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Tariffs – essentially taxes on imported goods – can have outsized impacts on America’s entrepreneurs. In fact, tariff effects on small businesses are often more pronounced than on large corporations. Smaller firms operate on tight margins and lack the buffers and supply chain flexibility of big companies. When import costs rise or trade relationships sour, small business owners find themselves scrambling to adapt. Below, we explore how tariffs affect U.S. small businesses and entrepreneurs, from higher costs and prices to disrupted supply chains and lost export markets, and how companies cope with these challenges.
Tariffs can reverberate through nearly every aspect of a small company’s operations. At a high level, the tariff effects on small businesses include increased costs for raw materials and inventory, pressure to raise consumer prices, supply chain upheavals, and even retaliatory trade barriers that hurt exports. Small businesses are uniquely vulnerable to rising costs because they run on razor-thin profit margins. Small businesses frequently cannot easily digest sudden cost spikes or figure out ways to navigate elaborate upcoming trade rules as can big companies. This increased cost has pushed many entrepreneurs to put on ice their plans for growth and simply concentrate on survival.
Furthermore, tariffs create uncertainty. Business owners may not know if a tariff is temporary or will expand to other goods, making it hard to plan investments or manage inventory. In short, the tariff effects on small businesses tend tomanifest as higher operating costs, squeezed profit margins, and difficult strategic decisions – all of which we will discuss in detail.
One of the most immediate tariff effects on small businesses is an increase in the cost of goods and materials. This is historicially shown and you can read more about the history of us tariffs here. When the U.S. slaps a tariff on an imported product, the companies buying that product must pay an extra tax. Small manufacturers, retailers, and wholesalers often rely on imported inputs – from steel to electronics to textiles – and suddenly those inputs become more expensive.
These higher costs hit small businesses especially hard. Larger companies might negotiate bulk discounts or shift production to different countries, but a small business often has far less leverage. In 2019, tariffs were expanded on thousands of products from China, and the average tariff rate on those imports jumped from about 2% to 24% within a few months. Such steep cost increases can be devastating for a small firm that can’t easily find substitute materials. Tariffs effectively act like a sudden hike in the cost of goods, squeezing entrepreneurs’ finances. Learn more about how tariffs started in the US here.
Often, small businesses have no choice but to pass along some of the higher costs to their customers. Another tariff effect on small businesses is that it forces them to raise prices for end consumers – potentially making their products less competitive. If a boutique furniture maker has to pay 10% more for imported wood due to tariffs, that added cost may show up in a higher price tag on the final product.
Many firms try to share the pain – a portion of the tariff is reflected in higher prices, and a portion is absorbed via lower profit or cost cuts elsewhere. Economists note that tariffs largely behave like a consumption tax. American consumers ultimately bear a significant portion of the cost in the form of higher prices. Studies of the 2018–2019 tariffs show a near one-to-one pass-through: import taxes translated almost entirely into price increases for U.S. buyers. This means small businesses raising prices weren’t just price-gouging – they were reacting to genuine cost increases imposed by tariff policy.
We saw concrete examples of price hikes. After tariffs on imported washing machines were implemented in 2018, the retail price of laundry appliances jumped about 12% in the following year. Likewise, small breweries and beverage companies faced higher costs for aluminum cans due to a 10% aluminum tariff, which in some cases led to slightly more expensive beer for customers. This delicate trade-off is a hallmark of tariff effects on small businesses: owners walk a tightrope between remaining profitable and keeping their products affordable.
Tariffs don’t just increase costs – they can fundamentally disrupt a small business’s supply chain. Many entrepreneurs have built their supply chains for efficiency, sourcing parts or products from overseas partners based on cost and reliability. A sudden tariff throws a wrench into that system. One major tariff effect on small businesses is the chaos it can create in procurement and logistics. Businesses may be forced to find new suppliers, reroute shipments, or even alter product designs to work around tariffed components.
During the U.S.–China trade war, for example, thousands of companies scrambled to shift sourcing to other countries. But these shifts come with challenges: new suppliers must be vetted, and other countries can quickly hit capacity. There’s also no guarantee that a new source won’t face tariffs. This kind of whiplash creates uncertainty and forces constantreevaluation of sourcing strategies.
Additionally, tariffs can lead to shipping delays and inventory headaches. Anticipating tariff increases, some small businesses rush to import and stockpile goods before higher rates kick in. This can strain warehouses and tie up cash in inventory. Others, caught off guard, experience delays as their shipments get stuck in customs or re-routed. In short, tariffs introduce friction into supply chains that were once smooth, and small firms often lack the resources to easily navigate these sudden detours.
It’s easy to focus on import costs, but we must remember that many small businesses are exporters as well. Retaliatory tariffs by other countries can hit American small businesses trying to sell abroad. When the U.S. raises tariffs, trading partners often respond in kind by levying tariffs on U.S. goods. This tit-for-tat can shut small companies out of importantoverseas markets. Thus, a significant tariff effect on small businesses (especially those who export) is lost sales and competitiveness abroad due to foreign tariffs.
Consider American whiskey distillers – including many craft distilleries – who sell bourbon and whiskey to Europe. In response to U.S. metal tariffs, the European Union imposed a 25% tariff on American whiskey in 2018. Over the next few years, U.S. whiskey exports to the EU plunged by about 20%. Similar stories played out in other industries: small U.S. craft cheese makers, auto-parts suppliers, and farmers all lost business as their products faced new foreign tariffs.
Small businesses are a significant part of America’s export economy. According to the U.S. Census Bureau, 97% of U.S. exporting firms are small businesses, accounting for roughly 36% of the nation’s export value. In short, tariffs can trigger a chain reaction of reduced market access. Small exporters may have to cut back production or even exit foreign markets entirely if their goods are priced out by tariffs. Thus, the tariff effects on small businesses include not just internal cost issues, but external trade challenges that can stifle expansion opportunities abroad.
Faced with these challenges, entrepreneurs have gotten creative in finding ways to soften the blow. While they can’t control trade policy, they can adjust their strategies. Here are some common ways tariff effects on small businesses are being managed or mitigated:
No single strategy eliminates the pain, but these steps can cushion the impact. Strategic pricing and efficient operations can maintain customer goodwill and business viability. The key for entrepreneurs is to stay agile and proactive.
Modern discussions of tariffs and small business inevitably turn to the turbulent trade policies of the Trump era (2018–2020). President Donald Trump’s administration imposed a series of sweeping tariffs, and these had significant consequences for small companies. Tariffs were placed on imported steel (25%) and aluminum (10%) globally, on solar panels and washing machines, and most notably on a wide range of Chinese goods (ultimately covering roughly \$370 billion worth of imports).
By 2019, the average tariff rate on Chinese imports had rocketed from just 3% pre-trade-war to over 20%. This sudden shift left small businesses reeling. A late-2018 survey found that over a third of U.S. small businesses had already seen their costs increase due to the China tariffs, and nearly half were changing their business strategies in response. Many small businesses became cautionary tales during the Trump tariffs.
For example, Mid-Continent Nail Company in Missouri nearly went under after the steel tariffs drove up its wire rod costs. Within months of the tariff, it laid off about 150 workers. There were many other examples: from bicycle part importers to mom-and-pop retailers, countless entrepreneurs had to downsize or rethink their business model.
On the other hand, a small subset of businesses producing something domestically that competed with imports initiallywelcomed the tariffs. Some steel mills and aluminum smelters saw a short-term boost. However, even those gains were limited and often temporary. For every small firm that might have benefitted, there were many more that suffered higher costs.
Notably, most of Trump’s tariffs remained in place in subsequent years. Small businesses had to continue adapting. By 2020, U.S. manufacturing output and job growth had not shown a significant boost from the tariffs. Essentially, the tariff effects on small businesses during the Trump era validated what history and economists predicted: widely applied tariffs tend to hurt more than they help. This period did, however, force small companies to build more resiliency.
In the long run, what do tariffs mean for the landscape of small business? History provides some guidance. Broadly, sustained high tariffs tend to restructure markets, often with negative consequences for smaller players. One famous case was the Smoot-Hawley Tariff Act of 1930, which raised U.S. import duties to record levels and contributed to the Great Depression.
More recent history like tariffs on phosphate, and chinese furniture parts, shows that any short-term protection tariffs offer can be outweighed by broader damage. The 2002 steel tariffs under President Bush were intended to help U.S. steelmakers, but they were withdrawn after 21 months because they threatened more jobs in downstream manufacturing than they saved in steel production. For small businesses, the implication is clear: policies that raise the cost of key inputs harm growth and job creation.
That said, long-term tariff effects on small businesses aren’t universally bleak. Persistent tariffs might encourage the development of local suppliers, potentially creating new business opportunities for certain domestic manufacturers. However, building up domestic capacity takes significant time and capital, and small businesses often can’t afford to wait out that transition.
Another long-term effect is a reevaluation of global strategy. Small businesses may become more cautious in entering international markets. Some are investing in more resilient supply chains – diversifying across foreign suppliers and maintaining backup domestic sources.
In sum, the long-term tariff effects on small businesses will depend on how enduring and broad the tariffs are. If most tariffs are rolled back, small companies will likely return to global sourcing and expansion. If tariffs persist or increase, the landscape may shift toward more regional trade and operational consolidation.
Tariffs and their ripple effects remain an important topic for anyone interested in the small business economy. To continue learning about tariff effects on small businesses and broader economic impacts, be sure to visit our Economy Blog. We regularly cover trade policy topics and concepts such as the optimum tariff theory, provide data-driven insights, and share real stories of how businesses adapt in an ever-changing global marketplace. Stay informed and prepared by exploring more on our blog – an informed entrepreneur is a resilient entrepreneur when facing challenges like tariffs.
