Tariffs Spark Trade War: Small Businesses Face Cuts, Tech Spending Slumps Amid Economic Uncertainty

[00:00:02] It's Monday, April 7th, 2025 and I'm Dave Solt. Four things to know today. Tariffs shake small businesses, brace for shifting client budgets and IT spending cuts. IT prices will be on the rise, adapting to the new reality. A solid jobs report masks tech sector woes, staffing challenges loom amid economic growth. And Microsoft's data center pause, AI investments getting a reality check. This is the business of tech.

[00:00:31] I said last week I'd start with the tariffs. The Trump administration has declared a trade war with the world, implementing globally applied tariffs that have sparked widespread criticism from economists. The new set of tariffs, described as potentially the largest since World War I, is predicted to cost the U.S. economy dearly, with estimates of a 60% risk of recession this year, according to J.P. Morgan's chief global economist.

[00:00:56] The stock market reacted swiftly, suffering a staggering loss of approximately $6 trillion in two days following the announcement. A wave of confusion has hit business leaders. Restoration Hardware CEO Gary Friedman expressed his shock during a live earnings call when his company's shares plummeted by 30% following the announcement of tariffs. Despite initial optimism about Trump's second term, executives are now realizing the administration's trade policies could lead to a recession.

[00:01:26] Recent historical data indicates that 9 out of 14 bear markets since World War II have preceded economic downturns. Initially, the expected reciprocal benefits from foreign relationships appear to be faltering, as evidenced by Israel's recent cancellation of tariffs on U.S. goods without receiving any concessions in return. In the New York Times, small businesses across the U.S. are facing a barrage of challenges, including funding freezes, staffing cuts, and significant tariffs imposed by the Trump administration.

[00:01:56] The owner of Golden Mountain Guides in Colorado has seen a surge in customer cancellations for climbing courses, reflecting broader concerns among entrepreneurs about economic stability. According to the National Federation of Independent Businesses, optimism among small business owners peaked after the recent election but has since waned as funding opportunities dry up.

[00:02:19] The economist Ulfek Aksugat from the University of Chicago reports that small businesses have been accumulating credit card debt, leading to increased financial vulnerability. The Small Business Administration has announced plans to cut its workforce by over 40 percent, raising alarms about its ability to support struggling enterprises.

[00:02:38] Additionally, steep tariffs on imports are forcing businesses to adjust their supply chains, with some, like Fort Hamilton Distillery in Brooklyn, struggling to find alternative suppliers without incurring hefty costs. The European Union is preparing to respond to the tariffs. French government spokesperson Sophie Primus announced that the EU's response could extend beyond goods to include digital services, potentially impacting major U.S. tech companies like Google, Amazon, and Apple.

[00:03:07] The EU trade ministers are set to meet to discuss strategies and preserve unity in negotiating with the U.S. An analysis by the American Enterprise Institute has revealed a significant mathematical error in the Trump administration's formula for calculating reciprocal tariffs, potentially inflating the impact of the tariffs by a factor of four. The formula, which was designed to determine tariff rates, simply divides the trade deficit by the total value of imports from each country.

[00:03:34] This method has resulted in tariff rates being set much higher than necessary to achieve the administration's objectives. For example, had the calculations been accurate, tariffs on Vietnam would have been set at 12.2 percent instead of an inflated 46 percent. The White House has yet to respond to these claims. Why do we care? Small business owners are left navigating an uncertain future as the economic landscape shifts under their feet.

[00:04:03] Let's talk about customer impact first. Clients across industries may tighten budgets, impacting IT spending and project funding. Providers must be prepared to pivot their service offerings to align with clients' revised financial priorities. Not all industries are equally affected by tariffs. Businesses with more domestic focus may remain stable. Tariffs will push companies to reconfigure supply chains.

[00:04:30] Providers can add value by offering consulting on IT infrastructure adaptations, like optimizing supply chain management software or integrating logistics data analytics. And companies offering cloud services or integrations with platforms like Google, Amazon, and Apple should monitor potential compliance and availability issues, particularly for their international clients. This episode is supported by Flexpoint.

[00:04:57] Flexpoint offers a purpose-built payment solution from managed service providers, automating billing operations to enhance efficiency and cash flow. With features like accounts receivable automation, branded client portals, and secure same-day payments, Flexpoint streamlines financial management. Integrations with accounting software such as QuickBooks and Xero, as well as professional services automation tools like ConnectWise and Autotask, ensure seamless data synchronization.

[00:05:24] Experience improved cash flow and client satisfaction with Flexpoint's comprehensive platform. Learn more at getflexpoint.com slash msp-radio. Now let's talk specifically about the tech impact. The International Data Corporation warns that the U.S. government's tariffs could have global information technology spending over the next six months.

[00:05:49] The organization predicts that these tariffs will raise technology prices, disrupt supply chains, and weaken overall spending in the sector. Originally forecasting a 10% growth in global IT spending, IDC now expects to revise this figure significantly downward to 5% due to the recent tariff announcements.

[00:06:09] In the Wall Street Journal, it was highlighted that the dream of the Trump tariffs is to boost high-tech manufacturing in the U.S., but the reality could lead to significantly higher prices for consumers. For instance, the cost of the iPhone 16 Pro with 256 gigabytes of storage is currently priced at $1,100. The bill for materials for Apple is approximately $550, which rises to around $580 when factoring in assembly and testing.

[00:06:39] However, with a newly announced tariff of 54% on goods from China, the total cost could escalate to around $850. The shift would force Apple to increase prices to maintain profit margins, emphasizing the complex global supply chain that defines its flagship product. Blood in the Machine discussed the possibility of the tariffs being AI-generated.

[00:07:03] Analysts noted that the administration did not calculate these tariffs correctly, instead possibly using a formula suggested by AI chatbots that divided the U.S. trade deficit by a country's export. The newsletter warns of a disconnect between the hype surrounding artificial intelligence and its real-world applications, emphasizing that the true danger lies in thoughtless decision-making by those in power using AI tools. CRN did a talk-to-the-people piece, where solution provider executives expressed concerns over the tariff,

[00:07:32] which they describe as creating confusion, uncertainty, and pain in the industry. Following the announcement of additional tariffs on imports from China, many companies, including MainGear, faced increased costs, with laptops expected to rise by around $70 per unit due to shipping and labor expenses. Executives predict price increases of 10-15% on hardware and anticipate a decline in customer IT budgets as businesses grapple with financial pressures.

[00:07:59] Despite the challenges, they acknowledge the necessity for ongoing IT investments, particularly in security and technology refreshes. Why do we care? I laughed at an AI analysis that offered, quote, As the uncertainty continues, companies are urged to advise clients on managing their IT spend effectively. End quote. No shit, Sherlock. It's the uncertainty that's the concern. With tariffs potentially doubling the cost of key components, end-user device prices are set to rise significantly.

[00:08:28] CRN reporting that laptops could see a $70 increase per unit alongside a 10-15% rise in other hardware costs. Clients already struggling with tight budgets may delay refresh cycles or look for refurbished options, which MSPs could proactively source and recommend. I want to note something. Advising clients on long-term strategies to diversify their tech stack and reduce reliance on heavily tariff imports could prove valuable.

[00:08:56] And that's very un-MSP, who like to standardize everything. It's very hard to standardize when prices are varied. And as tech prices rise and companies face financial pressure, IT budgets may shrink, especially for non-essential projects. Providers might see a shift from proactive upgrades to reactive maintenance, which will require recalibrating service portfolios to include more flexible on-demand support. And it's again very un-MSP.

[00:09:27] In a solid jobs report for March, the economy added 228,000 jobs, maintaining a historically low unemployment rate of 4.2%. Green Capital Economists suggest that this strong report indicates continued economic expansion, despite concerns about tariffs. However, they caution that the current momentum may not withstand potential trade shocks.

[00:09:48] Average hourly earnings rose by three-tenths of a percent, contributing to a year-over-year average wage increase of 3.8% among private sector workers. Additionally, about 232,000 workers entered the labor force this month, suggesting a slight increase in workforce participation. While federal employment saw a decline of 4,000 jobs, the overall government sector added 19,000 positions, suggesting resilience amidst trade tensions.

[00:10:15] And in a recent report from CompTIA, tech hiring activity showed mixed signals in March 2025. The report revealed a decline of over 8,000 jobs in the tech sector, with significant losses primarily in tech services and telecommunications. Despite this, the tech unemployment rate slightly decreased 3.1%, while overall employment across all sectors fell by an estimated 29,000 positions.

[00:10:41] New job postings for tech roles saw a modest increase, totaling more than 213,000, resulting in nearly 478,000 active tech job postings last month. Notably, positions requiring skills and artificial intelligence accounted for 21% of the postings. CompTIA's analysis indicates that California, North Carolina, and Washington experienced the highest increases in tech job postings, with Seattle, San Francisco, and San Jose leading the metropolitan markets in growth.

[00:11:13] Why do we care? Despite the positive macroeconomic data, the tech sector saw a decline of over 8,000 jobs, primarily in tech services and telecommunications. This signals that IT services companies could face challenges in maintaining staffing levels or recruiting top talent. And finding qualified talent is increasingly difficult. Despite the caution, the long-term trend toward digital transformation does remain strong.

[00:11:37] Clients may simply delay rather than canceling tech projects outright, particularly with the overarching uncertainty. Microsoft has halted data center projects in the U.S. and Europe that were set to consume 2 gigawatts of electricity, according to analysis from TD Cohen. This decision stems from an oversupply of capacity compared to Microsoft's current demand forecast.

[00:11:59] The tech giant's retreat from new leasing agreements is primarily influenced by its choice not to support additional workloads from OpenAI, creator of ChatGPT. Investor concerns regarding the substantial investments in artificial intelligence by U.S. tech companies have grown due to slow returns and competition from the Chinese startup Deekseek, which offers AI technology at significantly lower costs. Following Microsoft's withdrawal, Google is reportedly stepping in to fill the void in international markets,

[00:12:29] while MetaPlatforms is doing the same in the U.S. Despite the pullback, Microsoft reassured stakeholders that it plans to invest $80 billion in AI infrastructure this fiscal year, maintaining that growth will continue across all regions. And Apple chips are set to be produced in the U.S. at a faster rate, according to TSMC. The company, which has faced delays in establishing its first chip plant, claims that future facilities will be built more rapidly, with the next plant expected to come online in two years.

[00:12:59] TSMC's initial plant took five years to complete, and primarily produces chips for older Apple devices. Despite the progress, former Intel CEO Pat Gelnziger remains skeptical, arguing that without research and development in the U.S., the country cannot achieve semiconductor leadership. TSMC's U.S. expansion aims to address these concerns, with plans to produce three nanometer chips by 2028 and two nanometer chips before 2030. Why do we care?

[00:13:28] Microsoft's halt on data center projects, particularly due to the decision not to support open AI, hints at a more cautious approach toward AI infrastructure investment. It could signal a slowing momentum in cloud AI services growth, affecting clients who anticipate increased capacity for AI-driven workloads. The lack of rapid returns on AI investments, and competition from cost-efficient alternatives like DeepSeq,

[00:13:53] reflect growing skepticism about the short-term profitability of large-scale AI infrastructure. Despite halting specific projects, Microsoft is still committing substantial funds to AI infrastructure. In an interview with CNBC, Mustafa Suleiman, the CEO of Microsoft AI, explained the advantages of focusing on artificial intelligence models that are three to six months behind the latest developments. He emphasized that this approach allows for lower costs

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[00:15:21] Thanks for listening. Today is National Beer Day. I'm not sure I need any others, but it's also International Beaver Day and National Coffee Cake Day. I'll be speaking on a webinar on April 22nd about impound marketing in the AI era with the author of a new book. Link in the show notes and description to register. The Business of Tech is written and produced by me, Dave Sobel, under ethics guidelines, posted at businessof.tech. If you've enjoyed the show,

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