The Secondary Impact: How US Tariffs Reach European Shores

The US tariffs implemented on 4th March 2025, were ostensibly aimed at protecting American industries. However, the interconnected nature of global supply chains means these tariffs will have significant secondary impacts on UK and European businesses that may not immediately be obvious.

The Transmission Mechanism

The path from US tariffs to European cost increases follows several routes:

  1. Component Cost Increases: Chinese, Mexican or Canadian components used in American products will face 20-25% tariffs when entering the US.
  2. Finished Product Cost Rises: US manufacturers will pass these increased costs onto their European customers, raising prices on American exports to Europe.
  3. Supply Chain Reconfiguration: As US companies seek to avoid tariffs by changing suppliers, this creates global competition for alternative sources, potentially driving up prices worldwide.
  4. Component Shortages: Where specialized components have few manufacturing sources, tariffs may create global shortages affecting European manufacturers.

These mechanisms mean that even businesses with no direct exposure to the tariffed countries may still experience significant cost increases and supply disruptions.

Top European Industries at Risk from US Tariff Fallout

Several key European industries face particular vulnerability to these secondary tariff impacts:

  1. Aerospace: The European aerospace sector relies heavily on specialized American components, particularly for avionics and engine systems. With American manufacturers facing higher costs for Chinese and Mexican inputs, these increases will inevitably flow through to European aircraft manufacturers.
  2. Automotive: European premium car manufacturers incorporate numerous American-made components, especially electronic systems and specialized materials. The automotive supply chain is particularly vulnerable due to its complexity and just-in-time delivery requirements.
  3. Pharmaceuticals: The European pharmaceutical industry depends on American-manufactured precursor chemicals and specialized equipment. Any cost increases or supply disruptions could affect production of critical medicines.
  4. Consumer Electronics: Many European consumer electronics brands rely on American semiconductor designs manufactured in China, which will now face higher tariffs when passing through American supply chains.
  5. Machinery and Equipment: European industrial machinery often incorporates specialized American components that may increase in price due to tariff impacts.
  6. Renewable Energy: Solar panels and wind turbine components often contain Chinese parts that pass through American manufacturing before reaching European markets.
  7. Medical Devices: The specialized nature of medical technology means European hospitals and healthcare systems often have no alternatives to American-supplied equipment, much of which contains Chinese components.
  8. Defense: European defense contractors frequently incorporate American-manufactured systems and components that may face price increases.
  9. Food Processing: European food producers using American machinery and packaging systems may see maintenance and replacement costs rise.
  10. Chemicals and Plastics: European chemical companies dependent on American suppliers for certain additives or precursors could face higher costs.

Automotive Case Study: The Long Reach of Tariffs

The European automotive industry provides a clear example of how these tariffs create ripple effects. Consider a premium German vehicle manufacturer:

  • The company sources electronic control units from an American supplier
  • The American supplier uses Chinese-manufactured microchips in these units
  • These microchips now face a 20% tariff when entering the US
  • The American supplier raises prices by 15% to cover increased costs
  • The German manufacturer must either absorb this cost increase or pass it to customers
  • If passed to customers, European-made vehicles become less competitive globally

This example illustrates how tariffs can cascade through multi-tier supply chains, ultimately affecting European companies with no direct US, Chinese, Mexican or Canadian operations.

Financial Viability: The Hidden Danger for Already-Struggling Suppliers

Perhaps the most significant risk for European businesses comes not just from increased costs, but from potential supplier failure. Many suppliers are already operating with:

  • Thin profit margins following years of cost pressures
  • High debt levels taken on during the pandemic
  • Ongoing inflationary pressures in labor and energy
  • Supply chain disruptions from various global events

For these financially vulnerable suppliers, tariff-induced cost increases could be the final straw that pushes them into insolvency. When a critical supplier fails, the impact can be catastrophic for downstream manufacturers, potentially halting production entirely.

This risk is particularly acute in tier 2 and tier 3 suppliers—those not directly supplying European manufacturers but providing critical components to their direct suppliers. These deeper-tier suppliers often have less financial resilience and may not be visible to European companies during routine supplier monitoring.

Using FVRAs to Identify Supply Chain Vulnerability

A Financial Viability Risk Assessment (FVRA) provides a systematic approach to evaluating suppliers' financial health, helping European businesses identify potential points of failure before they occur.

What Is an FVRA?

An FVRA examines a supplier's financial stability through multiple indicators:

  • Liquidity ratios
  • Debt-to-equity ratios
  • Cash flow trends
  • Profitability metrics
  • Credit ratings and payment history

By analyzing these factors, an FVRA can categorize suppliers into risk tiers, helping procurement teams prioritize monitoring and mitigation efforts.

Beyond Direct Suppliers

Modern FVRAs increasingly look beyond direct suppliers to assess risk in the extended supply chain. This broader view is essential when considering tariff impacts, as financial instability can occur at any point in the supply network.

Early Warning System

Perhaps most valuable in the current environment, FVRAs serve as an early warning system, flagging potential issues before they manifest as supply disruptions. This advance notice gives procurement teams time to develop and implement mitigation strategies.

RiskTrace: Streamlining Financial Risk Assessment

Traditional FVRAs can be time-consuming and resource-intensive, particularly when assessing numerous suppliers across multiple tiers. RiskTrace provides a quick, convenient, and cost-effective solution for determining the level of risk across your supply chain.

The RiskTrace FVRA Tool automates time-consuming Economic & Financial Standing assessments, specifically designed for procurement but valuable for any organisation seeking to protect supply chains. The platform:

  • Instantly captures and stores suppliers' financial statements
  • Compares them with procurement contract ratios
  • Automatically completes FVRAs for all bidders in a contract
  • Saves suppliers countless hours while ensuring compliance for procurement teams
  • Provides ongoing financial health monitoring

This automation is particularly valuable during periods of economic volatility like the current tariff situation, allowing procurement teams to rapidly assess changing risk profiles without significantly increasing workload.

Beyond Financial Metrics: Comprehensive Supply Chain Analysis

While FVRAs provide valuable insights into financial stability, complementing them with detailed supply chain analysis offers a more comprehensive view of risk exposure. Supply chain experts like Husian Limited specialise in identifying precise points of vulnerability within complex supplier networks.

Such analysis can be used in conjunction with an FVRA to:

  • Map the entire supply chain to understand every supplier link
  • Identify the degree to which suppliers are exposed to risk from tariff changes
  • Quickly identify points of stress within the extended supply chain
  • Allow for targeted mitigation actions while minimising impact on stretched personnel and resource budgets

The value of this analysis is particularly significant for European companies attempting to understand how US tariffs might indirectly affect their operations through complex international supply networks.

Mitigation Strategies: Protecting European Operations

Once vulnerable suppliers have been identified through FVRAs and supply chain analysis, European businesses can implement several mitigation strategies:

Diversify Supply Sources

The most direct response to US tariff impacts is to identify alternative, non-American sources for critical components and materials. European suppliers may offer viable alternatives that avoid tariff exposure entirely.

Increase Inventory Buffers

For critical components from financially vulnerable suppliers, increasing safety stock can provide time to respond if a supplier fails.

Dual Sourcing

Implementing dual or multi-sourcing strategies for critical components reduces dependency on any single supplier potentially affected by tariffs.

Monitor Financial Health

Implement continuous monitoring of key suppliers' financial health, with particular attention to those identified as higher risk through the FVRA process.

Support Critical Suppliers

For strategically important suppliers facing financial pressure, consider offering support through adjusted payment terms, guaranteed minimum orders, or technical assistance to improve efficiency.

Redesign Products

Where possible, redesign products to use alternative components that avoid tariff-affected supply chains completely.

Geographical Risk Assessment

Conduct a comprehensive assessment of geographical risk exposure, including not just tariffed countries but also regions with potential for trade disputes or supply disruptions.

Case Study: European Manufacturer Reduces Tariff Exposure

A medium-sized European electronics manufacturer discovered through FVRA and supply chain analysis that nearly 40% of their components were indirectly exposed to the new US tariffs through their American suppliers who sourced from China.

The company took several steps:

  • Identified European alternatives for 60% of the affected components
  • Negotiated with their American suppliers to source certain components directly from China, bypassing US tariff impacts
  • For components with no alternatives, increased inventory levels to buffer against price volatility
  • Implemented monthly financial monitoring of at-risk suppliers

The result was a reduction in tariff exposure from 40% to 15% of their component base, significantly mitigating their risk with minimal disruption to production.

Conclusion: Turning Risk Into Opportunity

The US tariffs on China, Mexico, and Canada present significant challenges for European businesses, but also create opportunities for those who respond strategically. By implementing robust financial viability assessment and supply chain analysis, companies can:

  • Identify and mitigate vulnerability before it impacts operations
  • Potentially gain competitive advantage by adapting more quickly than competitors
  • Use the tariff situation as a catalyst to build more resilient supply networks
  • Develop deeper understanding of their extended supply chains

In times of economic uncertainty and trade volatility, the ability to rapidly assess and respond to financial risk across the supply chain can make the difference between business continuity and significant disruption. Investing in these capabilities now provides both immediate value in navigating current tariff impacts and long-term resilience against future economic shocks.