How Tariffs Impact the Manufacturing Sector: What SMEs Need to Know

    A practical breakdown of how recent US and UK tariff changes affect manufacturing SMEs, with actionable strategies for resilience.

    November 10, 2024The Tariff Research Company
    How Tariffs Impact the Manufacturing Sector: What SMEs Need to Know

    How Tariffs Impact the Manufacturing Sector: What SMEs Need to Know

    The global trade landscape feels more volatile than ever, doesn't it? For UK manufacturing SMEs like yours, navigating the complexities of international markets is challenging enough without sudden shifts in policy. The recent wave of US tariffs introduced in early 2025 adds another significant layer of pressure.1 While these import taxes affect businesses of all sizes, we understand that as an SME, you often face unique hurdles – tighter margins leave less room to absorb costs, resources for deciphering complex rules are limited, and you may have less leverage when negotiating with suppliers or customers.4

    The constant news cycle around tariffs, reciprocal actions, and potential trade wars can create a fog of uncertainty, making planning and investment decisions incredibly difficult.2 This uncertainty itself acts as a significant trade barrier for manufacturing businesses, perhaps even more so than the tariffs themselves, because it hampers your ability to plan for the future with confidence.

    This post aims to cut through the noise. We'll break down exactly how tariffs, particularly the recent US measures, impact key aspects of your manufacturing operations. More importantly, we'll explore practical, actionable strategies you can consider to navigate these challenges and identify the support available here in the UK.

    Understanding Tariffs: The Basics for Manufacturers

    At its simplest, a tariff is a tax levied by a government on goods imported into its country.6 Governments typically impose them for several reasons: to protect domestic industries from foreign competition, to generate revenue, or as a political tool for negotiation or retaliation.10

    For your business, the crucial point is how these tariffs are applied. The amount of tariff due isn't arbitrary; it depends fundamentally on two things:

    1. Product Classification: Goods are categorized using the international Harmonized System (HS). Each product is assigned a specific HS code (usually starting with 6 digits, with countries adding more for detail) based on what it is, what it's made of, and its function.15 This code determines the baseline tariff rate.
    2. Country of Origin (CoO): This identifies where the goods were produced or manufactured, not just shipped from.18 Tariffs are applied based on this origin. Goods originating from countries with Free Trade Agreements (FTAs) might qualify for lower or zero tariffs (preferential origin), while goods from other countries face standard rates (non-preferential origin) or potentially higher anti-dumping/countervailing duties.18

    The most common types of tariffs you'll encounter are:

    • Ad Valorem Tariffs: A percentage of the value of the imported goods (e.g., 10% tariff on a £100 component means £10 duty).11
    • Specific Tariffs: A fixed fee per unit of the item (e.g., £1.58 per kg of butter).11

    Getting the HS code and Country of Origin correct is absolutely critical, but it's often a hidden challenge. The HS system is complex, with detailed section and chapter notes, and even punctuation impacting interpretation.23 Relying solely on a supplier's code without verification, or failing to stay updated on the five-yearly WCO revisions, can lead to misclassification.24 This can result in paying the wrong duty, facing penalties, customs delays, and even invalidating claims for preferential rates under FTAs.27

    Similarly, determining the correct Country of Origin isn't always straightforward, especially if components come from multiple countries. It's generally the location of the last 'substantial transformation' – a process that results in a new product or represents a critical manufacturing stage.19 Simply assembling parts or relabelling goods in the UK usually doesn't change their origin if the core components came from elsewhere.21 Misunderstanding these rules could mean applying the UK's 10% US tariff rate when, in fact, the goods originate from China and should face the much higher rate (currently 145% including various duties 2), leading to severe consequences.32

    The Ripple Effect: How Tariffs Impact UK Manufacturing SMEs

    Tariffs aren't just a line item on an import declaration; they create waves that spread throughout your business operations. Understanding these impacts is the first step towards effective mitigation.

    1. Procurement Costs: The Direct Hit

    The most immediate impact is on your input costs. Tariffs directly increase the price of imported raw materials, components, and machinery essential for production.34 Whether it's steel and aluminium subject to 25% US tariffs 37, electronic components facing the baseline 10% 39, or specialised machinery, these costs feed directly into your procurement budget. As an SME, you may have less bargaining power with suppliers to absorb these increases and tighter cash flow makes managing these sudden cost hikes more challenging.7

    2. Production Costs: Squeezing the Margins

    Higher procurement costs inevitably translate into a higher Cost of Goods Sold (COGS).41 Every taxed component or material adds to the final production cost of your goods. This squeeze on margins is a significant concern, particularly in competitive markets where raising prices is difficult. While less direct, tariffs could also impact manufacturing overheads if they affect the cost of imported energy sources or essential factory supplies.

    3. Supply Chain Networks: Disruption and Diversification

    Tariffs act as a major disruptor to established supply chain networks.2 They can make long-standing supplier relationships suddenly uneconomical, forcing you to search for, vet, and onboard new suppliers.45 This process takes time and resources, introduces risks related to quality and reliability, and can lead to significant delays.2 The administrative burden of managing these changes, understanding new compliance requirements, and navigating potential logistics hurdles adds another layer of complexity, particularly for SMEs managing multi-tier supply chains where tariff impacts might be hidden deeper down.49 This pressure is accelerating the trend for businesses to diversify their supply base, looking towards nearshoring or even reshoring production to mitigate tariff risks.51

    4. Pricing Strategies: The Manufacturer's Dilemma

    Faced with rising costs, you face a difficult choice: absorb the tariff costs yourself, further squeezing profitability, or pass them onto your customers.34 Passing costs on risks making your products less competitive, potentially leading to reduced demand and lost market share, especially if competitors (perhaps domestic US firms or those sourcing from non-tariffed regions) don't face the same pressures.36 The Society of Motor Manufacturers & Traders (SMMT), for example, stated clearly that manufacturers cannot simply absorb the recent 25% US auto tariffs.56 Some businesses might consider tariff surcharges, listed separately on invoices, to maintain transparency, while others might opt for a general price increase, which can be simpler but less transparent.55

    5. Market Access & Competitiveness: Shrinking Opportunities?

    Tariffs act as a barrier, making your products more expensive in export markets like the US.2 The current 10% baseline US tariff on UK goods, plus the higher rates on specific sectors, directly impacts your price competitiveness against domestic US producers or suppliers from countries with lower or zero tariffs.59 This can lead to reduced demand, lost sales, and ultimately hinder your growth ambitions.6 The British Chambers of Commerce (BCC) surveys reflect widespread concern among exporters about this impact.62 Furthermore, if your UK production relies on imported inputs that have become more expensive due to tariffs, you might become less competitive even in the domestic market compared to imports from countries unaffected by those specific input tariffs.54 Added to this is the ever-present threat of retaliatory tariffs; if the UK or EU imposes duties on US goods, US firms might face higher costs, but it could also lead to further escalation, making UK exports less competitive in other global markets too.2

    It's important to recognise that these impacts aren't uniform. Your specific vulnerability depends on factors like your reliance on particular imported materials or components, your export market concentration (especially the US), the price sensitivity of your customers, and your position in the value chain.63 A manufacturer of highly specialised, niche products with strong brand loyalty might find it easier to pass on costs than a producer in a high-volume, price-sensitive market.37

    Beyond the direct duty costs, tariffs impose significant 'hidden' costs that particularly burden SMEs. These include the increased administrative workload for compliance, documentation, and potentially seeking rulings 50; the potential need to finance higher inventory levels if stockpiling becomes necessary 39; and the valuable management time diverted from strategic growth activities to dealing with tariff-related crises.61

    Spotlight: Vulnerable UK Manufacturing Sub-Sectors (2025 US Tariff Context)

    The recent US tariff announcements, while applying a baseline 10% to most UK goods, include significantly higher rates for specific sectors and maintain previous levies. Here’s a look at how some key UK manufacturing areas are affected:

    Tariff Type

    Rate

    Affected Goods/Sectors (Examples)

    Key UK Impact Area

    Relevant Snippets

    Baseline Reciprocal Tariff

    10%

    Most UK goods exports to US (unless exempt or subject to higher rate)

    Increased export cost, reduced competitiveness

    2

    Section 232 Steel Tariff

    25%

    Steel & derivative products

    Increased material costs for users, export challenges for producers

    2

    Section 232 Aluminium Tariff

    25%

    Aluminium & derivative products

    Increased material costs for users, export challenges for producers

    2

    Section 232 Automotive Tariff

    25%

    Passenger vehicles, light trucks, parts (from May 3rd, 2025)

    Major impact on UK auto exports (£7.6bn), supply chain costs, jobs (est. 25k risk)

    2

    China/HK De Minimis Removal

    N/A (Threshold removed from May 2nd, 2025)

    Goods <$800 originating from China/HK (even if shipped via UK)

    Increased costs/complexity for UK businesses using China/HK in supply chain for US sales

    2

    • Automotive: This sector faces a double hit – the 25% tariff on finished vehicles exported to the US (a £7.6bn market for the UK 38) and tariffs on imported parts (including potentially steel/aluminium). This significantly raises costs, threatens UK production competitiveness, and jeopardises jobs.37 Supply chains are particularly vulnerable as components often cross borders multiple times.48 Major brands like Jaguar Land Rover are heavily exposed.38
    • Electronics: While semiconductors were initially listed as exempt from the higher reciprocal tariffs 31, they and other electronic components imported from the UK likely face the 10% baseline. Furthermore, UK electronics manufacturers relying on components sourced globally may see input costs rise due to tariffs imposed by the US on other countries. This could lead to higher prices for finished electronic goods.44 The situation may, however, create opportunities for SMEs focusing on local UK sourcing and production.71
    • Machinery: This sector often relies on steel and aluminium, now subject to 25% US tariffs, increasing input costs.37 As a significant export category to the US 58, machinery manufacturers face reduced competitiveness due to the baseline 10% tariff, potentially dampening demand from US buyers.2
    • Food & Beverage: A major export sector for UK SMEs 73, facing the 10% baseline tariff.3 This impacts iconic products like Scotch whisky, cheese, tea, and biscuits, potentially reducing sales in the crucial US market (£1.6bn exports).73 Given that 99% of the sector comprises SMEs, the impact of cost increases on tight margins is a major concern.40
    • Steel & Aluminium: UK producers face direct challenges exporting to the US due to the 25% tariffs.37 This adds pressure to an industry already grappling with global overcapacity and high energy costs.38 While specialist, high-grade producers might retain some competitive edge due to quality 37, the overall impact is negative. Downstream users in construction, automotive, and machinery also face higher material costs.37
    • Chemicals: Another significant export sector to the US (£5bn chemicals, £6bn pharma in 2023 75), facing the 10% baseline tariff (though pharmaceuticals are exempt 31). The Chemical Industries Association highlighted that this adds to existing competitiveness challenges from high UK energy costs.75

    It's worth noting that even sectors initially exempted from higher reciprocal tariffs, like pharmaceuticals and semiconductors, are likely still subject to the 10% baseline rate.2 They also remain vulnerable to indirect impacts through their supply chains – if their suppliers or customers are in heavily tariffed sectors, they will feel the effects.

    These pressures may accelerate long-term shifts already underway, such as reshoring or nearshoring manufacturing activities to reduce reliance on complex global supply chains.9 Similarly, the increased cost pressures could drive further investment in automation within UK manufacturing as companies seek efficiency gains to offset tariff impacts, although the tariffs on steel could ironically increase the cost of some automation equipment itself.76

    Navigating the Storm: Practical Mitigation Strategies for SMEs

    Facing these challenges can feel daunting, but proactive steps can help your manufacturing business build resilience and mitigate the worst impacts of tariffs.51 Here are some practical strategies to consider:

    1. Supplier Diversification (Including Nearshoring/Reshoring):
    • What: Reduce dependence on suppliers in high-tariff regions like the US or those heavily impacted by US tariffs (e.g., China).39
    • How: Start by mapping your current supply chain to identify vulnerabilities – which critical components come from tariff-affected areas?.39 Research and vet alternative suppliers in countries with lower tariffs or existing UK Free Trade Agreements (FTAs).52 Explore nearshoring options (e.g., European suppliers) or, where feasible, reshoring production back to the UK.52 Build relationships with multiple suppliers for key inputs to increase flexibility.53 Government platforms and trade bodies may offer support in finding new suppliers.83
    1. Tariff Engineering:
    • What: Legally modify your product's design, materials, assembly process, or packaging to allow it to be classified under a different HS code that attracts a lower tariff rate.52
    • How: This requires careful analysis of the Harmonized Tariff Schedule (HTS). Could importing components separately for final assembly in the destination market result in lower overall duties? 85 Can alternative materials be substituted without compromising quality? 85 Could shifting the final assembly location change the product's origin advantageously?.52 Crucially, this is a complex area. Incorrect classification can lead to significant penalties.87 Always seek expert advice from customs brokers or consultants before implementing tariff engineering strategies.88
    1. Leveraging Free Trade Agreements (FTAs):
    • What: Utilize existing FTAs the UK has with various countries to potentially import inputs or export finished goods at reduced or zero tariffs.52
    • How: Identify relevant FTAs through government resources (like DBT's website 90). The key challenge is meeting the specific Rules of Origin (RoO) for each agreement and product.5 You must be able to prove your goods qualify, usually through supplier declarations or detailed production records, and obtain the necessary certificates.92 The complexity of RoO documentation is why some SMEs choose to pay the standard tariff rather than claim preference 22, but the potential savings can be significant.
    1. Boosting Operational Efficiency:
    • What: Offset tariff-driven cost increases by finding savings within your own operations.63
    • How: Implement lean manufacturing techniques to reduce waste. Optimize inventory management – while stockpiling might seem appealing before tariffs hit 39, balance this against carrying costs and consider Just-in-Time (JIT) systems where appropriate.95 Streamline production processes.8 Consider targeted investments in automation for efficiency gains, keeping in mind potential tariff impacts on the equipment itself.37
    1. Smart Contract Negotiations:
    • What: Proactively address tariff risks in your contracts with both suppliers and customers.52
    • How: Review existing agreements – do they contain clauses covering tariff changes or force majeure?.39 When negotiating new contracts, aim for terms that allow for cost-sharing or price adjustments if tariffs fluctuate.80 Discuss potential price increases or surcharges openly and transparently with customers, explaining the direct link to tariffs.52
    1. Other Considerations:
    • Risk Assessment & Scenario Planning: Regularly assess your specific tariff risks and model the potential financial impact of different tariff scenarios and mitigation strategies.49
    • Customs Procedures: Investigate options like using Foreign Trade Zones (FTZs) or customs warehousing to potentially defer or reduce duty payments on imported goods until they enter the domestic market.52

    It's clear that these strategies are often interconnected. Successful tariff engineering might rely on diversifying suppliers to find alternative components. Claiming FTA benefits requires robust documentation and compliance processes. Therefore, a holistic approach, rather than relying on a single tactic, is generally most effective.

    Furthermore, the trade environment is constantly shifting.2 Mitigation is not a one-off task but requires continuous monitoring of trade policies, supplier performance, and market conditions, coupled with the agility to adapt your strategies as needed.49

    Finding Support: Key UK Resources for Manufacturers

    Navigating this complex environment alone can be overwhelming, especially for SMEs. Fortunately, a range of UK organisations offer support, guidance, and resources:

    • Government Departments & Tools:
    • Department for Business and Trade (DBT): The primary government department for trade support. Offers online resources via great.gov.uk (including market guides, export opportunities, and a specific US tariff information page), the Export Support Service helpline for specific questions, and access to trade advisors.67 DBT is currently seeking business input on the UK's response to US tariffs.67
    • HM Revenue & Customs (HMRC): Responsible for customs administration. Provides guidance on procedures, classification, valuation, VAT, and duty relief.106 Offers email updates and webinars on trade topics 106 and has a specific email for duty liability policy queries.107 Publishes workarounds for issues with the Customs Declaration Service (CDS).108
    • GOV.UK Trade Tariff Tool: The official online tool (www.gov.uk/trade-tariff) to look up UK commodity codes, import/export duties, VAT rates, and other measures.109
    • UK Export Finance (UKEF): The UK's export credit agency. Provides loans, insurance, and guarantees to help UK companies, including SMEs, win export contracts, fulfil orders, and manage payment risks.90 UKEF's capacity was recently boosted, partly to help firms manage tariff pressures.112 Regional Export Finance Managers offer guidance.90
    • Trade Remedies Authority (TRA): Investigates dumping, subsidies, and import surges, recommending protective measures (often tariffs).113 Their website (www.trade-remedies.service.gov.uk) lists current UK trade remedy measures and investigations.116
    • Trade Associations:
    • Make UK: The manufacturers' organisation. Provides industry-specific insights, policy updates, and support for members facing tariff challenges.59 They are actively providing updates on US tariffs and calling for government action.59
    • Federation of Small Businesses (FSB): Advocates for SMEs and offers resources. They have highlighted the significant impact of US tariffs on small exporters and called for government support.7
    • British Chambers of Commerce (BCC): Offers local business support through regional chambers, provides trade documentation services (via ChamberCustoms 88), and conducts research on trade impacts, including recent surveys on US tariff concerns.62
    • Institute of Export & International Trade (IOE&IT): The professional body for international trade. Offers a wide range of support including:
    • Training: Formal qualifications, practical courses (including a "Navigate US tariffs" bundle), and webinars (e.g., upcoming session on Rules of Origin for manufacturers).121
    • Advisory Services: Tailored consultancy for specific business needs.121
    • Helpline: Unlimited access for business members to their trade and customs helpline.121
    • Resources: Practical guides and toolkits, including one specifically on US Tariffs.121 Visit www.export.org.uk.
    • Customs Brokers & Consultants: Essential partners for navigating the technicalities of customs compliance. They offer expertise in HS classification, valuation, customs procedures, documentation, and potentially tariff engineering strategies.88 GOV.UK provides a list of agents.122

    While UK resources are key, don't overlook international tools like the WTO's tariff database (ttd.wto.org 123), the EU's TARIC database (ec.europa.eu/taxation_customs/dds2/taric 125), and the WCO's resources on the HS system (www.wcoomd.org 25) for broader context.

    However, feedback suggests that SMEs sometimes find official guidance too complex or struggle to access the right support at the right time.5 This highlights the need for clear, accessible, and tailored advice. Compliance is non-negotiable, and mistakes involving classification, valuation, or documentation are common and can lead to costly penalties and delays.29 Investing in training or expert help is crucial not just for optimisation, but for avoiding these pitfalls.88

    Getting Specific: Tailored Tariff Intelligence

    The challenge for many manufacturing SMEs is translating general advice and broad tariff announcements into specific impacts on their business. Knowing the UK faces a 10% baseline US tariff is one thing; knowing the precise HS code for your specific imported component, its confirmed country of origin, the exact duty payable (including any pre-existing MFN rates), and how that impacts your COGS is another.

    This level of detailed analysis takes time and expertise – resources that are often scarce in a busy SME. Generic sector reports might miss nuances critical to your specific products or supply chain. This is where specialised tariff intelligence becomes invaluable.

    Services like The Tariff Research Company's 'Essential' report are designed precisely for this need. They offer fast, affordable, and actionable intelligence tailored to your specific circumstances. Instead of you spending hours deciphering complex tariff schedules or trying to map multi-tier supply chains, we do the heavy lifting.

    Our 'Essential' report can provide:

    • Accurate HS Classification: We determine the correct HS codes for your specific materials, components, or finished products, mitigating the risk of costly classification errors.
    • Precise Duty Calculation: We calculate the exact tariffs and duties applicable based on verified classification and origin rules, including the impact of recent US measures.
    • Targeted Impact Analysis: Understand how these specific tariff costs affect your procurement expenses and product margins.
    • Mitigation Support: Our intelligence can inform your decisions on strategies like supplier diversification or tariff engineering by quantifying the potential impact for your business.

    In a volatile trade environment, having this specific, reliable data allows you to move beyond guesswork and make informed, strategic decisions quickly.

    Conclusion: Proactivity is Key

    The current tariff landscape presents undeniable challenges for UK manufacturing SMEs. Increased costs, disrupted supply chains, and pressure on competitiveness require a proactive, not reactive, approach.

    The key takeaways are:

    1. Understand Your Exposure: Tariffs hit specific products from specific origins. Know your HS codes, verify the country of origin for your imports, and understand how recent measures like the US tariffs directly affect your costs.
    2. Explore Mitigation Strategies: Don't assume you have to simply absorb the costs. Investigate supplier diversification, tariff engineering (with expert help), leveraging FTAs, boosting internal efficiency, and negotiating smarter contracts.
    3. Utilise Available Support: Tap into the resources offered by UK government bodies like DBT and UKEF, trade associations like Make UK, and expert organisations like the Institute of Export & International Trade. Don't underestimate the value of customs brokers.
    4. Seek Specific Intelligence: Generic advice may not be enough. Consider specialised services to get fast, affordable, and actionable intelligence on how tariffs impact your specific products and supply chain.

    The situation is fluid, but uncertainty shouldn't lead to inaction. By understanding the impacts, exploring mitigation options, and leveraging available support and targeted intelligence, UK manufacturing SMEs can navigate the current challenges and build greater resilience for the future.

    Ready to understand your specific tariff exposure? Contact The Tariff Research Company today to learn how our 'Essential' report can provide the clarity and actionable intelligence your business needs.

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