How Blanket Tariffs Disproportionately Hurt Honest Small Businesses

Specific, targeted tariffs can serve an important purpose to support home-grown industries. Blanket tariffs do nothing but harm those they’re purported to protect.

The last couple weeks have been a whirlwind for the markets and supply chains, if you’ve paid any attention. The threats of blanket tariffs, along with tariffs that were actually implemented, roiled companies across North America. And even though the Mexican and Canadian tariffs were delayed (and likely will never be implemented), the extra ten percent tariff on Chinese goods remains, causing a good deal of panic amongst consumers, not to mention companies that are trying to figure out how to price their goods.

Despite my personal distaste for tariffs, targeted tariffs can actually serve an important purpose to protect domestic industries. For example, there is a large steel industry in the US, with Indiana, Ohio, and Pennsylvania leading the way. The tariff on foreign steel, to an extent, helps protect the domestic production and forces US companies to purchase their steel stateside. Potatoes are grown mostly in Idaho and Washington in this country – if the government wanted to protect against the import of the crop from Canada, that may also force domestic companies to keep their purchases within our borders. Soybeans, chemicals, and even cars all potentially fall into this same category. So long as there is enough domestic supply to meet the demand, targeted tariffs are helpful.

The problem is when blanket tariffs are imposed on all items, regardless of the commodity. If there is no domestic alternative or enough domestic supply to satisfy the consumer demand, then there is actually no point in implementing a tariff in the first place. Who is it protecting?¹ When the government issues a massive regulation, especially one that it has little ability to properly enforce, the potential for law-breaking goes through the roof. Think about if the government were to abolish the IRS: sure, you may feel it’s still your ethical duty to pay taxes. But if there were zero consequences for evasion, the rates of tax fraud would skyrocket.

“Duty dodging”, or the evasion of tariffs, is an existing problem within Customs and Border Patrol (CBP), and there are three ways that importers attempt to do so: (1) trans-shipping, which is when products are shipped to a third-party country to make it appear as if it is the country of origin; (2) underreporting value, which is if you take a $100,000 shipment and declare it worth $20,000; and (3) mislabeling, which is when you declare a good under a different, erroneous HS code, usually one that carries a lower duty rate or no duty at all.

There are a myriad of ways that companies, big and small, engage in duty dodging. At the one end of the spectrum is a company outright lying about what it is importing in order to avoid customs regulations. I wouldn’t even call this “duty dodging,” to be honest – we should really just refer to it as criminal activity, or even smuggling. A good number of these companies will never get caught, simply because CBP does not have the manpower or the efficiency to check every shipment that enters our country’s borders. By default, CBP has to trust that the importer is being truthful on all filed documents. And that makes sense. A customs exam currently takes a few weeks, and that’s just with them randomly selecting a tiny percentage of incoming shipments. If we defaulted our mindset to “every importer is dishonest”, CBP would be so backed up in cargo exams that no one would ever receive their shipments of goods, and store shelves would constantly be empty.

At the other end of the spectrum are companies who twist the truth around just enough to be able to claim they are following the letter of the law, while stomping on the spirit of the law. Those are the companies we’re focusing on here. It is almost impossible for CBP to uncover these schemes without inside help.

For example, one of the ways that tariffs can legitimately punish the exporting country is by goading importers into moving their manufacturing or supply chain elsewhere. In recent years, many manufacturers who had previously outsourced their factories to China have relocated them elsewhere, such as India, the Philippines, Vietnam, and others in the Eastern Hemisphere. So, that has actually worked to some extent, though I would argue it isn’t tariffs that caused that shift, but rather the various supply chain problems that have arisen over the last few years that scared many companies out of their total reliance on China.

The problem with this is that relocating a manufacturing plant is expensive. Really expensive. You know what’s cheaper? Shipping the goods to another country, then importing it, thereby avoiding the tariff. That’s the aforementioned “trans-shipping.” Now the product being shipped from the third-party country is, according to CBP, originating in that country (rather than, for example, China, where it was actually produced before trans-shipping). Tariff avoided, and all it cost was a little bit of extra freight.

This is actually exactly what was happening with Qingdao Haiyan Group, a cabinet manufacturer that supplies most of the cabinets in our supply chain, including the ones that end up in Home Depot and Lowes. The company was shipping its Chinese-made products to Malaysia, labeling the products as “Made in Malaysia,” then shipping them to the US to avoid Trump-imposed tariffs from his first term. In this case, CBP was alerted in 2021, a lawsuit was filed, but it does not appear anything was ever actually done about it. In 2024, a judge ordered CBP to review the case again, but the US government does not have the resources nor operational efficiencies to handle a case this complex, let alone thousands of them. This is just one company that happened to be caught, not to mention the thousands of companies that likely are still getting away with doing so.

Barron’s reports that as much as $130 billion in tariffs were evaded in 2023, and as much as $125 billion more could be under the government’s new tariffs. According to government data, exports from China dropped $240 billion between 2018 and 2023 due to the tariffs Trump implemented in his first term, but Goldman Sachs says that number is overstated by nearly $100 billion precisely because of companies undervaluing their shipments to evade tariffs.

The solution to this would be a better system and legislation to protect American companies. And Senator Rick Scott appears willing to do this, having introduced S.172, currently titled “a bill to clarify the country of origin of certain articles imported into the United States for purposes of certain trade enforcement actions.”² The bill is purported to protect against people misreporting the country of origin on a customs form. The text of the bill is not yet available, but if you take the text of the same bill from the previous Congress (S.5110), in actuality it only adds regulations against companies owned by “a foreign adversary country.” That would help with Qingdao Haiyan, but not the thousands of American companies that reportedly evade tariffs each year.

Source: U.S. Global Investors

There are two types of companies that are likely to take part in these shenanigans: large companies, often public, who have the budget to avoid the tariffs with legal maneuvers; and small companies who are simply being dishonest.³ Regardless of the ethics involved in either one of these scenarios, both are finding a way to avoid a blanket tariff implemented by the US government.

And who ends up actually paying most of the tariffs? The honest, small businesses who are following the rules either because it’s ethical, or because they can’t afford to evade properly (or both). What ends up happening is that these honest small businesses are forced to raise their prices, while their competitors are not, driving consumers to the dishonest or larger companies.

Let’s say Company A imports products and implements a ten percent price increase because they’re now paying a tariff from goods that are only made in China. Now let’s say Company B, purchasing the same products from the same factory, decides to undervalue the goods, or change the country of origin on their customs forms. CBP will blindly trust both companies’ paperwork, but now Company B has a competitive advantage because they’ve broken the law in such a subtle way that they likely aren’t going to get caught without an internal whistleblower. Long-term, Company B will corner the market and survive, while Company A will cease to exist. And at that point, Company B will raise their prices even higher than Company A in the first place. Who loses in the end? Consumers.

At the end of the day, the result of this vicious cycle is that the market is left with only large companies or dishonest companies (or both!). And neither of them are paying the proper tariffs. If CBP had the ability to police the laws properly, this would all be moot. Companies would be forced to oblige by the regulations (like when everyone eventually drives the speed limit after they see the police consistently ticketing everyone on a specific road).

But since CBP doesn’t, a blanket tariff just increases illegal activity and creates a larger disparity between honest companies and those that are happy to lie their way to the top. Which means all we’re doing with these new policies is rewarding deviousness, rather than encouraging domestic production. Let’s first come up with a way to ensure the playing field is level before tearing up the field with a backhoe.

1. I’m not counting tariffs meant to effectively stop the import of any products from a specific country, like we did with Russia after they invaded Ukraine.

2. Rolls right off the tongue, no?

3. This sounds like I’m suggesting large companies would never be dishonest. I’m not. But small companies certainly don’t have the budget to go toe-to-toe with the larger ones vis-a-vis the legal maneuvers.