Q4 Manufacturing & Distribution Update: Tariff Uncertainty and China +X in Manufacturing

1. Tariff Uncertainty Will Not Go Away

As much as we would like to put it to bed, tariff fear continues to be the most mentioned factor for business owners, and especially manufacturers that have some exposure to material costs and import pressures. The latest trade negotiation between the Trump Administration and China is little more than a handshake with no legal enforcement. The only real threat from enforcement of the agreement is tariff retaliation if a party doesn’t uphold its end of the verbal agreement. And therein lies the problem, manufacturers are already dealing with tremendous change in 2025, and it looks like that uncertainty could continue well into 2026. Most will say that they can handle increased costs, but it must be predictable. Their cost structures cannot have a 10% cost increase impact this month and 100% next month.

The US is still lacking a comprehensive trade agreement with India, Canada, and Mexico as well and the process of legal ratification and binding agreements is still underway with most trading partners. Up and until these letters of agreement can be signed into formal legal agreements with ramifications, conditions can easily change.

Many surveys of credit managers, purchasing managers, consumers, and business executives of all types still show concerns over tariffs and trade uncertainty at the top of their wall of worry (indirectly linked as well to concerns over the economy and inflation).

Recent manufacturing data shows the US sector still holding its own with some mild contraction. The latest manufacturing data from October showed some mild expansion in the US manufacturing sector with mild increases in new orders. But manufacturers state that they are still concerned about the future, and near the top of their concerns continues to be tariffs.  

Additional Reading: S&P Global Manufacturing Report

2. China +X Strategy Emerging as the Winner

Prior to the pandemic, manufacturers and purchasing managers focused on a China sourcing strategy, and many were single sourcing. Coming out of the pandemic and the global supply chain crisis of 2021/2022, many instituted a China +1 strategy, aimed at diversifying their sourcing of products to at least two markets if it included China. But now, that is “morphing” into a China +X strategy where purchasing managers are sourcing the same products in multiple markets.

Mexico and India appear to be the critical components of that (along with some mild US reshoring activity taking place for traditional manufacturing). Mexico has seen a surge in foreign investment over the past year (up 10.2% on $34.3 billion in 1H ’25) and at a recent conference held to discuss manufacturing opportunities in Mexico, executives from all over the world flooded it. US firms were the largest investors in Mexico this year, dropping billions of dollars and accounting for more than 51.2% of foreign direct investment. The US was followed in a distant second by Germany (9.3%), Canada (6.8%), Japan (6.5%) and Spain (6.3%).

As the global supply chain matures, this will create unique challenges for clients and opportunities for consultants. Managing complex supply chain routing and ordering tasks (to drive down total landed cost) will be important as well as managing the risk side of currency exchange, cost controls, compliance and trade issues, etc.  Add-in the complexity of a rapidly changing tariff and trade compliance industry, and many clients will need assistance in navigating this environment.

Most evidence suggests that this will only get more challenging as the US, Canada, and Mexico approach USMCA negotiations late next year.