about trust but rather dominance, he cares about creating the opportunity for headline validation. His goal is to appear dominant and then claim some form of a win now, long-term consequences be damned.

Trump is adept at exploiting present bias, a psychological phenomenon known as hyperbolic discounting. This means people often prefer an immediate gain over a potentially larger future benefit.

In addition to treating each “negotiation” as a value maximizing, domination exercise, Trump is concurrently participating in what is called a sequential games approach. He launches highly public tariff announcements. He’s picking the fight and he wants you to know. This therefore forces a public counter response.

He could have approached these countries quietly and initiated discussions and garnered wins that didn’t rise to the level of insult. Maybe the benefits were asymmetric but rather than allow for an elegant solution, we went for brute force.

This has escalated into a public standoff, forcing trading partners to retaliate and respond in kind. They have no choice but to now dig in even if they would have given in privately. And this is because you shouldn’t apply the wrong game theory strategy to the wrong situation. And you always leave room for people to save face - because when you don’t, you burn a bridge.

America's trading partners now see the U.S. as unreliable, violating well-documented psychological principles of trust. Once broken, trust is incredibly hard to rebuild, making future trade negotiations even more difficult.

These two concurrent factors - decline in available labor and an active tariff war - guarantee that prices for food in America will go up and likely stay there for some time. International trade and the stability of the supply chain relies on some level of trust and cooperation. There are so many reasons why it’s hard to repair trust. At this point America has violated so many principles of relationship building that tap into well known phenomenons in behavioral and cognitive psychology.

1. Betrayal Aversion

2. Negative Bias & Memory Retention

3. Expectation Violation Theory

4. Trust Asymmetry Principle

Additionally, even if the tariff war is some kind of bizarre negotiation game (e.g. we’re immediately willing to change our minds, again?), as market participants, the time to implement and to adjust is detrimental to a startup’s business model. We have to place orders in advance, take inventory, hold stock, etc. All of this requires actual time and effort and a physical transfer and movement of goods that cannot be as easily changed as an updated tweet.

As consumers, we have to account for the price stickiness. If the input costs are wildly variable, companies are going to track costs at the upper bound and price against that in order to protect against potential margin erosion and future increases in subsequent input costs. Margin protection can occur concurrently with price stickiness.

From a small business owner's perspective producing a food product, the instability, the current approach to tariffs, is putting too much long-term risk to play with people’s livelihoods. For us, what we’re seeing is our Canadian suppliers are getting spooked and hesitating to ship because they’re not sure yet how to adjust to the tariffs. This translates into schedule delays and delays of going to market and generating cash. Fear creates inaction (and/or sticky high prices).

At the end of the day, the business model needs to make sense. For that to make sense, the supply chain needs to function in a predictable way so that proper purchasing and forecasting can be done. Consumers also need to be able to afford good food.

We clearly need a humane approach to legal workforce participation in order to stabilize America’s own food supply chain. To advocate, you can contact local representatives about agricultural labor policies. Here is a helpful advocacy toolkit by the National Sustainable Agriculture Coalition.

For entrepreneurs and business leaders, here are a few organizations that can help with supply chain planning and also small business interest advocacy.

• National Federation of Independent Business (NFIB): As a prominent advocate for small and independent business owners across the United States, NFIB addresses various challenges, including supply chain issues. They provide resources and representation to ensure that the interests of small businesses are considered in policy-making processes. ​nfib.com

• Association for Supply Chain Management (ASCM): ASCM is a global organization dedicated to supply chain excellence. They offer frameworks, industry standards, and educational resources that can help small business owners enhance their supply chain operations and navigate disruptions effectively.

• National Association of Manufacturers (NAM) – Power of Small: NAM's "Power of Small" initiative focuses on supporting small manufacturers. They provide insights and advocacy related to supply chain resilience, helping small businesses navigate challenges and improve their operational efficiency. ​

• Association for Enterprise Opportunity (AEO): AEO champions the interests of underserved entrepreneurs and small businesses. They focus on developing effective initiatives to assist these businesses in starting, stabilizing, and expanding, which includes addressing supply chain challenges.

The future of our food system depends on our collective ability to move beyond short-term political posturing and create sustainable, equitable economic strategies.

Let’s tone down the rhetoric and the aggressive approach to what should be a long-term collaboration and partnership. Blustering and bragging and fighting on social media and in the news headlines doesn’t make it easier to put good food at affordable prices in the hands of parents in America. If anything, it’s only going to make it harder.

America has always been resilient—but resilience requires smart policy, not political posturing. It’s time to refocus on long-term economic strength, not short-term wins. America was pretty great and it still can be. Let’s focus now on making it better.