Trump's tariffs get knocked out - but the hit to small business is just beginning

By Robert Pozen

Supreme Court tariff reckoning won't rescue Main Street from the damage it's suffered

A recent survey shows 81% of small businesses are concerned about tariffs, while 60% report that tariffs have increased their costs.

The Trump administration is pivoting to impose tariffs under other legal authorities. Congress needs to intervene.

The U.S. Supreme Court has invalidated President Donald Trump's sweeping 2025 tariffs imposed under the International Emergency Economic Powers Act (IEEPA).

In their decision on Feb. 20, both conservative and liberal justices questioned whether that act, which does not mention tariffs or taxes, authorizes across-the-board import duties. By rejecting an expansive interpretation of the act, the Court has reinforced constitutional limits on executive power - but the practical problems facing small businesses are still unresolved.

The Trump administration is already pivoting to adopt tariffs under other legal authorities. Trump has responded to the Court decision with a new 15% global tariff under Section 122 of U.S. trade law, which allows for tariffs based on large and serious balance-of-payment deficits. Section 232 of the Trade Expansion Act could apply to steel and aluminum tariffs on grounds of threats to national security. Section 301 remains available to counter unfair trade practices.

As for the refunds of tariffs already collected, the Court wasn't clear, so the timeline is uncertain. Small businesses do not have the luxury of waiting years for reimbursement. They pay tariffs upfront when goods clear customs, often weeks before receiving payment from customers. If refunds are slow - or don't come at all - some will not survive.

Small businesses constitute the backbone of the U.S. economy. They account for over 99% of all U.S. firms and employ roughly 46% of private-sector workers, according to the U.S. Small Business Administration. About one-third of small manufacturers rely on imported inputs. When tariffs raise prices for those inputs, they decrease profits at small businesses.

60% of small businesses report that tariffs have increased their costs, forcing many to raise prices and delay expansions.

Although various Trump administration officials have alleged that tariffs are paid mainly by foreign firms, research from the Federal Reserve Bank of New York found that nearly 90% of tariff costs from 2025 were borne by U.S. importers and consumers. The Congressional Budget Office reached a similar conclusion: "U.S. businesses will absorb 30% of the import price increases by reducing their profit margins; the remaining 70% will be passed through to consumers by raising prices."

Read: Hassett says New York Fed staff should be disciplined over study finding Americans paid for Trump's tariffs

Surveys underscore the strain on small firms. According to a recent Small Business Majority poll, 81% of small businesses are concerned about tariffs, and 60% report that tariffs have increased their costs, forcing many to raise prices and delay expansions. Similarly, a recent survey of small and midsize firms by Revenued found that 67% reported adverse effects of tariffs through higher costs of goods and materials, as well as supply delays.

The U.S. Chamber of Commerce has reported that small importers face effective tariff increases of 15% to 25% on many categories. Unlike large corporations, small importers cannot easily reroute supply chains to Vietnam or Mexico. They cannot hire trade lawyers to secure exemptions from tariffs. They lack the scale to negotiate lower freight rates or long-term contracts to buffer volatility.

The results are predictable. Small businesses raise prices, compress margins or delay investment. A Federal Reserve survey during the prior tariff cycle in the first Trump administration found that nearly 40% of affected firms postponed capital expenditures and slowed hiring.

Congress must acknowledge who actually pays tariffs. American firms and consumers bear almost all the burden.

When tariff rates change abruptly - or when exemptions hinge on lobbying - small businesses struggle to price products, plan inventory or hire workers. Volatility itself becomes a tax. Uncertainty reduces investment, even when the tariff ultimately disappears.

The Supreme Court decision on the IEEPA tariffs does not undo the damage it's done to small businesses. A business cannot retroactively place orders it canceled. It cannot instantly rehire workers who found other jobs. It cannot rebuild disrupted supplier relationships.

Therefore, Congress needs to rethink and revise current tariff policies.

First, Congress should limit tariffs under Section 232 to genuine national-security threats. The range of situations alleged to constitute threats to national security has become much too expansive.

Second, Congress should more clearly define unfair trade practices under Section 301. It should broaden the definition of unfair practices to address modern realities, including large-scale state subsidies in China that distort global markets. Traditional antidumping rules that focus narrowly on below-cost pricing miss these structural distortions.

Third, policymakers should publicly denounce the use of sweeping tariffs as tools to extract U.S. investments by foreign countries, especially America's allies. Policymakers should also come out against opaque processes for obtaining tariff exemptions and rapid changes in tariff rates without an articulated framework. Such opaque processes and tariff volatility are particularly troublesome for small businesses.

Finally, Congress should require the executive branch to assess explicitly how proposed tariffs will affect small businesses before implementation. Agencies should provide clear notice periods, transparent exemption processes and predictable implementation schedules. If tariffs proceed, policymakers should mitigate the cash-flow strain on smaller firms - perhaps through delayed payment mechanisms or temporary tax credits.

In all these deliberations, Congress must acknowledge who actually pays tariffs. American firms and consumers bear almost all the burden. Small businesses carry a disproportionate share because they lack the resources to navigate rapid policy swings, secure carve-outs or endure prolonged refund battles.

If the Trump administration shifts legal authorities and reinstates broad tariffs with selective exemptions and rapid changes, it will repeat the same instability of import duties prevalent under IEEPA. That repeat would compound the damage already done to small firms.

Small businesses can innovate and thrive in an environment of fair competition. What they cannot endure is constantly changing tariff schedules layered on thin margins.

Congress and the executive branch should adopt a stable, well-reasoned trade framework that targets real threats to fair competition, evaluates the impact of tariffs on small firms, and avoids high volatility in import duties. That's the strategy to help small businesses weather the tariff storm.

Robert Pozen is a senior lecturer at MIT Sloan School of Management and a former president of Fidelity Investments.

More: Americans' affordability crisis isn't tariffs' fault - it's something much, much deeper

-Robert Pozen

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02-21-26 1248ET

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