Download "Tackling Tariffs" for views across Fidelity International's investing and research teams

Business is a game of constrained optimisation. The aim is to maximise some variable (typically profits) subject to prevailing constraints, like the resources at your disposal.

When those constraints keep changing, it forces everyone to play on difficult mode. Hence the oft repeated (but nonetheless true) cliché that business likes certainty. The twisty-turny US tariffs saga is throwing up examples of what happens when that certainty is removed. 

Tariffs are a negative-sum game, imposing both a direct cost on commerce and an indirect one in the form of foregone mutually beneficial trade. Companies are seeking solutions in a world of second best, each adapting and making do in an attempt to share as little of this cost as possible.

Here’s how some of them are responding.

The view from China: Mitigation where possible, wait-and-see otherwise

One month after the escalation of trade tensions, the world is still guessing when US and Chinese leaders will sit down to talk. Our research shows Chinese exporters, which have been hit hardest by tariffs, have already started adjusting to a new global trade order.

Common mitigations include hiking prices, reshuffling capacity, ramping up US factory production, redirecting shipments, or simply waiting to see what happens next.

“The supply chain response is that they won’t bear additional costs from tariffs because margins are already razor thin,” says investment analyst Allen Yang of one electronic components manufacturer in his coverage. “The actual impact though may not be as bad as feared because there are multiple potential solutions.”

One idea under discussion is to have 50 per cent of the bill of materials completed in the US using a high degree of automation, thus keeping labour and tariff costs more manageable.

“Another solution,” adds Yang, “would be for this company to do what it did in 2024, and complete a large part of the assembly in China before shipping the partially finished product to India for final packaging and testing. So the origin is India but most of the value-add is from China.”

For many companies, negotiations are ongoing with customers to determine how much of the tariff cost can be passed on.  

Elsewhere, there are other examples of Chinese companies passing tariff costs on to consumers abroad, or otherwise changing their business practices.

“Temu has suspended most cross-border parcels in the US because the economics doesn’t make sense,” says Sherry Qin, a Hong Kong-based analyst covering e-commerce companies. “They now prioritise the traditional e-commerce business model where merchants will ship their products from China to warehouses in the US so the platform can ensure supply.”

Qin adds that merchants will have to include all tariffs in their pricing, although the level of tariff charging will be lower than for cross-border small parcels.

“They claim the import cost as the tariff base rather than the end price,” she explains.

Analysts are also circumspect about the broader effects tariffs will have on economic sentiment.

“US import tariffs aren’t going to directly impact China’s property sector,” says real estate credit analyst Ming Gong, “but the second-order impact remains to be seen. If economic growth significantly slows down, how will the government address these challenges?”

“On the positive side, the government is likely to further stimulate the economy,” says one China-based real estate analyst, citing looser monetary policy as one possible response.

“This is positive for the property sector’s financing costs. If the outcome of tariffs is sufficiently bad, further policy stimulus may be introduced faster, including home repurchases, purchase restriction relaxations, and financing support for developers.”

The view from America: Uncertainty weighs on decision making

“Routine capacity management” is how Amazon responded to reports in April that they were pausing talks to lease data centre space for its cloud division.

Those reports followed similar rumblings earlier in the year about Microsoft scaling back its data centre plans.

These decisions were almost certainly driven by those companies’ internal calculations, coupled with a more cool-headed view on the near-term economics of AI, especially in the wake of DeepSeek. 

Yet there’s a suspicion that the timing is significant for other reasons, the news coming as it did while the business world was bracing itself for tariff announcements and then absorbing their implications.

“Beyond this, a consistent message from management teams is that we have seen some hesitance in customers’ decision making,” says Abhishek Dhawan, whose coverage includes equipment rental and building materials suppliers – companies whose order books tend to give an early warning sign of slowing economic activity.

“The tariffs uncertainty has led to businesses taking a pause in capex spending, which could be painful for the capital goods sector in general.”

Indeed, uncertainty is the watchword across a whole range of sectors covered by North America-focused analysts:

• “Trump has become more vocal on pharmaceutical tariffs and drug pricing” - Emma Newey Clark, Equity Research Analyst, Pharmaceuticals.
• “Transports has deteriorated with uncertainty around the demand impacts from tariffs. Aerospace has deteriorated at the margin for the same reason, although defence has improved as there’s less fear around DOGE cuts and there’s potential for budgets to grow in the US.” - Payton Liske, Equity Research Analyst, Aerospace, Defence, and Transportation.
• “Increased macro uncertainties have been a major headwind to demand. The tariff war has led to cost inflation for building products and lumber price increases.” - Bobby Missar, Credit Research Analyst, Homebuilders.
• “Sentiment has become more negative because of brewing problems in the oil market. Now there is an expectation of both more supply and weaker demand, which will put downwards pressure on oil prices. Management teams are bracing for pain ahead.” - James Trafford, Analyst and Portfolio Manager covering the oil and gas industry.

By contrast, analysts covering traditionally defensive sectors like utilities, consumer staples, and telecoms express less concern about the near-term outlook or need to adapt.

“Telecoms is a domestically-focused business with essential, utility-like demand,” says fixed income analyst Evan Delaney. “As such, it has fared well relative to the rest of the market in the ‘tariff tantrum’ sell-off. The overall outlook for the sector remains unchanged on an absolute basis, which is an improvement relative to other industries.”

Changes to shipping routes reflect impact

Shanghai-based Amara Xia has been speaking to shipping liners to gauge their reactions to the tariff situation. Here's what she says:  

"In April, bookings for China-US shipping fell by 50-70 per cent, depending on which shipping company you speak to. In response, liners have reduced capacity in order to support stable freight rates, while also re-allocating some to alternative routes. 

"Demand to ship goods from China to Vietnam, Thailand, Malaysia, and Indonesia has gone up, mainly from big exporters who have existing manufacturing capacity in Southeast Asia. Smaller exporters are still co-ordinating transshipment trades, indicating potential volume growth in the next few weeks. Congestion at Southeast Asian ports has escalated, particularly in Bangladesh, Indonesia, Malaysia, the Philippines, and Thailand.

"Some shipping companies have begun moving or adding to their services from China to other parts of Asia, the Middle East, Mexico, and Africa. But while there has been a slight uptick in both volume and freight rates on routes between China and Southeast Asia, the impact hasn’t been enormous as shippers remain cautious. Supply chain reorganisation also takes time.

"Cargo owners meanwhile are exercising patience, seemingly doubtful of the sustainability of current tariff policies."

American consumer-facing businesses are under pressure

The latest results from Fidelity’s monthly Analyst Survey show analysts who cover consumer discretionary businesses are most likely to expect the new tariffs to impact their companies’ profitability. 

Robert Glatt, a senior credit analyst covering gaming, lodging, leisure, restaurants, and retail, shares his thoughts on what his companies can do next:

"Companies are unsure what to do at the moment. The size of the tariffs will be very difficult to absorb, particularly for imports coming from China. But there isn't a quick and easy way to move manufacturing capacity at scale to the US or somewhere else in Southeast Asia. 

"Additionally, the uncertainty means companies are hesitant to make long-term decisions or invest capital to re-adjust supply chains. 

"So companies are increasing production outside of China where possible, but are also deferring long-term business decisions until there’s more clarity. 

"In the near term, I've heard many companies are letting inventory sit in China as they don't want to pay the tariffs that will take effect once it gets on a boat to the US, and some Chinese manufacturing has paused production and furloughed employees. Many of the retailers I've spoken with have inventory on hand for spring/summer and can wait until July to make order decisions for fall/winter product. The size and financial resources of a company and the demand elasticity of the product being shipped are key factors impacting real-time decisions, though none seem to be good options.

"Will companies be able to pass costs on to consumers? This again will vary by product, but I think in large part companies will have no choice but to pass on much of the tariff in categories where manufacturing can't quickly be diverted to another market (such as categories like toys, appliances, and furniture which are very reliant on China). Manufacturers in China have minimal profitability to eat into, which means that companies can either swallow the loss or pass on the increase. 

"I'm expecting a lot of companies to pass on the dollar amount of the tariffs, but without being able to maintain their margins, so gross margins will get squeezed. Because demand is elastic, particularly in the current environment where the consumer is already dealing with years of inflation, I think this will decrease volumes sold and decrease gross profit dollars as well. 

"In other words, businesses will make the same gross profit per item but sell fewer items. So revenue might be similar, but with lower volumes and margins."

Tariffs “are unsustainable” for auto industry

Car making is one industry that looks particularly exposed to the new tariffs regime. Fidelity analysts who cover the sector in China and North America explain how their companies are adapting.

“Companies that are best placed to adapt fall into two categories,” says Eric Zhu, a Shanghai-based equity research analyst who covers the auto parts industry. “Those that have strong market share, and those with factories in the US.”

Zhu cites the example of a Chinese automotive glass producer with a 30+ per cent global market share. Its peers meanwhile are struggling with profitability and on the edge of quitting the business. 

“Such a dominant market position means it can fully pass through the costs of tariffs to its customers,” he says. “However, one issue auto parts companies cannot fully mitigate is a global recession in auto demand. So we need to continue to monitor the situation.” 

Even without this demand shock, tariffs represent a significant threat for the broader industry.

On the other side of the Pacific, “sentiment has gradually turned more negative as the sector accepts tariffs will remain in place for a while,” says North America-focused auto analyst Tanay Dixit. “The structural change to margins is now being priced in and we will see earnings-per-share downgrades over the next few quarters as management teams revise or retract guidance given the uncertainty.”

That hasn’t kicked in yet though. Fixed income analyst Andras Karman agrees the situation has got worse for the auto sector as a result of tariffs and weak consumer sentiment: “Automotive suppliers kept their guidance but the carmakers themselves have been mostly withdrawing or downgrading theirs.”

Dixit says some of his companies are looking at how much of the tariff impact they can pass on to customers in the form of price increases: “This would lead to a demand shock and lower volumes, so companies are prioritising higher value, lower volume cars to protect margins as the cheaper cars would essentially become loss making.”

Other manufacturers are considering localising more of their business within the US. But this comes with higher labour costs and direct expenses which would structurally lower their margins.

“They may not be able to pass on the full 25 per cent to customers,” explains Dixit, “because the resulting drop in volumes would be a drag on profitability, again due to their high fixed cost base.”

“I don’t think tariffs are sustainable for the auto sector,” adds Hong Kong-based analyst Eric Tse, “because margins are so thin.”

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