On Tariffs and Government Business Model Interference

A Background to My Story

I am passionate about the sanctity of business models. When it comes to government policy and legislation, I generally find myself on the side of businesspeople trying to make the most of what they have. Key to this pursuit is predictability and an aversion to political risk. So, my view has always been that business models are best left to the businesspeople that make them happen. Such a laissez-fair approach promotes competitiveness and overall economic efficiency that benefits our economy and our people.

In recent years, there have been a few assaults on the sanctity of business models. One is the 1% excise tax on share repurchases imposed on corporations by the Inflation Reduction Act of 2022. (When it comes to promoting corporate health, why are share repurchases worse than dividends?) And then there is the recent bipartisan euphoria in the 21st Century ROAD to Housing Act that would prohibit the ownership of single-family rental properties for companies having more than 350 such investments. (Why limit corporate property rights when the businesses in question have been successfully meeting consumer needs to lease single family homes?) I could talk more extensively about both these legislative business model constraints, but there’s a bigger fish to fry: Tariffs.

Throughout the history of America, sweeping, untargeted tariffs have never been a good idea. The costs of tariffs are inevitably borne by consumers with inevitable results. With rising prices, demand falls. Meanwhile, sweeping tariffs generally result in retaliatory tariffs that make our exports more expensive, reducing exporter revenues. The collective result of reduced exports and lower demand is downward global pressure on GDP growth. The arc of our history bends towards the benefits of low tariffs and free trade. But after almost a century of gradually lower effective tariffs, the Trump administration has dramatically changed course.

A Brief Tariff History Since 1890

Between 1890 and 1913 (and this transcends the presidencies of Harrison, Cleveland, McKinley, Roosevelt and Taft), there were five Congressionally passed tariff acts that imposed, retracted and modified tariffs. Given the impact of tariffs upon business and the economy, such legislation often contributed to significant swings in fortune for the parties in power. Central to this legislative back and forth was that tariffs were the dominant source of federal revenues until 1913.

As our original primary source of federal government revenues, tariffs typically accounted for between 70% to 95% of all federal receipts. Hence, the customs houses in major port cities tended to be amongst the largest, most opulent federal buildings. The New York customs house alone collected over half of the tariff revenues in the 19^th century. That facility was replaced in 1907 by the new, grander Alexander Hamilton Customs House designed by Cass Gilbert, later selected by his friend, Chief Justice (and former President) William Taft as architect of the new United States Supreme Court Building.

Tariff winds started to change in 1909 when President Taft recommended and Congress approved the 16^th Amendment to the Constitution authorizing the imposition of income taxes. Wyoming became the 36th state to ratify the 16^th Amendment in 1913, ushering in a move from our reliance on stagnating tariffs to one centered on income tax revenue. The Revenue act of 1913 cut average dutiable tariff rates from 40% to 26%, with the average effective tariff (including tariff-free goods) falling from about 19% to 9%. Tariffs were the dominant source of Federal government funding for over a century but proved to be a blunt instrument having unintended economic consequences.

By the time Herbert Hoover was elected President in 1928, protectionism had driven tariffs on dutiable goods to more than 38%, with an average tariff of about 14%. Hoover was the preferred candidate of businessmen and bankers, having ably served as Secretary of Commerce for his two predecessors. But the love affair was short lived. Following the 1929 stock market crash, he would come to sign the Smoot–Hawley Tariff Act in June 1930, elevating dutiable and average tariffs to new record heights of 59% and 20% respectively. Thomas Lamont, J.P. Morgan Jr.’s senior partner and the firm’s chief political liaison would later recall that he “almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley‑Smoot Tariff.”

I own a souvenir of this moment in the form of a small engraved Egyptian revival amethyst coin dish given by JP Morgan, Jr. to Herber Hoover to congratulate him on his landslide victory. Doubtless, he would like to have had his small gift returned by 1930!

President Hoover had supported protectionist tariffs to appease farmers, but Smoot-Hawley did far more than that. The economic damage caused by elevated tariffs on some 20,000 goods was enormous, with international trade falling roughly 65% between 1929 and 1934, and U.S. exports to retaliating countries dropping by 28–33%. The legislation is now widely regarded as one of the most economically damaging pieces of legislation in U.S. history and one that tarnished Hoover’s reputation. Across historian surveys, Hoover consistently ranks in the bottom quartile of our presidents.

Tariffs Post Smoot-Hawley

Smoot- Hawley began to be dismantled shortly after the election of FDR with the Reciprocal Trade Agreements Act (RTAA) of 1934. The RTAA marked the beginning of trade liberalization, allowing President Roosevelt to negotiate bilateral trade agreements, contributing to enhanced long-term economic expansion and setting the US on a course of sustained low effective tariff rates until recently.

When it comes to the imposition of sweeping tariffs, our history is centered on congressional legislative actions. However, on a narrow basis, presidential executive actions, generally responding to specific business requests, have delivered protectionist tariffs under Section 232 of the Trade Expansion Act of 1962 and Sections 201 and 301 of the trade Act of 1974 which give presidents limited tariff authority. Section 232 requires no review or time limitations and pertains to imports presenting a national security risk. Section 201 requires U.S. International Trade Commission review and was designed to offer short term relief from import surges. Section 301 requires support from the Office of the United States Trade Representative and was designed to address documented unfair trade practices Examples of past protected industries under these statutes have included automobiles, steel, solar panels, dishwashers and machine tools, among others.

Avoiding Legislation

The history of tariffs brings us to this moment, with an administration currently seeking to use Sections 232 and 301 to impose lasting and broad-based tariffs, bypassing Congress in the process. It bears mention that these tariffs were not conceived in response to business concerns. This rationale replaces the administration’s initial 2025 reliance on the International Emergency Economic Powers Act (IEEPA), a statute customarily used for financial sanctions and declared invalid for tariff purposes on February 20^th by the Supreme Court. And what does all this mean for our expected effective financial tariffs? I have seen estimates ranging from 7% to 14%. There is uncertainty about where we will land.

That broad-based tariffs are a toxin when it comes to economic prosperity is a widely accepted view based on our history. At the level of a business, tariffs can be a major disruptive force adding needless political risks that can damage business models and discourage growth. The uncertainty delivered by frequent changes in tariff policy simply serves to compound this economic damage by discouraging added business investment or expansion. As a result, the number of companies lobbying on tariffs unsurprisingly nearly doubled in the first quarter of 2025 compared to 2024, as companies sought to influence new import duties. The third quarter of 2025 set a record, with over 2,300 lobbying filings mentioning trade or tariffs. Unfortunately, larger companies are the ones most able to afford expensive lobbyists, while smaller companies are at greater risk of getting run over.

When Congress takes up sweeping tariff legislation, as has historically occurred, there is time for companies to contribute to the dialogue to promote debate and a thoughtful outcome. However, when the executive branch of government holds that same authority to rest with a single person, then the political risk of doing business increases, as does the likelihood of ill-conceived and capricious trade policy.

The New Manufacturers

Factoryless goods producers (FGPs) are companies that design products that are manufactured elsewhere. In business parlance, they are “asset light” companies because they elect not to make the costly investment in manufacturing facilities. They outsource manufacturing because they believe it to not be a core competency of their business model. Nobody knows for sure how many FGP’s are in the United States, but it’s a lot.

Based on 2017 US Census Bureau special inquiry data, there are approximately 37,300 FGP’s operating in the US. Perhaps the largest of these is Apple Computer, which for years would note on its iPhones that they were “Designed by Apple in California. Assembled in China.” Still, the FGP number is an estimate because there is no NAICS code for an FGP. In fact, NAICS (The North American Industry Classification System) rules require classification by domestic production activity, making it impossible to classify FGPs as manufacturers.

Why talk about FGP’s? Because these modern-day manufacturers rely on supply chain management and international trade stability. FGP’s also tend to have a greater share of higher paid managers, professionals, and technical workers than non‑FGP firms. Finally, FGP’s are a comparatively new phenomenon, having first emerged in the 1970’s and grown with the emergence of elevated global manufacturing and trade. Hence, no one knows precisely what the impact of sudden rises in global tariffs will have on this vital source of recent American economic growth. But the obvious guess is that it can’t be good.

The other thing about FGP’s is that their existence distorts our view of American employment. FGP’s are manufacturers owning intellectual property but are typically statistically viewed as wholesalers. Given that, their employees are not viewed as manufacturing employees, which has the impact of incorrectly reducing our manufacturing employment.

In a recent piece on value investing, I spoke of known knowns, known unknowns and unknown unknowns. These concepts originated with Greek philosopher Socrates but were made famous in America in 2002 by former Defense Secretary Donald Rumsfeld. Here I would suggest that the impact of the Trump administration tariffs on FGP’s is a known unknown because we don’t know precisely how many of them there are or how many millions they employ.

The Sanctity of Business Models and Predictability

The sweeping tariffs being undertaken by the Trump administration were not done at the broad behest of businesses. From the vantage point of a business, sudden changes in tariffs alter the cost of imported goods and product components, hindering sales and causing operating profit margins to compress. Moreover, whereas legislative tariffs can be anticipated and potentially planned for, the sudden imposition of tariffs imposed by the executive branch of government is akin to a jolt of electricity. Business models are quickly upended, and that’s not a good thing.

Economists most often like to think of the impact of tariffs at a high macro level, which is where this article started. But my thoughts center on business models at the corporate level. I believe in free enterprise and in the sanctity of business models. I believe in the importance of business landscape predictability, which encourages our business leaders to take the risk to invest in growth. This is more of a micro view, but the combined impact on our economic prosperity of those thousands of companies benefitting from business model sanctity and landscape predictability shapes our macro reality.

When it comes to the sanctity of business models, I leave certain government and judicial actions out. Corporate taxes are part of the cost of doing business, paying for the governmental services we receive. Likewise, companies that become too powerful, potentially restricting competition and consumer choice can be subject to anti-trust actions. I tend to view anti-trust actions as the ultimate back-handed business model compliment. And then there are the targeted tariffs as originally conceived by Sections 201, 232 and 301, which are typically protections sought by companies to level our global competitive playing field so their business models can work. Here, a main risk of targeted tariffs is the limitation of consumer offerings and the entrenchment of inefficient businesses that lower our nation’s productivity and competitiveness.

For the first time in my career, with an active executive branch rapidly altering the rules of trade, we have introduced meaningful political risk to doing business in America. The unknown number of FGP’s having “asset light” business models defining a generation of companies will be harmed. But more broadly, sweeping tariffs will adversely impact our other manufacturers, wholesalers and retailers. Business landscape uncertainty, caused by the rapid imposition of tariffs and sudden shifts in tariff rates will only serve to make the damage to our economy and our growth potential worse.