Small business operators, a demographic central to President Donald Trump's political support, are increasingly encountering significant challenges amid the administration's policy decisions in its second term. Economist Paul Krugman, a Nobel Prize recipient, underscored these difficulties in a newsletter published on Monday, characterizing 2025 as a particularly difficult year for the small business sector and predicting that conditions in 2026 are likely to deteriorate further.
Krugman referenced empirical studies indicating that individuals engaged in small business ownership typically favor conservative perspectives regarding government regulation. However, he noted that the expectations rooted in this conservative outlook have conflicted with the real impacts of the policies enacted over the past year, leading to widespread discontent in this community.
The economist pointed to two primary policy areas affecting small businesses: tariffs and immigration enforcement. High tariffs, especially on imported goods, have substantially increased operating costs for businesses reliant on supply chains extending beyond domestic borders. This situation has effectively acted as a severe setback for these companies, creating a challenging environment for procurement and inventory management.
Simultaneously, the administration's intensified immigration enforcement, resulting in mass detentions and arrests of immigrant workers, has disrupted industries dependent on foreign-born labor. Sectors like construction contracting have been notably impacted, finding it difficult to maintain their workforce under such pressures.
While these regulatory and policy-induced pressures affect businesses across the spectrum, Krugman highlighted that large corporations possess greater resilience. These entities have leveraged their capacity to source alternative suppliers, utilized trade agreement exceptions, and engaged political connections to navigate or mitigate the effects of tariffs and labor shortages.
Krugman specifically cited Apple's situation as an example, where the tech giant received exemptions on smartphone imports from India, contrary to the punitive tariffs applied broadly to Indian exports. This selective relief illustrates a trend toward crony capitalism — where business success increasingly depends on political favor rather than market competition.
In contrast, small businesses lack the political clout to secure such preferential treatment, leaving them disproportionately vulnerable to the adverse impacts of these policies. Krugman also highlighted the compounding effect of rising healthcare costs, which have become an additional burden. Notably, nearly half of the adults enrolled in health insurance plans via government-run exchanges are either small business owners or employees of small businesses. The cessation of federal subsidies for these plans has therefore exerted a substantial financial strain on this sector.
Further illustrating the repercussions, multiple reports have surfaced about small businesses compelled into insolvency due to escalating input costs triggered by tariffs applied to imports from countries such as India and China. These businesses have encountered contract cancellations and fiscal insolvency risks, prompting many owners to compare the preceding era of proactive trade promotion under President Ronald Reagan with the current administration's protectionist tariff policies, suggesting a departure from free-market principles toward restrictive trade practices.
Former U.S. Trade Representative Roy Kirk echoed these concerns, noting that the tariff policies have created significant uncertainty and operational difficulties for small export-oriented businesses. As over 90% of U.S. exporters are classified as small or family-owned enterprises, Kirk emphasized that the inconsistent and unpredictable regulatory landscape complicates their ability to plan and compete effectively in global markets.
The cumulative impact of these policies has triggered a pressing need for reassessment, given the centrality of small businesses to the broader U.S. economy and job creation. Without adjustments that alleviate the disproportionate burdens faced by these enterprises, the sector may experience continued deterioration, with broader implications for employment and economic growth.