Understanding Proposed Tariffs From a Small Business Perspective

Incoming President Donald Trump has promised a new round of tariffs. The proposals include a 10% to 20% across-the-board tariff on all trading partners, a 25% tariff on trading with Canada and Mexico, and a minimum of 60% on goods from China. So, how do tariffs work? And can businesses avoid them?

First, the Law

To start, how does the U.S. impose tariffs? The U.S. Constitution gives Congress the right to impose taxes, including on imported goods. However, Congress has explicitly given the Executive Branch the power to impose tariffs within certain constraints. The first time was for President Franklin Delano Roosevelt in the Reciprocal Trade Agreement Act of 1934. It was enacted as a means of combating the Great Depression. Congress has since expanded that power, including in 1962 with the Trade Expansion Act. This was the source of President Trump's authority to impose tariffs on steel and aluminum in 2018.

The upshot is that a president has a lot of authority to negotiate and enact tariffs without Congressional approval. For small businesses, that means tariffs could arrive more quickly than would otherwise occur if Congress had to pass a law.

How Can Small Businesses Prepare?

Trump's proposed unilateral tariffs, if implemented, would likely anger trading partners and incur retaliatory measures. As is often the case with proposed measures, it's unknown at this point how much of the talk is a negotiating tactic or the true plan moving forward.

Some businesses, including retailers and manufacturers, are preparing for potential tariffs by examining their supply chain and stockpiling goods that may be subjected to new tariffs where possible. Other measures could include:

• Negotiating contracts with foreign suppliers to have them take on some of the higher costs
• Plan for potential disruptions in supply chains and explore alternatives, such as by not agreeing to any exclusivity arrangements with suppliers
• Raise prices

Exemptions to Tariffs

Could your business obtain an exemption? The 2018 tariffs were smaller than what is currently under consideration, but they do provide guidance. Tariffs were a major component of the first Trump Administration. Under Section 301 of Title III of the Trade Act of 1974, four rounds of increasing tariffs were imposed on about two-thirds of U.S. imports from China.

Affected U.S. businesses could apply for a tariff exclusion with the U.S. Trade Representative (USTR). This process was considered highly unusual as it bypassed Congressional oversight and lacked any way to appeal a decision. However, it's likely a similar exemption process would occur for any new tariffs.

The criteria for an exemption was based on the following:

• Whether tariffs would impose significant harm on American business interests
• Whether the products were “strategically important” to China
• Whether substitute products were available outside China

Less than 15% of applications were approved. A 2024 study published in the Journal of Financial and Quantitative Analysis showed a markedly higher success rate for a tariff exemption for companies with contributions to Republican candidates and lower success rates for companies that contributed to Democratic candidates.

While it is likely any new round of tariffs would include exclusions, that process has not yet been outlined. As demonstrated by previous tariffs, obtaining an exclusion is by no means guaranteed.

A Note on Replacing the Income Tax

Trump has suggested that tariffs could replace income tax as a source of revenue. This line of thinking is based on the policies of the 19th Century, when most of the nation's income came through tariffs. This changed with the 16th Amendment in 1913, which gave Congress the power to access and collect income tax.

The Wall Street Journal provides a good video summary of the economic effects of tariffs if you're interested or would like a refresher. The short of it is that most economists are dubious of Trump's vague plans to elevate tariffs to a major, if not the highest, source of revenue for the United States. Others are sounding an alarm, especially for the working class.

One of the main issues a tariff-led revenue plan faces is the sheer amount of money required. In 2023, over $2 trillion was raised between individual and corporate taxes. It would be difficult, if not impossible, for tariffs to match that. And while a side effect of tariffs is encouraging imported products to be created in the U.S. instead, that's not always feasible.

The costs of any tariffs levied by the United States are ultimately paid for by consumers in the nation. It's just a different form of taxation and unlikely to meet the country's financial needs. There's also the very real concern of retaliation by affected countries with tariffs or sanctions of their own, with some studies showing estimates of the U.S.'s gross domestic product suffering up to a 1.4% decline.

Put simply, it might be nice if tariffs could replace the income tax, but economists are warning that we shouldn't hold our breath.

Businesses Must Monitor Developments

While the tariff measures Trump is proposing may make some economists shudder, there's no argument that the past eight years have proved that they do carry some degree of efficacy. Regardless, there's a good chance of them occurring in the near future. Businesses across the country are already preparing.

Related Resources

• Tariff Laws and the Tariff Exemption Process (FindLaw's Business Tax Law)
• Tariffs Under U.S. Code (FindLaw's Codes)
• Business Tax Law Center (FindLaw's Learn About the Law)