When the UK became the first country to reach a trade agreement with the US in May, after President Donald Trump’s announcement of sweeping “reciprocal” tariffs, it was hailed as a blueprint for other key US trading partners.
But almost two months passed before a second country — Vietnam — was able to strike a deal. Meanwhile, details of the UK accord are still unclear, unconfirmed or subject to potential revision.
Britain is fighting to secure a carve-out from higher steel tariffs, for example, but Trump’s executive order explicitly reserves the right to reimpose 50 per cent duties if “he determines” the UK is not complying with a promise to reduce the role of China in its supply chains.
The headline impacts are already being felt; US tariff revenue surged almost fourfold from a year earlier to a record $24.2bn in May, while imports from China fell 43 per cent from the same month in 2024.
But with policymaking so evidently at the caprice of Trump himself, it has become incredibly challenging for businesses to make long-term decisions about supply chains, according to Neil Shearing, chief economist at Capital Economics, a research company.
“Relocating plants is an eight- to 10-year decision, but when you can’t predict what is happening next week, let alone next year or in five years, mitigation of the status quo is the likely strategy,” he says.
The shocking force of Trump’s “liberation day” tariffs announced on April 2 was blunted by his announcement of a 90-day pause within a week. The mood shifted from “extreme panic to qualified concern”, says Heiko Schwarz, global supply chain adviser at risk management technology consultancy Sphera.
Now, as countries clamour to strike fresh deals with Trump before the July 9 deadline, deep unease still lingers through global boardrooms and supply chains.
Many companies are resorting to holding strategies. “We are seeing an uptick in business looking to diversify sourcing, but there’s still a lot of ‘wait and see’ going on,” says Simon Geale, executive vice-president at Proxima, a supply chain consultancy owned by Bain & Company.
Importers are stockpiling goods and increasing their use of bonded warehouses, which allow importers to hold goods for up to five years and only pay tariffs when they are released on to the market. Storage costs for bonded warehousing are now up to four times the cost of non-bonded premises.
Another ripple effect is port congestion — ships still carry 90 per cent of global trade — as exporters look to avoid the latest tariffs. At Europe’s largest port, Rotterdam, chief executive Boudewijn Siemons predicts prices for consumers will rise as companies continue to reorient goods flows.
“I’m always amazed by how fast supply chains redirect themselves,” he says. “That’s because ships have two distinct features: they have a propeller and a rudder and they can go wherever you want them to.”
The fallout from the tariff announcement has spread beyond corporate supply chains. Investment decisions are on hold and the uncertainty is also a factor in reduced merger and acquisition volumes.
“If you’re directly affected, you might do something around footprint and supply chain organisation,” says Mats Persson, a former UK Treasury adviser who now works at consultancy EY. “But the far greater impact is the freezing effect on deal activity. That’s having a greater chilling effect than holding fire on moving business behind the Trump [tariff] wall.”
Whether next week’s deadline for tariff negotiations brings a further reprieve or deepens the uncertainty depends largely on one man, says Shearing. “This is why this crisis is different from the Covid-19 pandemic or the 2008 financial crisis in that key respect — it all comes down to the whims of Donald Trump.”
Since Trump first imposed tariffs on China in 2018, a trend towards so-called friendshoring — companies locating or relocating facilities in countries geopolitically and strategically aligned with the US — has been gathering pace.
But reshoring is complex and risky. A Bain survey of chief operating officers, conducted before Trump’s re-election last year, found that while 80 per cent were planning to increase supply chain onshoring or reshoring over the next three years — up from 63 per cent in 2022 — only 2 per cent had successfully completed such plans.
“Changing suppliers or shifting production is easier said than done,” Geale says, “and because organisations are all looking at the same locations, that is likely to create capacity constraints in terms of skilled labour and factory space.”
How trade patterns shift varies widely from product to product, depending on how easily alternative sources of supply could be found, according to Olivia Smith, director of the McKinsey Global Institute. Lithium-ion batteries, for example, are far easier to source outside China than, say, laptops. T-shirts are much simpler than socks.
“When you start to go more granular, you see how different dynamics might be playing out for different products and value chains,” Smith says. “Companies are thinking about how to make sure that their supply chains are more flexible and resilient, even if they’re not making specific bets on individual trade corridors.”
Also, tariffs alone have never been a good enough reason for companies to shift supply chains, according to Persson at EY. Regulatory changes — for example, new rules that will require cars sold in the US to contain no Chinese software from 2027 — can be much bigger drivers of change, he says.
For highly regulated industries such as pharmaceuticals, industry analysts say that shifting production to the US would be so expensive and disruptive that even relatively high tariffs may not necessarily lead to immediate factory relocations.
The Trump administration is considering imposing sectoral tariffs on pharmaceutical imports and has specifically put Ireland in its crosshairs. “We’re going to have that,” Trump said of Ireland’s position as a manufacturing base for many of the world’s biggest medicine makers.
Merck, Roche and Johnson & Johnson have all emphasised increased investment in the US, while the industry has been stockpiling inventory in America to give them breathing space in case higher tariffs are indeed implemented.
“The main factor is the uncertainty which is leading to inertia in investment,” says Lawrence Lynch, an analyst with Dublin-based Metatron Consulting and an adviser to the industry in Ireland, adding that it is unclear whether tariffs would be high enough to force manufacturing to shift to the US over time.
“It requires years to . . . shift supply chains. It is not going to happen overnight,” Stefan Oelrich, head of pharmaceuticals at Bayer, told journalists in Brussels in June. He also warned that the disruption “is going to have consequences on the cost of medicine, and someone will need to absorb those consequences”.
The most tangible consequence of the Trump tariffs so far is not supply chain reordering, but the sudden dearth of dealmaking, according to Persson of EY.
A survey of dealmakers by PwC in May found that 30 per cent were either pausing or revising deals because of the uncertainty caused by tariffs. Among those pushed back amid the uncertainty included bids for Boeing’s navigation unit and an expected £4bn sale by buyout group Apax of insurance group PIB.
The sudden slowdown flew in the face of investor expectations that Trump’s return to the White House would trigger a wave of M&A activity on the back of a deregulatory splurge, according to Josh Smigel, partner in PwC’s deals practice.
As a result, Smigel calculates, private equity firms are holding about $1tn worth of assets that — absent the Trump uncertainty — could have been redeployed back into the market if planned exits had not stalled.
“We’ve never seen anything like it, and it continues to grow quarter on quarter,” he says of the growing backlog of deals. “It is not just market dynamics or interest rates, it is to do with geopolitical forces and an administration that’s making bold policy decisions on tariffs that I don’t think the investment community expected.”
“Our clients are just uncertain what the playing field is now.”
Even if Trump’s trade war is considered something of a “phoney war” in some quarters, with US equity markets having erased their post-April 2 losses, analysts warn that it still poses a long-term threat to the US economy.
Despite the carve-outs and climbdowns, the US’s overall average effective tariff rate now stands at 15.8 per cent, according to calculations by the Yale Budget Lab — the highest rate since 1936 and an increase of more than 13 percentage points since Trump returned to office in January.
The World Bank and OECD downgraded their forecasts for both US and global growth last month, partly because of the uncertainty around trade policy.
There are already early signs that tariffs are having an effect on prices of items as diverse as toys, bananas and large electrical appliances that do not have alternative sources, leaving them more exposed to tariff impacts.
As an example of unintended consequences, Trump’s decision to double tariffs on all imported steel to 50 per cent on June 3 is also rebounding on the US market, according to analysts, driving up prices of raw steel products but also for end users in US manufacturing industries.
Experts warn that the levy — the UK is seeking a lower rate — is likely to have the opposite impact to the one intended. “US steel . . . producers will just jack up prices and that will be passed on to suppliers and ultimately consumers,” says Wayne Winegarden, senior research fellow at the Pacific Research Institute, a free-market think-tank.
“Trump isn’t wrong when he says the increase in tariffs will harm other countries; he just forgets the largest impact will be on the US,” Winegarden adds. He and others cite the precedent in 2018, when the first round of Trump steel tariffs created 1,000 jobs in the steel industry, but cost 75,000 jobs in other sectors, according to Econofact, a non-partisan publication of the Fletcher School at Tufts University.
The prospect of more uncertainty and sudden swings in policy under Trump is also weighing on future business sentiment, according to Atakan Bakiskan, US economist at Berenberg bank.
“Businesses that felt optimistic about tax cuts and deregulation at the start of the year suddenly lost confidence,” he wrote in a June research note, citing multiple indices of business plans for investment and new orders in both services and manufacturing contracting following April 2.
“At first glance, tariffs may appear to have only dented consumer and business sentiment rather than caused real economic damage. However, the stagflationary effect of tariffs is still in the pipeline,” he added. “We expect clearer signs of tariff damage to emerge in coming months.”
Until more data emerges, investors and business leaders must remain poised to respond to any outcome. “There is a significant risk to investment, but at this stage we only see it in investment intentions, not in hard numbers,” says Shearing at Capital Economics. “It could crystallise — or it could go away.”
Data visualisation by Amy Borrett
