Import tariffs have become the priority trade issue since President Donald Trump took office on January 20, 2025, with a wide variety of measures announced and imposed by the US and other countries. These tariffs have the potential to disrupt all industries; however, they pose unique challenges for the manufacturing sector, in particular in areas such as automotive, where specific sectoral duties are also proposed. We have set out below i) a summary of key takeaways on the tariff landscape, as well as ii) specific takeaways regarding the manufacturing sector.
Tariffs
Since taking office, President Trump has announced a multitude of tariff measures on a variety of countries and products. This has generated uncertainty, with measures being announced, implemented, and suspended on short notice. In addition there is ongoing court action in the US as to the US Administration’s authority to impose wide-ranging tariffs that impact global trade, the outcome of which is awaited.
At the time of publication, a universal 10% tariff has been imposed against all territories with perceived trade imbalances with the US, with higher ‘reciprocal’ tariffs on certain jurisdictions such as China. In addition, significant tariffs have been imposed on certain products imported into the US, such as steel and aluminium (50% – other than from the UK where a trade deal reduces the tariff to 25%) and on certain sectors, such as the automotive sector (25% – again with a reduced tariff deal quota for the UK and the countries having signed a Trade deal with the US – including the EU & Japan). Other countries, who are hoping to sign trade deals with the US have either announced their own retaliatory measures or the continuation of negotiations for a trade deal in response.
Increased tariffs mean that industrial products and components from impacted jurisdictions are subject to higher customs duties on import into the US (and into any other jurisdictions that impose retaliatory tariffs against US originating products). Customs duty is paid as a percentage of the customs value of the imported goods and is a cost that will be borne by the importer (depending on its contractual terms with its customer, it may be possible for this cost to be passed on to the latter)…and will consequently hit the profit margin of the concerned stakeholders.
The implications of tariffs are wide ranging: the volatile nature of the current tariff landscape has created significant uncertainty in the markets, whilst tariffs on imports from major US trading partners like China, Canada, and Mexico may lead to increased consumer prices whilst straining key trading relationships. For automotive businesses territories such as Mexico and China are key manufacturing bases where the US tariff impositions have now led companies in that sector to re-evaluate their manufacturing locations.
Increased costs from tariffs can impact transfer pricing arrangements and compliance with the arm’s length principle. Companies need to determine which entity should bear the increased costs to ensure they remain tax deductible and align with group transfer pricing policies. Tariffs can also lead to potential double taxation issues, as different tax authorities may interpret cost allocation differently, possibly resulting in disputes and the need for relief through mutual agreement procedures.
In addition, tariff proposals are having an effect on M&A activity. Buyers are unable to confirm their business case for acquisitions and the pricing of a deal as the future profitability of the target business may be impacted in a myriad of ways. For example, if the target company’s supply chain includes the production of goods in Mexico which are then imported into the US, this could now be subject to a tariff and further erode the profit margin on such products. As businesses typically trade on a multiple of EBITDA, this could have a substantial effect on the pricing of deals.
Manufacturing impacts
- Increased Costs and Prices: Tariffs will lead to higher costs for the importer, as noted above, and can lead to higher prices which are often borne by the end consumer. Since manufactured products and often involve components sourced from other countries, these increased costs could make production and aftermarket more expensive, for businesses and consumers alike.
- Supply Chain Disruptions: The global nature of many manufacturing supply chains means that tariffs could cause significant disruptions. Many manufactured products are the result of an internationally connected supply chain and sourcing materials may become more difficult and expensive, potentially leading to shortage problems. The re-routing of supplies at short notice to avoid tariff hits and the increased administration involved in changing supply routes are leading to backlogs and delays in delivery at ports as well.
- Manufacturing Location Strategies: the US administration’s stated aim of tariffs is to bolster US domestic production and incentivise companies to relocate their manufacturing operations to the US, also with the provision of various tax incentives under the One Big Beautiful Bill Act. While this could reduce dependency on foreign suppliers, it may also lead to higher production costs and longer timelines for product availability. The timescales for US relocation for companies opting to do so could prove extensive, and it is not clear in all cases – even considering the tariffs – whether US domestic production would prove cheaper than the vast economies of scale available in other countries, such as China.
- Materials, Parts and Semi-finished products scarcity and quality reduction: In response to escalating US tariffs on imported components, manufacturing companies are increasingly considering cost-cutting measures, including the use of lower-grade parts and semi-finished products. The tariffs have significantly raised the cost of high-quality imports, prompting manufacturers to explore alternatives that meet minimum specifications, but which may compromise long-term durability and performance.
At the same time, the industry is grappling with a scarcity of parts and materials. This shortage stems from disrupted global supply chains, trade route realignments, and reduced availability of tariff-exempt sources. Many suppliers have scaled back production or shifted focus to less affected markets, while manufacturers face delays and rising competition for limited resources. The result is a constrained supply environment that challenges production schedules and quality assurance across the IMT sector.
Automotive
Targeted sectoral tariffs are also likely to have a significant impact on the automotive sector which depends on complex supply chains and offshore manufacturing, often in countries such as Mexico and China which are also key targets for US reciprocal tariffs. Further, the 25% tariffs on steel and aluminium-containing products (so called “derivative” products) that took effect at 12:01am March 12, 2025, also impact the automotive sector as many components contain steel and aluminium. (The 25% tariffs apply to the value of the steel/aluminium in such components.)
Many automotive components are manufactured in countries which are subject to proposed US tariff hikes and the tariffs can lead to increased costs and potential shortages. Many businesses are therefore actively re-evaluating their manufacturing strategies to diversify their production and supply bases, including considering countries in South East Asia and Eastern Europe. However where they have established supply chains and infrastructure in territories in which they have invested over long periods of time it may be financially and logistically challenging to relocate.
We finally also would like to stress the fact that the recent surge in US tariffs on Chinese-made vehicles has significantly disrupted global automotive trade flows. As Chinese automakers face mounting barriers to the US market, they are redirecting excess inventory toward Europe, where entry conditions remain comparatively more favorable. This shift exposes the EU to a potential influx of competitively priced Chinese vehicles, particularly electric models, which could challenge domestic manufacturers already grappling with rising production costs and supply chain disruptions.
European carmakers, long reliant on Chinese components and joint ventures, now face a dual pressure: higher input costs due to tariffs and intensified competition from Chinese brands seeking new markets for their surplus stock. The result is a strategic vulnerability that could reshape the EU automotive landscape.
Mitigation Strategies
Based on possible impacts, mitigation strategies should be taken into consideration (e.g. unbundling of transfer prices or use of alternative customs valuation methodologies to optimize customs values (read our blog, Trump Tariffs: Customs Valuation and TP Impacts and Mitigation Strategies). Businesses should be aware of their import and export volumes in the US and elsewhere, broken down by products and current tariff rates. This allows businesses to quickly calculate possible impacts on additional customs duties in both regions as a first step on the products targeted by the lists mentioned above and prioritize mitigation strategies.
Businesses should also audit existing contracts and standard terms for level of exposure to tariff changes throughout their supply chains, and their ability within the contracts to mitigate that exposure. Key clauses to review include:
- Pricing
- Material Adverse Change
- Change Control
- Change in Law
- Termination
- Force Majeure
Baker McKenzie has extensive experience with assisting clients in navigating and mitigating tariffs and trade-related actions, as well as conducting reviews of intercompany valuations on imports.