The Big Story: Tariffs invite retaliation that will harm startups
President Donald Trump announced new tariffs that risk escalating a trade war, making it harder for startups to grow outside of the U.S. Using emergency powers intended for wartime, Trump announced 25 percent tariffs on imports from allies Canada and Mexico, and 10 percent on imports from China. Last minute talks with Mexico and Canada led to a temporary, one-month pause for tariffs on their exports, but the ten percent tariff on Chinese imports took effect on Feb. 4th. China retaliated with tariffs on U.S. energy and auto imports, export restrictions on minerals critical to U.S. electronics supply chains, and an investigation of Google. Before the pause, Canada and Mexico had drawn up plans to retaliate with tariffs and other measures. The episode underscores how overreliance on tariffs in trade policy increases costs, invites retaliation, and creates uncertainty that harms U.S. startups’ ability to scale internationally.
Tariffs and the escalating trade tension they bring—especially among top trading partners—create a cycle of negative consequences that startups must navigate. Many startups will see production costs tick up and new retaliatory measures that will create new barriers to reaching markets around the world. Chinese retaliation is designed to harm U.S. semiconductor production needed for innovation in areas like AI. Canada already has a digital services tax on the books that discriminates against U.S. companies and increases costs for services startups rely upon. Disregarding our trade commitments to allies like Canada by imposing unrelated tariffs means they’re increasingly unlikely to honor those commitments themselves.
Moreover, tariffs undermine opportunities to expand U.S. trade. For example, the United States-Mexico-Canada Agreement, a free trade agreement Trump signed in his first term, included a digital trade chapter with provisions critical for startup success abroad. Imposing tariffs in violation of that agreement not only threatens the viability of those provisions, but undermines the chances of exporting them to agreements with other trading partners. Instead, as Olivia Walch, CEO of Arcascope, testified before Congress last year, startups like hers “need proactive digital trade leadership from the U.S., [so] companies can continue to do what we do best—build—and compete on a global stage.”
The back and forth over tariffs comes as the Senate considers President Trump's nominee, Jamieson Greer, for U.S. Trade Representative. His confirmation hearing last week included heavy discussion of both tariffs and digital trade. Policymakers like Greer must pursue a smart approach to digital trade that reduces barriers and enables U.S. startups to scale abroad.
Policy Roundup:
Senate committee advances key broadband and controversial age verification legislation. The Senate Commerce Committee advanced several measures last Wednesday, including the Rural Broadband Protection Act, a bill ensuring the Universal Service Fund is allocated to Internet service providers capable of bringing high-speed Internet to low-income and rural areas. The committee also moved forward the Kids Off Social Media Act, which raises concerns for startups, as proposals that effectively require age verification could strain limited budgets, increase cybersecurity risks, and disrupt user experience.
California proposes AI training data disclosure bill. California policymakers introduced a bill last Tuesday that would require AI developers to notify copyright owners before using their works in training data. This proposal would create unnecessary burdens on developers and stifle innovation and comes as courts are still considering whether using copyrighted content in training data is protected by fair use.
Policymakers examine small business needs. The House Committee on Small Business held a hearing last Wednesday to discuss how Congress can better support small businesses. The hearing surfaced key issues for the startup ecosystem including the impact of tariffs, the high cost of childcare, and several tax issues, like the need to reinstate immediate expensing for R&D costs.
On the Horizon
WED. 2/12: The House Committee on Small Business will convene a hearing to discuss Small Business Administration lending programs and community banking at 10:00 AM ET.
WED. 2/12: The House Judiciary Committee is holding a hearing on "the censorship industrial complex" following committee Republicans' years-long complaints about Internet companies' content moderation decisions at 10:00 AM ET.
WED. 2/12: The House subcommittee on commerce, manufacturing, and trade will convene a hearing on AI in manufacturing at 10:00 AM ET.
Startup Roundup:
#StartupsEverywhere: Covington, Kentucky. Founded in 2022, Flamel.ai helps multi-location and franchise brands stay true to their brand guide while delivering content at scale. With a background in venture capital, co-founder Paul Ehlinger is a seasoned expert on issues facing startups today. We sat with Paul to discuss AI, open source, and more.
