Over the past few years, supply chains have faced a series of major disruptions. The COVID-19 pandemic, Russia’s invasion of Ukraine, earlier rounds of U.S.-China trade conflict, and most recently, the sweeping tariffs introduced by the Trump administration in 2025, have all sent waves of economic shock through international supply networks.

For investors and financial institutions, tariffs should be understood as part of a broader structural shift that is making global trade more complex and less predictable. 

How tariffs disrupt supply chains

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Tariffs raise the cost of imported materials and components, compressing operating margins for businesses that rely on cross-border sourcing. 

This is especially challenging for companies that rely on ‘just-in-time’ inventory management. These systems are designed to minimise storage costs and improve cash flow, but they depend on stable trade flows and reliable supplier relationships. Tariff uncertainty undermines these systems and increases the risk of stock shortages, production delays, and cost volatility.

How businesses respond to tariffs

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To manage these pressures, businesses typically consider a mix of mitigation strategies: 

• Absorbing the cost: accepting reduced profit margins in the short term
• Passing costs onto customers: increasing prices (with potential impact on demand and market share) 
• Finding alternative suppliers: shifting sourcing to lower-tariff or exempt jurisdictions
• Renegotiating supplier contracts: adjusting pricing or order volumes
• Pre-ordering stock: building up inventory ahead of tariff implementation, which can tie up working capital and increase storage costs
• Redesigning products: changing inputs to avoid tariff classifications
• Discontinuing product lines: exiting unviable offerings entirely 

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Each approach involves trade-offs, and can introduce new costs, delays or operational risks. Switching suppliers, for example, can disrupt delivery timelines or introduce new compliance risks. 

For investors and lenders, these adjustments could affect earnings, debt capacity, and the long-term viability of the businesses they finance, especially in low-margin sectors.

Understanding direct and indirect tariff exposure

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The effects of tariffs often extend beyond the point of entry. When upstream suppliers are affected, added costs can cascade through multiple tiers of the supply chain, impacting companies that are not directly targeted by the trade measure.

• Direct tariffs are taxes applied to specific imported goods. While relatively easy to identify, their impact depends on how businesses respond. Companies may choose to absorb the cost or renegotiate supplier terms.
  
  Example: If fully passed on, a 20% tariff on imported rice would raise its final price by 20%.
  
  
• Indirect tariffs occur when tariff-related cost increases are embedded in upstream inputs. Costs accumulate as upstream suppliers adjust their prices or production methods to offset the impact on their own cost base.
  
  Example: A European appliance manufacturer may source electric motors from a supplier in South Korea, who in turn depends on Chinese-made copper wire. If tariffs are applied to Chinese copper that are imported into Korea, the increased costs may be passed by the motor manufacturer along the chain, ultimately raising the cost of the European appliance, even though the manufacturer itself is not directly subject to new tariffs. When this kind of effect occurs at multiple points in the value chain, the result is a compounding cost increase. In practice, these cumulative impacts are often the outcome of tens of thousands of overlapping tariff measures embedded within complex global supply networks.

Modelling tariff impact

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To evaluate tariff exposure, companies need to understand how cost shocks propagate across their supply networks. For direct tariffs, a conservative modelling approach is relatively simple: apply the tariff rate to the import value of the goods, assuming full cost pass-through.

Modelling indirect tariffs requires more detailed analysis. Fair Supply maintains a high-resolution global supply chain database that traces the flow of goods and services across multiple sectors, tiers and jurisdictions. This economic view allows tariff data to be overlaid onto transaction-level data to simulate cost impacts across both direct and indirect suppliers.

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This approach enables businesses and investors to:

• Quantify the total cost impact of existing or proposed tariffs
• Compare the relative exposure of different suppliers, products, or sourcing regions
• Test scenarios such as switching suppliers or reconfiguring trade routes

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The result is a sector-by-sector estimate of how much more expensive it becomes to source goods or services from each part of the global economy. This allows investors to pinpoint where cost pressures are likely to concentrate, which sectors or jurisdictions may become less competitive, and where exposure within their portfolios may require closer scrutiny or strategic adjustment. For investors, it offers valuable input for resilience planning and risk-adjusted investment strategies across their portfolio.

Case study: Tariff disruptions in the global aviation supply chain

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The United States is one of the few countries capable of producing passenger aircraft at scale. As such, U.S.-made planes are a significant export good and a critical purchase item for many airlines worldwide.

Roughly 60% of the components required to manufacture planes in the United States are themselves imported. These include high-tech avionics, specialised alloys, and complex subassemblies. Many of these components are now subject to import tariffs under the 2025 U.S. trade measures. 

When we model the cost impact of these upstream inputs, the cumulative increase in the cost of producing U.S.-made passenger planes is estimated to exceed 21%, assuming full cost pass-through and no supplier substitution. By contrast, production cost increases for equivalent aircraft assembled in Europe are estimated at less than 4%.

Given the thin margins and competitive nature of international aviation, these differences are financially material. For investors with exposure to global aviation or related infrastructure, this scenario illustrates how indirect tariff risk can influence procurement decisions, pricing power, and capital allocation.

How investors can assess and mitigate portfolio exposure

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To respond to tariff risk as part of a broader portfolio assessment, investors and lenders can take the following steps:

1. Engage with companies on supply chain visibility. Ask companies whether they can identify not just their direct suppliers, but second- and third-tier exposure to tariff-affected goods. Encourage the use of tools that provide multi-tier visibility.
   
   
2. Integrate tariff sensitivity into credit analysis. Adjust assumptions on earnings and transition costs for companies exposed to sustained tariff volatility.
   
   
3. Request forward-looking scenario planning. Encourage firms to model different tariff regimes and stress-test both financial and operational outcomes.
   
   
4. Monitor re-onboarding risk for any supplier changes. If suppliers are replaced, assess if ESG audits or certifications need to be repeated. These transitions carry compliance and operational implications that should be tracked closely.

From visibility to strategy

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Assessing direct and indirect tariff exposure needs a structured, data-driven approach. It also requires visibility into multi-tier supply chains. Practically speaking, this means going beyond first-tier supplier lists and tracing how global events affect the full web of upstream relationships.

Fair Supply’s free Tariff Calculator applies short-term pricing shocks to a detailed global supply chain database to estimate both direct and indirect tariff exposure. By assuming full cost pass-through and no immediate supplier or trade-route substitution, the tool provides a conservative, high-impact scenario to support strategic planning.

Explore the Tariff Calculator to model different scenarios and assess cascading cost impact in your portfolio.

Beyond tariffs: the broader supply chain impact story

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Tariffs should be contextualised against a broader procurement risk landscape. In some cases, tariffs may make new regions or suppliers more financially attractive than before. But these shifts can introduce unintended consequences, such as heightened exposure to modern slavery risks, more carbon-intensive production methods or sourcing from jurisdictions with weak regulatory oversight. 

These trade-offs are not always visible without the right tools. Fair Supply’s broader platform enables investors and procurement leaders to proactively map and quantify exposure to embedded ESG risks across global value chains — from Scope 3 emissions to biodiversity and modern slavery.

To see how this works in practice, book a demo and explore how deep supply chain transparency can strengthen financial and ESG due diligence.

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