This article contains an update.
The great American historian Barbara Tuchman once described folly in government as the pursuit of policies contrary to a country’s own interests and despite the availability of feasible alternatives. Folly, as Tuchman noted, is more than just a one-off bad decision; rather, it is the consistent implementation of a policy that achieves the opposite of what is intended. The Trump administration’s unprecedented trade war rises to this level of mismanagement.
President Donald Trump’s embrace of tariffs to a level not seen in more than a century, supposedly to foster the redevelopment of the country’s industrial base, will do the opposite of what he intends it to do. It will crush U.S. small businesses, particularly those engaged in manufacturing, decimating the backbone of American industry and of countless communities across the country. Already, corporate bankruptcies are up 7.38 percent year over year, commercial freight contracts have plummeted, ports are empty, and hiring has been frozen across several different industries.
Costlier imports, higher borrowing costs, and falling demand
The Trump administration’s trade wars will hit—and are already hitting—small businesses, which employ nearly half of all U.S. workers, from multiple directions, putting significant strain on their operations. The net effect will be layoffs, furloughs, and downward pressure on wages and benefits for American workers. In fact, small-business owners face an almost unprecedented situation as they deal with massively increased operating expenses, higher borrowing costs, and in many cases, falling demand for their products or services abroad.
The Trump administration’s trade wars will hit—and are already hitting—small businesses, which employ nearly half of all U.S. workers, from multiple directions, putting significant strain on their operations. The net effect will be layoffs, furloughs, and downward pressure on wages and benefits for American workers.
Most small businesses operate with very tight margins, and their ability to reorient supplier networks is limited relative to larger firms with greater buying power. For the vast majority of small and medium-sized enterprises, absorbing the significantly higher operating costs associated with a 145 percent tariff on Chinese imports is simply not a realistic option—but neither is finding an alternative outside China. For companies reliant on critical minerals from China to make clean energy products, consumer electronics, electric vehicles, and components for the nation’s electricity infrastructure, the impact could be catastrophic, as China has restricted the sale of several minerals to the United States in retaliation for Trump’s massive China-specific tariffs.
One solution for U.S. small businesses would be shift production back to the United States. Yet while this is a laudable and achievable goal in some cases, it is not a short-term solution—particularly for firms that rely on contract manufacturers or that import Chinese-made goods to sell domestically. Another potential solution would be to seek exemptions from tariffs, specifically for products unavailable in the United States. Yet the Trump administration has rejected calls from business leaders to create an exemptions process, and most small businesses lack the wealth and name recognition to seek special treatment, unlike larger firms and the president’s wealthy donors.
As a result, small businesses can expect to pay significantly higher prices for the imported parts and materials they need to produce in the United States, as well as the finished goods they sell domestically. And since larger vendors are likely to use their purchasing power to squeeze suppliers into absorbing higher tariff costs, the burden of President Trump’s tariffs is likely to fall again on smaller firms. Perhaps this is why small-business optimism has fallen every month since Trump took office.
President Trump may claim that “all prices are down,” but the reality is that small businesses, including manufacturing firms, are bracing for higher costs as a result of the Trump administration’s trade policies. S&P Global’s April Purchasing Managers’ Index (PMI) report for manufacturing, for example, noted that tariffs had resulted in “steep increases in both input costs and selling prices.” In fact, the Institute for Supply Management (ISM®) index of prices paid by U.S. manufacturers has increased by 17 percentage points since Donald Trump’s inauguration—a dramatic increase that has brought the index to levels not seen since the supply chain challenges from the COVID-19 pandemic.
For many smaller firms, relocating supply chains to other Asian markets is also not an option, as potential manufacturing hubs such as Vietnam prioritize large corporations, leaving smaller players struggling to secure production capacity. Even if business leaders were to consider investing in a particular foreign market, spending precious time and capital to find new suppliers, the Trump administration’s chaotic, reckless approach to trade policy would serve as a disincentive. Any investment in finding new suppliers in one market could be for naught if the administration were to rewrite tariff levels either as a result of new deals or at the discretion of the president’s whims. As Jeffrey A. Sonnenfeld and Steven Tian of the Yale School of Management recently wrote, “No business can authorize investments that cost billions of dollars of shareholders’ money in plants, factories, or reshoring supply chains when there is such head-spinning policy turbulence.”
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Unlike their larger counterparts, small businesses often must finance the build-out of additional productive capacity and/or an expansion of their operations, unable to rely on their own balance sheets to internally fund investments in future productivity. An April letter from the Alliance for Automotive Innovation made this point clearly:
Most auto suppliers are not capitalized for an abrupt tariff-induced disruption. Many are already in distress and will face production stoppages, layoffs and bankruptcy … it only takes the failure of one supplier to lead to a shutdown of an automaker’s production line.
Investors at home and abroad already appear to be losing confidence in the United States, as evidenced by the falling value of the U.S. dollar and the recent surge in bond yields, both a result of the Trump administration’s chaotic, impulsive policies. The cost of borrowing will likely increase, leaving many businesses unable to profitably take advantage of new opportunities to meet domestic demand should they arise.
U.S. exporters, moreover, now face considerable disadvantages in foreign markets as a result of retaliatory tariffs and ad hoc consumer protests against brands associated with the United States. Many American brands have been taken off shelves, with foreign customers demanding non-U.S. alternatives even without official government action to isolate U.S. exports in response to Trump’s trade wars.
The Trump administration’s trade wars will hit the U.S. manufacturing sector hard
The Trump administration claims that its tariffs are meant to protect American workers from being taken advantage of by foreign producers, but the negative impact of these policies will be felt most acutely by American manufacturers and their workers. In fact, more than half—56 percent—of all goods that are imported into the United States are manufacturing inputs, despite the sector accounting for just 13 percent of the country’s gross domestic product (GDP). This is because U.S. manufacturers are more reliant on trade than most other industries. Eighty percent of manufacturing workers, for example, are employed by companies engaged in international trade and thus largely hurt by the compounding effects of the administration’s actions.
This is not an argument against strategic tariffs that protect American workers from unfair and possibly illegal nonmarket competition from places such as China. It is an indictment of the Trump administration’s poor execution of trade policy, which has left American firms unable to invest and grow in the United States, unsure of what the trade rules will be going forward and without the international partnerships needed to build resilient supply chains. In fact, the belligerence of the Trump administration’s trade actions is more likely to spur the creation of non-U.S. supply chains than it is to regrow American industry relative to others.
If the administration wants to rebuild American industrial capacity—and it should—then it ought to invest in U.S. small businesses and the entrepreneurs that bring new ideas and new technologies to market. It should work closely with large tier-one manufacturers to help capitalize and grow their domestic supplier base. It should engage with local community leaders and credit unions to ensure that affordable financing is available to help small businesses grow and compete more effectively. And it should double down on investments in research and development to help create and deploy the technologies needed to support U.S. industrial competitiveness for years to come. Moreover, it should ensure that competition between firms in the same industry remains high, allowing smaller firms to compete on level terms with larger ones.
If the administration wants to rebuild American industrial capacity—and it should—then it ought to invest in U.S. small businesses and the entrepreneurs that bring new ideas and new technologies to market.
The Trump administration’s actions are more likely to push innovative industries away from the United States to locations where they have access to reasonable and consistent trade policies, as well as policies that can attract top researchers and academics. For its part, Congress should consider developing a CHIPS-style investment package to spur growth in key industries of the future, ensuring sustained U.S. leadership in sectors such as quantum computing, artificial intelligence, 3D printing, and clean energy. And it should tie federal investments to firm-level commitments to support the workforce training and education, health care, and child care needs of employees.
The Trump administration’s actions are more likely to push innovative industries away from the United States to locations where they have access to reasonable and consistent trade policies, as well as policies that can attract top researchers and academics.
What is more, the negative impacts of the Trump administration’s trade wars are amplified by other actions seemingly designed to gut American manufacturing rather than support it. The administration’s apparent disdain for electric vehicles, for example, caused more domestic manufacturing projects associated with electric vehicle manufacturing to be canceled in the first quarter of 2025 than in the previous two years combined. Its decision to halt the development of offshore wind projects has directly resulted in the cancellation of planned manufacturing facilities, as well as the loss of jobs that would have otherwise been created. And the Trump administration has demanded that the CHIPS and Science Act be repealed despite the legislation heralding massive growth in domestic semiconductor manufacturing.
Conclusion
Taken together, the Trump administration appears to be implementing a trade and industrial strategy that is devastating to American industry. Already, leading U.S. firms have announced layoffs and furloughs. Bankruptcies have increased year over year, despite the surge in inventories that occurred as companies frontloaded purchases to avoid paying Trump’s tariffs in the first months of the administration. Freight contracts too have been cut significantly, as U.S. truckers and port operators face an unprecedented decline in demand, suggesting that the future of small businesses that rely on foreign inputs could be bleak. The Trump administration is not creating a new “golden age” of American industry; it is actively harming U.S. small businesses and their workers. This is the definition of folly.
Update, May 12, 2025: An earlier version of this article included a statistic on the percentage of American companies that import from China and do not have viable Chinese alternatives. The Center for American Progress can no longer verify this statistic and has thus removed it from the article.