Rippling Effects Of Reciprocal Tariffs On Machinery & Equipment, Here’s What You Shouldn’t Overlook

Introduction

• The latest tariff announced in the recent update has initiated a tariff war between two economic giants that are getting more aggressive by the minute. The U.S., in its last update on 5th April, imposed an average 10% tariff on all countries and a 25% tariff on Canadian and Mexican imports. The tariff risk is a chain reaction that spreads rapidly all over the globe, creating uncertainty and opportunity in a multifold manner.

• Tariffs are introduced to protect domestic manufacturing and reduce the trade deficit by making foreign goods expensive, thereby increasing the competitiveness of U.S. manufacturers. The U.S. tariff is calculated by estimating the tariff levels required to reduce its trade deficit (last observed at -6.1%) with each country to zero. The calculation uses trade data and the sensitivity of imports to price changes.

Note: The value having 0 represents data not available for the country.

• However, data shows that the U.S. has shifted its earnings largely to the service sector, and now manufacturing employs just 8% of the total workforce. According to findings, 30 largest trade partners of the U.S. represented 86.1% of U.S. exports and 89.6% of U.S. imports in 2024. Also, U.S. is the world’s second-largest re-exporter. Thus, there is a huge economic disorder due to the weakening of the USD currency and heavy dependency on foreign-manufactured goods for consumption and re-exporting.
• Another major reason for the tariff imposition is that the U.S. had added USD 13 trillion in loans during the pandemic, which will mature by 2025. Currently, it is planning to refinance its debt, but the rates are higher than they were during the pandemic. Thus, the imposition of the tariffs could create an economic recession and stagflation, which would lower FED interest rates.

How Tariffs are Impacting the Economy

Tariff imposition could have major repercussions on countries such as China, Japan, Taiwan, South Africa, India, South Korea, Italy, Vietnam, and others. It will also impact the U.S. economy in the short term, causing GDP shrinkage, inflation, job losses, and other factors. Tariffs can slow down the economy. When things cost more to import, companies might not invest as much, owing to the stagflation and margin shrinking. This might cause people to buy less, which affects the demand for machinery and FDI in the manufacturing sector.

Impact on Global Business

• Rising Costs & Supply Chain Shifts

Tariffs have impacted machinery and equipment industries by increasing costs for imported raw materials and components, leading to higher production expenses and disrupted supply chains. Reciprocal tariffs could hinder the trade situation in the Asia Pacific, the world’s prime market for selling products. Thus, tariffs could disturb the supply chain because of the higher landed cost and increased scrutiny at the trade border. Buyers of machinery and components could see disruption in the supply chain and longer lead times as providers arranged a new supplier network to avoid the tariffed region. Further, retaliatory tariffs on machinery and increased costs may be passed to the end of the supply chain, affecting product competitiveness in both domestic and international markets.

Figure: Major countries' share in U.S. machinery import and export for the year 2023

• Sector-Specific Impacts

Tariffs make finished products and parts more expensive for factories, as primary raw materials need to be sourced from other countries at higher prices. Key industrial machinery and components manufacturing countries, such as China, Japan, South Korea, Taiwan, Italy, and others, could face repercussions for the short term in a 90-day trade pause. Due to higher cost of input materials such as steel, aluminum, motor, and electric components, the manufacturing and assembling cost of this machinery would increase, impacting the final prices of a product by almost 12-19% in the short term.

• For instance, according to The Budget Lab at Yale, tariffs would increase the overall price by 6% and the domestic product price by 4%. At the same time, the cumulative effect of tariffs will increase prices for machinery and equipment in the short run by 13.1%.

Key sectors include industrial machines and supplies, farm equipment, semiconductor manufacturing machinery, machine tools, precision components, and iron and steel articles, which have a 27% tariff rate that could impact. Due to these factors, the machinery and equipment industry could face challenges such as increased competitiveness in pricing, rising landed cost, and capital project delays due to increasing costs and budget constraints.

Strategies for Businesses

Businesses might face uncertainty and rising costs during their short-term tenure. Firms in these sectors must adapt to maintain profitability and their market positions amidst evolving global trade policies. As a quick action, many companies are re-negotiating contracts to lock in the long term to minimize the tariff increase cost effect. Businesses are considering nearshoring and regional sourcing as alternatives to production hubs in China, Vietnam, India, and other countries, creating opportunities for domestic, reliable manufacturers. Companies need to redesign and rethink strategies to develop a resilient supply chain. Further goods that are listed under USMCA between neighboring countries (such as Mexico and Canada) will be tariff-free in the U.S. Also, positive signs by the government through trade deals and bilateral trade agreements could ease the tariff impact in the long term.

Key Takeaways

Tariffs are reshaping the global economy order and trade flows through the supply chain and cost structure. The repercussions of the tariffs would cause economic disorder, stagnation, uncertainty, and margin shrinks. Tariffs on steel, aluminum, and machinery components could impact the manufacturing cost of machinery by approx. 12-19%. Adapting flexible strategies is important to tackle a constantly evolving scenario. These dynamics demand a proactive approach, not a reactive action. Churning the numbers and strategies to improve margins through a resilient supply chain could improve business expansion.