How Trump's Trade Tariffs Are Affecting UK SME Growth: What Manufacturers Need to Know

The tariff storm that swept through global trade in 2025 has left an indelible mark on British manufacturing. For UK SMEs, the impact extends far beyond headline rates: it has fundamentally reshaped export strategies, supply chain decisions, and growth trajectories.

New research reveals that more than one in five UK SMEs now cite trade tariffs as their single biggest challenge, placing it above recruitment difficulties, tax burdens, and regulatory compliance. For manufacturing businesses, the figures are even more stark. Understanding precisely how these tariffs affect your operations, and what practical steps you can take, has never been more critical.

The Current Tariff Landscape: What UK Manufacturers Face

The tariff regime affecting UK manufacturers comprises several distinct layers. At the baseline, UK goods entering the United States face a 10% tariff, a rate that, whilst significant, proved less punitive than many feared. The European Union, by contrast, faces 20% baseline tariffs, creating a relative advantage for British exporters in certain categories.

However, specific sectors face considerably higher barriers. Steel and aluminium imports attract a 25% tariff, with the UK narrowly avoiding the 50% rate imposed on Chinese metals during the Economic Prosperity Deal negotiations. Passenger vehicles face 25% tariffs, though UK automotive manufacturers secured a quota allowing 100,000 vehicles annually at the lower 10% rate.

There are bright spots. Aerospace goods falling under the WTO Agreement on Trade in Civil Aircraft now enter the US tariff-free. Pharmaceuticals, pharmaceutical ingredients, and medical technology goods will maintain zero percent tariffs for a three-year period following an agreement in principle reached in late 2025.

For steel and aluminium derivative products, the complexity has increased substantially. Since August 2025, 407 derivative product codes face tariff treatment, with 124 codes flagged as both aluminium and steel derivatives. Importers must now declare which material is present even in single-material products, creating additional documentation burdens.

The Real Impact: What the Data Shows

Research from Paragon Bank surveying 1,000 UK SMEs paints a concerning picture of how tariffs have filtered through to business operations:

• 25% of businesses report profit margins have been directly hit
• 17% are recording reduced sales volumes
• 23% suffer from reduced access to export markets or falling overseas demand
• 22% say uncertainty affects their ability to plan strategically
• 20% report direct impacts on production timelines
• 30% have seen import costs rise
• 28% face supply chain disruption
• 27% report increased production costs

The Make UK and DHL “International Trade Trends 2026” report adds further detail. One in four manufacturers report balance sheet losses directly attributable to tariff-related cost increases. Nearly a quarter accelerated exports to the US in early 2025, attempting to beat anticipated tariff rises. The same proportion are now pivoting towards non-US markets, whilst one in five have already cut back or halted US exports entirely.

Eight in ten UK manufacturing firms report being affected by tariffs in some form. Beyond direct costs, 58% cite trade rules as major obstacles to exporting, whilst half report problems with customs delays, paperwork burdens, and inconsistent guidance.

Sector Vulnerability: Who Is Hardest Hit?

The Paragon Bank research identifies transportation, storage, and manufacturing as the sectors reporting greatest vulnerability. Within manufacturing, the picture varies considerably by sub-sector.

Steel-Dependent Industries

Manufacturers relying on steel, whether as input materials or finished products, face the most acute pressure. The 25% tariff on steel derivatives affects everything from construction equipment to consumer durables. UK Steel has warned that the tariff “represents a retrograde step for the steel industry and economies on both sides of the Atlantic,” with concerns that harmful trade diversion into the UK market could compound the problem.

Automotive

The UK automotive sector secured a partial reprieve through the 100,000 vehicle quota at 10% rather than 25%. However, this quota represents roughly 40% of typical UK exports to the US, meaning volumes beyond that threshold face the full rate. Component manufacturers face particular challenges, with tariffs on steel and aluminium inputs raising costs throughout the supply chain.

Heavy Equipment

JCB has publicly called on the UK government to intervene following surprise tariff changes on steel and aluminium components. Whilst the UK avoided the aggressive 50% tariffs imposed on some nations, the expanded scope of 25% tariffs on components has hiked prices significantly for equipment manufacturers.

The Strategic Response: How Manufacturers Are Adapting

Despite the challenges, UK manufacturers are demonstrating resilience. The January 2026 PMI reading of 51.8 marks an 18-month high, with export orders rising for the first time in four years. Mike Thornton, head of industrials at RSM UK, notes: “2025 saw trade uncertainty, but despite tariff and geopolitical risks, UK manufacturers are maximising new trade opportunities.”

Make UK reports that manufacturers “aren’t retreating from global trade, they are recalibrating.” The strategic responses fall into several categories.

Market Diversification

Nearly a quarter of UK manufacturers are actively pivoting towards non-US markets. The priority destinations include:

European Union: Despite Brexit friction, the EU remains the UK’s largest trading partner. For manufacturers facing US tariffs, redirecting capacity to EU customers offers immediate relief, particularly given the EU’s 20% US tariff rate makes UK goods relatively more competitive.

Asia-Pacific and CPTPP: UK membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership opens access to markets representing £10 billion in existing UK exports. The agreement reduces tariffs across diverse industries, with the government’s impact assessment projecting motor vehicle manufacturing GVA gains of £183 million. Rules of origin provisions allow manufacturers to diversify production and sourcing across CPTPP members.

India: The UK-India Free Trade Agreement offers substantial benefits in food and drink, industrial goods, and automotive through phased tariff reductions. India’s easing of data localisation policies also benefits service-adjacent manufacturers.

Middle East and Gulf States: Several manufacturers report shifting growth focus to Gulf markets. Joe & Seph’s, the premium popcorn manufacturer, exemplifies this pivot: having planned significant US expansion, the company is now focusing growth on Middle East and Asian markets instead.

Supply Chain Reconfiguration

London Chamber of Commerce guidance highlights supply chain diversification as a critical resilience strategy. Practical steps include:

• Auditing current supply chains to identify tariff exposure points
• Finding alternative suppliers or components from tariff-free regions
• Reviewing country of origin for inputs and assessing alternative sourcing
• Exploring local suppliers to avoid tariff impacts entirely

For manufacturers dependent on US components, Mexico, Vietnam, and India offer tariff insulation whilst often benefiting from favourable US trade arrangements themselves.

Local Partnerships and Distribution

Some manufacturers are exploring partnerships with US-based distributors or contract manufacturers to shift production closer to the target market. This approach can sidestep tariffs entirely, though it requires careful analysis of intellectual property protection, quality control, and the economics of split production.

Pricing and Commercial Strategies

Flexible pricing models can help absorb tariff impacts creatively. Options include:

• Dynamic pricing strategies that adjust for currency and tariff fluctuations
• Product bundling to protect perceived value whilst spreading cost increases
• Contract clauses allowing shared cost adjustments if tariffs drive prices up
• Transparent customer communication about tariff-driven price changes, emphasising product quality and provenance to maintain loyalty

Financial Resilience: Protecting Cash Flow

Tariffs create dual pressure on manufacturer cash flow: costs rise whilst sales volumes potentially decline. For SMEs operating with tighter margins and smaller reserves, this combination proves particularly challenging.

Phil Hughes, Deputy Managing Director of SME Lending at Paragon Bank, observes that “trade tariff disputes have created significant challenges for SMEs, not only those directly involved in import and export markets, but also businesses further down the supply chain.” Many businesses have “delay[ed] investment decisions or scale back growth plans” as a consequence.

Practical financial resilience measures include:

Working Capital Management: Review stock levels and ordering patterns. Holding excess inventory ties up capital; insufficient stock risks lost sales. The optimal balance shifts when import costs rise.

Credit Facilities: Having business credit facilities in place before they are needed provides flexibility when unexpected costs arise. Waiting until cash flow is already strained makes approval harder and more expensive.

Currency Management: For exporters, currency volatility compounds tariff uncertainty. Forward contracts or multi-currency accounts can provide stability.

Customer Payment Terms: Reviewing payment terms, particularly for US customers whose own cost pressures may affect payment behaviour, helps manage receivables risk.

The Optimistic Case: Why 2026 Could Unlock Growth

Despite the tariff headwinds, there are genuine reasons for cautious optimism.

First, the relative tariff position favours the UK. The 10% baseline compares favourably to the EU’s 20%, meaning UK manufacturers competing with European rivals for US contracts may actually benefit. Joseph Sopher of Joe & Seph’s notes that US importers who would have sourced from Europe “might now say; ‘Actually, we’ll buy more from the UK.’”

Second, manufacturer confidence remains robust. Make UK reports that almost eight in ten firms express confidence in the UK’s overall trade prospects. 85% of respondents say they emphasise the “Britishness” of their product or company when exporting, suggesting the UK’s manufacturing reputation carries genuine commercial value.

Third, the Industrial Strategy framework provides potential investment clarity. RSM UK’s Mike Thornton suggests that “if export demand continues, if we see no more tariff changes and if the Industrial Strategy clarity boosts investment, then 2026 could unlock real growth for UK manufacturing.”

Practical Action Plan for Manufacturing SMEs

For manufacturing directors and operations managers seeking to navigate the tariff environment, the following framework provides a structured approach.

Immediate Actions (This Quarter)

1. Conduct a Tariff Exposure Audit: Map your supply chain and customer base against current tariff treatments. Identify where the 10% baseline, 25% steel/aluminium rate, or derivative product classifications affect your operations.

2. Quantify the Financial Impact: Calculate the actual cost increase from tariffs, including both direct costs (on exports and imports) and indirect effects (from suppliers passing through their increased costs).

3. Review Customer Contracts: Identify which agreements allow price adjustment mechanisms and which lock you into rates that no longer reflect your cost base.

4. Assess Cash Flow Resilience: Model scenarios where tariffs persist or increase. Ensure you have credit facilities to manage working capital through volatile periods.

Medium-Term Strategies (6 to 12 Months)

1. Develop Alternative Market Entry Plans: Identify three to five non-US markets where your products have potential. Prioritise based on tariff treatment, market size, and alignment with your existing capabilities.

2. Diversify Supply Chains: Begin qualifying alternative suppliers in tariff-advantaged regions. Allow time for quality validation and logistics optimisation.

3. Explore CPTPP Opportunities: Understand how the agreement’s rules of origin, conformity assessment, and tariff schedules apply to your products and potential customers.

4. Engage with Trade Support: Make UK, the Department for Business and Trade, and local Chambers of Commerce offer guidance, market intelligence, and practical support for export diversification.

Long-Term Strategic Positioning (12 Months and Beyond)

1. Consider Production Localisation: For significant US market presence, evaluate whether local manufacturing partnerships or facilities make economic sense.

2. Invest in Operational Efficiency: Lean manufacturing principles become even more valuable when tariffs squeeze margins. Every percentage point of efficiency improvement helps absorb external cost pressures.

3. Build Brand and Quality Differentiation: Products competing solely on price are most vulnerable to tariff disruption. Investing in quality, provenance, and brand value provides pricing power and customer loyalty.

The Bottom Line

US tariffs have created genuine challenges for UK manufacturing SMEs. Costs have risen, uncertainty has complicated strategic planning, and some businesses have seen profits and sales decline as a direct consequence.

Yet the manufacturers adapting most successfully share common characteristics: they are diversifying markets rather than depending on single destinations, reconfiguring supply chains to reduce exposure, managing financial resilience proactively, and maintaining confidence in their products and capabilities.

The tariff environment may remain volatile. But for manufacturers who respond strategically rather than reactively, 2026 offers genuine opportunities to build more resilient, diversified, and ultimately stronger businesses.

The question is not whether tariffs affect your business. They almost certainly do, directly or indirectly. The question is whether you are taking deliberate action to manage that exposure, or simply hoping the situation resolves itself. The data suggests that waiting is not a strategy that works.