Tariff Update and the Impact on Manufacturing
The trade negotiation situation has been volatile, which might be one of the understatements of the century. Most recently, a Federal Trade Court has ruled that the reciprocal and fentanyl tariffs imposed by the Trump Administration are illegal under the International Emergency Economic Powers Act (IEEPA). At the time of writing, a Federal Appeals Court had reinstated the tariffs temporarily until the full appeal can be heard and adjudicated. That decision will likely come in the middle of June and could set up a Supreme Court showdown if the appeals court upholds the lower court’s findings and still finds them illegal. If that occurs, the process of working through the Supreme Court could take half a year or more, delaying a number of ongoing trade negotiations.
In the interim, the Trump Administration has other Trade policies that it can use to impose tariffs, but most are more difficult to administer, have limitations on the size of the tariff and the duration, and/or require Congressional review to apply. That leaves Section 232 National Security tariffs which apply to specific products or industries (such as steel and aluminum) or section 301 tariffs (used to respond to a country that is imposing unfair trade practices that are harmful to US industries).
As an instrument for trade negotiation, those ongoing processes lose much of their urgency if the reciprocal tariffs go away. And most importantly for US manufacturing and distribution, the negotiations that could open up foreign markets to US exports also get delayed. As was seen under the tentative UK agreement with the US, more than $23 billion in annual US exports to the UK were negotiated under the deal, providing new market opportunity for US firms. That, being one of the smaller and simplest trade deals among the US’s top 18 trading partners, is positive for the outlook as 17 more “deals” are reportedly to be announced between now and July 9th. Again, without the reciprocal tariff threat, the timing and completeness of those more complex negotiations could be underwhelming compared to this first agreement struck with the UK. This makes the appeal process important to monitor over the course of June and further appeals that could follow if it is pushed up to the Supreme Court.
Additional Reading: Section 232 Tariffs
Watch for Supply Shortages Late in 2025
Amid the tariff uncertainty and trade volatility, one of the unintended consequences is the prospect of material shortages later this year. The reasons why this could occur stem from the initial reciprocal tariff application, specifically against China. When tariffs hit 145% (or more depending on the product), many companies froze their orders and/or cancelled them. Even with tariffs being adjusted downward to 30%, the cost pressure on many products prevented companies from ordering new items.
Recently, US economic activity has been surprisingly strong, and consumption of products has been above average. Across manufacturing, construction, wholesale trade, and retail, inventories are generally reasonable relative to sales. In other words, inventory-to-sales-ratios did not balloon as expected in Q1 as companies front-loaded inventory building activity to get ahead of tariffs. These inventories may not have been sufficient enough to give them a year or more of carry. And with reorder cycles now disrupted by tariff pressure, inventories will not be replenished at a fast enough rate through the summer and early fall period to fully restore many depleted stocks.
Some construction and manufacturing sectors are projecting tighter inventories in Q4. And those industries that are getting caught up in the rare earth mineral trade dispute between the United States and China will certainly experience tighter market conditions. Even with a reported inbound wave of containers headed for the US in late June / early July, this will only temporarily help with the inventory situation. Many firms are still forecasting challenges ahead, which could impact assembly line continuity.
Additional reading: CNBC
