Manufacturing is the most exposed sector to tariffs, accounting for 19 of the top 25 most-affected subsectors in the U.S. economy. The most exposed manufacturing industries face estimated cost increases of 2% to 4.5% on imported intermediate inputs, and our own research found that 80% of CEOs rank increased cost pressures as their top short-term challenge stemming from geopolitical/tariff developments, followed with 60% voting for supply chain restructuring.
As the U.S. Supreme Court weighs in on the global tariffs under the International Emergency Economic Powers Act, costs for materials have been both in flux and on the rise. Among major trading partners, China faced 39.2% tariff rates during summer 2025, and steel and aluminum products were the most heavily tariffed product category at 39.8%. Both critical to U.S. manufacturing, the 2025 National Foreign Trade Council survey reported that 75% of respondents agree that tariff-related uncertainty limits their ability to invest in U.S. operations and plan for the future.
Various manufacturing subsectors saw different GDP impacts in 2025. Overall, the sector expanded by 2.5% under the tariffs. Nonadvanced durable manufacturing grew 4.5% and nondurable manufacturing grew 1.6%, but advanced manufacturing is down 3.3%.
Thus far, it’s estimated that 61-80% of the new 2025 tariffs were passed through to consumer core good prices.
Strategic Relocation and Restructuring
With 57% of CEOs actively relocating or restructuring their supply chains, a majority of contract manufacturers either reshored for customers, are actively executing orders, or are quoting reshoring. Sixty-six percent of contract manufacturers reshoring cases involve customers assembling the end product in the U.S. and moving component sourcing onshore.
While the U.S. was the top target for relocation of raw materials and components, with a majority citing government incentives/disincentives as the primary driver, many key components are not readily available and building domestic capacity is a long-term effort. Forty-seven percent of those surveyed across all industry subsectors of U.S. businesses say they have already scaled back or anticipate scaling back U.S.-based operations due to the cumulative burden of tariffs.
There are additional benefits to the nearshoring trend that we saw over 2025. Average transit times decreased with overland shipping between Mexico and the U.S. down to 2–5 days, contrasting the multi-week shipments from Asia. Globally, greater intra-regional trade is also raising audit and inspection demands across Latin and South America showing an increase in foreign investment interest, rising 8% year-over-year by Q2 2025. This trend did not align with that in the U.S., as the demand dropped 9% in the same timeframe.
Beyond faster access to localized materials, nearshoring naturally reduces the carbon footprint of transport. By Q3 2025, "Green Logistics" began yielding actual tax credits and lower energy costs for manufacturers using regionalized, more efficient routes, and Mexico-U.S. trucking saw a 60-80% reduction in transport-related CO2 emissions.
As 80% of leaders face challenges in balancing short-term cost needs with long-term strategic changes like relocation, there’s still heavy dedication towards capital investments.
Long-Term Investment and Structural Impact
How are manufacturers adapting? Notably in spending.
Investments in R&D surged by 18% and Infrastructure by 11% since May 2025 with technology as a large recipient. Sixty-nine CEOs plan to spend up to 20% of their budget on AI to manage supply chain issues and drive efficiency. This has helped organizations move from "disaster recovery" to "active situation management." With the rise of Digital Supply Networks (DSNs), companies can now activate backup supplier clusters in real time when a tariff threshold is hit, or a route is blocked.
On a broader scale, accumulated Foreign Direct Investment (FDI) inflows into Mexico reached $34.3 billion by the first half of 2025, with the U.S. leading those inflows (42.9% of the total). Compared to China, Mexico’s average manufacturing wage remains competitive at $4.90 per hour, $1.60 per hour less than China, keeping it as a place to watch especially considering tariff concerns.
According to the Perryman Group, sustained tariffs are projected to cost the U.S. economy $58.1 billion in annual gross product and nearly 460,000 jobs. In the same line, companies announced $9.3 billion in new manufacturing projects in Q1 2025, which is 23% below the value announced in Q1 2024.
While people costs dominate supply chain budgets across all manufacturers, larger organizations allocate a slightly higher share to salaries, bonuses, and benefits, while smaller companies devote a comparatively greater portion of their budgets to training—suggesting different approaches to capability building by revenue size.
Measuring the Pace of Change
Geopolitical issues have created a turbulent, measurable shift characterized by higher import costs, forced restructuring, and prioritized domestic/nearshore investment. While the 2025 tariff shock initially strained margins, the long-term outlook for 2026 suggests a hardened, more agile global manufacturing core. The organizations that survived the transition didn't just move their factories—they re-strategized their goals. By centering operations and leveraging AI-driven automation to offset higher domestic costs, the industry is defined by shorter, smarter, and more profitable value chains that are no longer at the mercy of limited trade routes.
