US tariffs: How UK businesses can mitigate the impact

Whatever the intentions of the present US administration are on overall imports, reviving the US automotive industry remains central to the government’s intentions. The White House has imposed 25% on all finished cars and parts, early on during the launch of its trade wars. There’s some lack of clarity about imports from Canada and Mexico as they fall under the USMCA (US-Mexico-Canada) agreements. Looking at the industry, we understand that different OEMs (Original Equipment Manufacturers) will be affected very differently, depending on the setup of their manufacturing, and positioning of their supply chains.

Broadly we think that:

• Premium and luxury brands are better positioned to maintain their margins and pass most costs onto their high-end consumers.
• Capital expenditure will rise sharply, to accommodate more US investment where possible, or more diversification, where desirable. In that spirit, logically asset disposals will likely slow down for the time being, at least until the C-suite can re-focus and re-plan.
• Brands who already have invested heavily in the US (local or foreign) have an advantage. Most of the cars produced in the US aren’t exported, so reciprocal tariffs from other countries will likely not have a big effect.
• To export vehicles from the US to Europe, would require significant modifications in the manufacturing lines to make sure EU/UK safety standards are met.
• Conversely, some companies will seek to diversify operations. Thinking long term some might seek to bring part of their business to the UK and Europe in general.
• Overall, we expect prices across the board in the US to rise meaningfully to cover increased costs, supply chain changes and capital expenditure. In terms of tires, we expect prices to rise significantly as 60% are imported (roughly 2/3 of these from Asia).
• This puts European companies at an additional disadvantage: not only will they have to increase their spending to manage loss of access to US, but they will face stiffer competition from China which will need to reduce its inventories and focus on Europe, at even lower prices.
• JP Morgan suggests a possible 25% earnings drop for European manufacturers in 2025.

What can OEMs do?

• Tech: Auto companies’ margins will be challenged across the board. We think that they should double down on efforts to increase technological efficiencies (AI, Robotic plants etc).
• Supply chains: Companies will need viable alternatives as global supply chains undergo dramatic change. They need to avoid over-reliance on one, and have multiple alternatives across geographies, while, at the same time, keeping the supply chain as slim as possible
• Operations: The build-up of inventories might cushion some of the effect of the global trade war. But this needs to be carefully managed alongside the liquidity of the business, including management of any working capital and liquidity borrowing covenants.
• Financial structure: Financially leveraged OEMs could find it difficult to refinance outstanding loans, as fixed income volatility might result in higher repayment rates. Companies will need to engage with their lenders to ensure liquidity. Presently, we feel that European inflation will be likely suppressed, so shorter duration borrowing makes more sense.
• Strategy and growth territories: Is the firm’s overseas strategy still relevant in a Tariff world? In this instance, companies need to think beyond the obvious US-related risks and start thinking about the possibility of a world where trade, overall, slows down, as protectionism rises.

Resilience isn’t an option for consumer companies. It’s a prerequisite.

The broad picture is one of forthcoming consumer uncertainty. Up until the eruption of the global trade war, UK retail sales bucked the trend of slower growth. When asked, consumers suggested that they felt only slightly more worried than average. However, the US upping its average trade tariff nearly nine-fold (from 2.5% to 22.5%), including a 10% tariff on UK goods, threatens UK growth, which is already weak. In 2025 the OBR projects 1% growth for Britain. Generalised trade wars could help bring it closer to recession. Going forward, we believe that slower growth and bad economic headlines could dampen consumer sentiment. In this environment, inflation would likely be an issue, as demand would slow down. Additionally, America blocking US trade access to China would likely cause Chinese companies to try and find more European destinations for their goods, at lower prices. The combination of sluggish growth and the fallout from the trade war, could cause a deflationary wave, allowing the central bank to lower interest rates faster than previously anticipated.

However, we mustn’t forget that the changes in the global trading system are tectonic. High volatility and uncertainty would likely further hinder main street efforts to withstand competition from online, both domestic and foreign (eg. Temu, Ali Express, Shein etc), as well as foreign low-price companies in the UK. Forecasting, which would affect investment decisions, inventories, hiring, becomes very difficult. Scenario planning will become key for CFOs to manage risk. The key going forward is “resilience”. Companies must build their resilience in

• Supply chains. Companies will need viable alternatives as global supply chains undergo dramatic change. They need to avoid over-reliance on one, and have multiple alternatives across geographies, while, at the same time, keeping the supply chain as slim as possible
• Operations. The build up of inventories might cushion some of the effect of the global trade war. But this needs to be carefully managed alongside the liquidity of the business, including management of any working capital and  liquidity borrowing covenants.
• Financial structure. Financially leveraged companies could find it difficult to refinance outstanding loans, as fixed income volatility might result in higher repayment rates. Companies will need to engage with their lenders to ensure liquidity
• Employees. Ostensibly, higher unemployment in the back of lower growth is an opportunity for companies to find the best talent. However, employees low quit/new jobs rates suggest that the employment market may be slightly frozen- which would have an impact on the morale of incumbents. Resilience should be built at the employee level to make sure a firm is ready to cope with the challenges of a volatile economic environment.
• Strategy and growth territories: Is the firm’s overseas strategy still relevant in a post-Trump Tariff world? In this instance, companies need to think beyond the obvious US-related risks and start thinking about the possibility of a world where trade, overall, slows down, as protectionism rises.

The tariffs announced bythe US administration on 2 April have led to market volatility and warnings from the IMF about global economic risks. The tariffs announced are expected to impact the energy and infrastructure sector in a number of ways: 

• Infrastructure sector effects: Greenfield and brownfield infrastructure projects are expected to be impacted, causing construction cost increases and potential delays or cancellations due to supply chain disruptions. 
• Recession risks: Potential recession could negatively affect demand-sensitive assets like toll roads and airports, while inflation-linked revenues might see higher forecasts. 
• Energy transition projects: The impact on energy transition projects is uncertain, with some markets potentially benefitting from diverted exports and others facing challenges due to currency and power price fluctuations. 
• Alternative trade routes: Governments may re-commit to infrastructure spending combined with support for national re-industrialisation. 
• Bond yields and valuations: Falling government bond yields could reduce borrowing costs and increase valuations for defensive parts of the energy and infrastructure sector. 
• Financial reporting: Listed companies must model the near-term impact of tariffs, complicating financial stability assessments and requiring disclosure of risk management strategies. 

Overall, US tariffs present some challenges, but the infrastructure sector's resilience and potential government interventions offer some optimism. 

The financial sector is much safer than 2008.

We are going through a period of record economic and financial uncertainty as the US attempts to change the global trade and economic model. Markets are experiencing extreme volatility, and some traditionally safe assets, like the Dollar and the US Treasury don’t behave the way that is expected. While the financial sector is not immediately impacted by higher tariffs (tariffs are not imposed on services) or supply chain dislocations, it is a sector that is impacted by rates and market volatility. Wider economic malaise and possibly lower rates will likely affect profitability across the board. Risks will rise due to volatility, and this will be reflected in financing costs.

However, the outlook is still not a negative one. For one, the recent rally in bonds may help the banks reduce some of their unrealised bond losses. Also, central banks have a job to ensure a modicum of stability. After the 2008, the global banking system has put up significant guardrails and banks are very well capitalised. Meanwhile, central banks have become adept at providing a safety net at times when volatility threatens sector dislocations. Volatility provides profit opportunities for asset managers, investment banks and traders.

For insurance companies, similar principles apply. They are very well capitalised (Solvency II in EU) and regulated. However, insurance premiums on cars, construction and others will likely increase to account for inflation. As growth is expected to slow down across the board, margins will probably be compressed and consumers will likely seek cheaper and online insurers, possibly further challenging the bigger companies. Having said, that, as with banks, there are no systemic risks in the immediate horizon. Climate change remains the biggest threat to the industry.

How is the financial sector affected overall?  

This will largely depend on two factors: government regulation and corporate agility.

Government: The UK is in a unique position to quickly adapt regulation to accept new business that might find it easier to operate there, as opposed to the US. Already we are seeing some spillage in other sectors, as business owners consider their geographical exposure. Deregulation could offset some of the headwinds from lower growth.

Corporate agility is the other factor: Are local banks ready for a significant shift in global trading patterns? Are their risk departments prepared for increased delinquencies? Does their capital structure reflect growth and inflation uncertainty? Are their business developers ready to scour for opportunities and accept new money?

Additionally, a firm has to think about talent retention and growth territories:

Human resources: Ostensibly, higher unemployment in the back of lower growth is an opportunity for companies to find the best talent. However, employees low quit/new jobs rates suggest that the employment market may be slightly frozen- which would have an impact on the morale of incumbents. Resilience should be built at the employee level to make sure a firm is ready to cope with the challenges of a volatile economic environment.

Strategy and growth territories: Is the firm’s overseas strategy still relevant in a post-Trump Tariff world? In this instance, companies need to think beyond the obvious US-related risks and start thinking about the possibility of a world where trade, overall, slows down, as protectionism rises.

Waiting, not freezing ahead of clarity.

Over 40% of all UK pharma business takes place in the US. While (potential) US tariffs will likely hurt the UK Pharma, Biotech and Life Sciences sector, the actual impact is difficult to assess. The level of tariffs remains uncertain, as do the mechanics (will tariffs be applied to the end product or all active ingredients?). Supply chains are very complex and different for each product. Tariffs on active ingredients could render moving more operations to the US a difficult proposition.

The industry will likely face increasing headwinds, and profit margins will likely be challenged in the next few months. Before touching tariffs, we should mention that the US regulatory landscape for pharmaceuticals is changing in an unpredictable way. And while we expect less regulation overall as a result, it will take some time for the new rules to become clearer.

Meanwhile, the White House has suggested that they would impose 50% to 200% duties. Jefferies, an equity analyst firm, suggests that 25%-50% US unreciprocated tariffs mean a 4%-5% hit on profits. Meanwhile, capital expenditure is expected to slow down – except for projects that will focus on building up a US presence. At any rate, lower profitability and focus on US-based investments mean pressuring prices on the upside, and other investments (including R&D) on the downside.

The heads of industry, looking for a way to reduce their risks, sent a letter to the EU on the 15^th of April, suggesting that they would need a modicum of deregulation in order to better be able to operate in Europe.

The impact, at the end of the day, will be different for each company and will depend less on the US sales exposure and more on the exact manufacturing set-up. Companies with a significant presence already in the US will likely have a relative advantage.

How should the C-suite react? Patience is key. As the exact nature of tariffs is still uncertain, decision-making at this point would be made without important information. In the meantime, to prepare, companies could:

• Assess the strength and breadth of their supply chains: While breadth is generally important, in our particular juncture leaner and tighter supply chains may reduce risks. At the same time, they need to service as many clients as possible. External stakeholders should be contacted and assessed to make sure they also can withstand fluctuations in demand.
• Employment: It is important to recognise that this is a particularly stressful period for internal stakeholders as well. Identifying and managing key personnel may be crucial, especially after the crisis has subsided.
• Technology: Pharma firms, which are especially reliant on R&D, should make sure to persist with efforts to integrate AI into their processes and increase efficiencies. The fourth industrial revolution is well underway, and strategic adaptation should remain central to management decisions.  
• New territories: Counterintuitively, perhaps, assessing new territories might provide strategic advantages. While the Trade War makes it difficult to assess which territories may provide the best advantages (or least disadvantages), it is also important to remember that at times of crisis, assets may be bought at lower prices and countries might be more ready to accept new work, from a regulatory perspective.  

The impact on the public & social sector from the US Tariffs and counter-tariffs will be felt more indirectly than in other sectors of the UK but they do still very much impact.

Central and local government, the NHS, education, social housing and charities, plus many, if not all, of their service users, will not be immune from its effects. A macro-economic impact and the chance of a recession could impact the disposable income of many UK households, place additional pressure on public services, and also directly impact the funding efforts of charities and the social sector in the UK. 

The immediate impact of the US tariffs and subsequent market volatility will affect the value of public sector investments particularly pension funds, who hold investments in UK and global equities, and other investment vehicles.  It could well have an impact on the current round of triennial valuations used to set employer contribution rates over the next three years.

There may also be an impact on borrowing for projects creating further uncertainty for the sector, compounded by supply chain issues globally that will impact both the cost and delivery of major capital projects, either in progress or due to start.  For example, new social housing construction, regeneration and infrastructure projects, as well investment in the NHS estate.

Uncertainty can lead to additional scrutiny and risk aversion that may make public & social sector organisations even more cautious about their priorities and how money is spent in the short term.  It would be reasonable for the sector to reflect on their mission and, in the light of immediate priorities, evaluate what they do in a changed landscape. The medium-term focus needs to be on analysing how they operate and assessing any fixed assumptions. With any black swan scenario, a commercial mindset with robust plans in place for income generation, debt collection, tax and spending requirements are crucial. 

The US tariffs should act as a milestone in waking up the public and social sector to commercial reality, with uncertainty, flexibility and risk built into their business plans. Those that do not take the action required risk being left behind.

Tariffs are a type of tax that governments impose on goods imported from another country.

On 2 April President Donald Trump announced a host of tariffs impacting countries worldwide. The key tariffs announced included:

• Baseline tariff: Effective from 5 April there will be a 10% tariff on all imported goods to the US
• Reciprocal tariff: Effective 9 April additional tariffs placed on imports from nations worldwide. A full list of these tariffs can be found here
• Specific tariffs: a number of specific tariffs have been placed on industries such as vehicles and auto parts as well as steel imported to the United States.

For UK goods imported to the United States, the 10% baseline tariff will be effective from 5 April. There is also higher specific tariffs of 25% on vehicles, auto parts, steel and aluminium imported to the US from the UK.