How Might Fifth District Firms React to Changing Tariff Policies?

Introduction

In March 2025, the U.S. implemented a 20 percent tariff on all imports from China and an additional 25 percent tariff on all steel and aluminum imports. The administration has also announced additional 25 percent tariffs on goods imported from Canada and Mexico to be implemented in April 2025 and proposed a set of tariffs targeting the European Union and automotive imports.

In order to better understand how these implemented and proposed tariffs might affect firms in the Fifth District, we included questions about the impact of tariffs in our March business survey, which was fielded from Feb. 27 to March 19. Altogether, 72 percent of firms responded to the survey after the tariffs on Chinese imports were implemented on March 4 and 41% of firms responded to the survey after the tariffs on steel and aluminum were implemented on March 12. However, through the survey fielding period and continuing to today, there remains considerable uncertainty around which tariff policies will persist and the potential for retaliatory tariffs among trading partners. In fact, the tariffs on all Mexican and Canadian imports were supposed to be implemented on March 4, but tariffs on a large share of imports were walked back on March 6. Likely, those proposed tariffs were also on the mind of many survey respondents in much of the survey period. Thus, our questions were focused on both implemented and proposed tariffs.

As of March 19, most Fifth District business survey respondents anticipated impacts to their business from tariff policies. While about one-third of firms expected to be able to source inputs from alternative (non-tariffed) suppliers for some affected inputs, very few expected to be able to find different sources for all affected inputs. Furthermore, responses to questions in our February surveys indicate that most firms are likely to pass through (or at least attempt to pass through) some of the cost increases to customers.

What Effects do Businesses Expect from Tariffs?

More than 80 percent of survey respondents anticipated some impact from proposed, planned, or implemented tariffs, with just under a quarter of firms expecting to be significantly impacted. The difference between manufacturing and services firms was stark. Ninety percent of manufacturers expected to be impacted, compared to roughly 75 percent of service providers. Manufacturers also expected the impacts to be more severe than their service-sector counterparts, who were more likely to be unsure about the extent of the impact that tariff policies would have on their firms. This is consistent with other information on the differing effects of tariff policies on U.S. industries.

Of course, there is much uncertainty around what tariffs will take effect, both in terms of the products that will be tariffed and the countries that will be affected. Although we do not know precisely the extent to which the firms surveyed in February would be exposed to the various tariff proposals, we do know that the majority of respondents to the December survey have some sort of international exposure. According to data from the International Trade Administration, we also know that with respect to imports, Fifth District states as a whole rely the most on Mexico, China, and Germany. The biggest receivers of our exports are Canada, China, and Mexico.

How Might Firms React?

Anecdotally, we hear that it can be costly to restructure supply chains, so most Fifth District firms will likely not be able to immediately find different suppliers that are not affected by tariffs. Although about one-third responded that they will be able to source some of their inputs from alternative suppliers that are not subject to tariffs, only about 8 percent expected to be able to source all affected inputs from alternative suppliers.

Not surprisingly, given the uncertainty about the tariffs themselves, more than a quarter of firms were not sure if they would be able to source inputs from alternative suppliers. One survey respondent wrote, "As a global marketer and manufacturer, uncertainty related to how far reaching, and which countries in total will be targeted, makes it [a] very difficult to scenario plan [for]." Firms that were able to find alternative suppliers were split between whether those suppliers were domestic or some combination of foreign and domestic.

To the extent that firms are not able to find non-tariffed suppliers, results from our February surveys suggest that firms would pass unexpected cost increases on by increasing the prices they charge customers. Nearly three-quarters of respondents reported that they would increase prices if faced with an unexpected cost increase, and nearly 60 percent would pass through the full amount or more. The extent of price pass through will likely depend on the magnitude of cost increases from tariff policy.

Have Fifth District Firms Seen Cost Increases from Tariff Policy Yet?

In our March surveys, firms reported that cost growth has accelerated and manufacturers, in particular, expect to see further cost growth. However, tariffs and trade policy have not yet resulted in widespread cost increases — firms are still more likely to report labor costs and insurance costs as the drivers of greater-than-anticipated cost increases, and a fair number of firms have increased their prices accordingly.

Conclusion

As of the writing of this post, the future of U.S. tariff policy — and the potential retaliatory response from trading partners — is uncertain. However, most firms in the Fifth District business survey source at least some of their inputs from abroad and few report being able to find new non-tariffed sources for all inputs. Most plan to pass along at least some of their cost increases, although as of right now, cost increases have been dominated not by trade-associated costs but by labor and insurance costs. Understanding the costs that firms face and the effect of tariff policy on firms' price adjustments and potential supply chain shifts will be important as we move forward.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.