Section 232 tariff update widens the divide between U.S. manufacturing and offshore production

Overview

This report comments on the Trump administration's latest Section 232 tariff update and its impact across North American industries, especially U.S. industrial companies. The key change is that Section 232 tariffs, which previously focused mainly on metal content, will now be levied on the total value of cross-border products at tiered rates, with the main rate around 25%. Morgan Stanley believes this will materially increase importers' tariff bills and widen the cost advantage of domestic U.S. production over offshore production, reinforcing its long-term $10 trillion U.S. manufacturing reshoring theme.

Core views

The report's core view is that the 232 update creates a 'material but differentiated' impact. On the negative side, consumer-related verticals and companies with high international capex exposure are more vulnerable to rising costs and demand elasticity; on the positive side, distributors may benefit from inventory holding gains, data-center-related companies are more favorable because demand is stickier and they have more room to raise prices, and beneficiaries of U.S. domestic capacity and reshoring should also command higher premiums. The authors believe the direction of future NTM earnings revisions will mainly be driven by two variables: end-market demand elasticity and company pricing power.

Analysis framework

The report estimates changes in tariff burden by comparing the share of domestic value added in U.S. manufacturing revenue, the share of import value, the share of metal BOM, U.S. vs. ROW production scenarios under USMCA, and the change in the tax base after tariffs shift from metal content to the product's customs value. The authors also draw on the past 12 months of U.S. industrial companies' experience of raising prices by mid-single digits while largely keeping margins stable to infer whether actual COGS inflation and import cost exposure are consistent with the strength of the 232 tariff.

Methodology notes

• tariff_impactSection 232 tariff bill sizing

  Section 232 tariff bill sizing

  Estimate tariff burden using the share of imported value in sales, the tax rate, metal content, and customs value, rather than looking only at metal content.

• industry_strategyElasticity plus pricing power

  Demand elasticity and pricing power framework

  Whether tariff costs compress earnings depends on whether companies can raise prices without a meaningful drop in volume and retain those price increases over time.

• supply_chainUS Reshoring thesis

  U.S. reshoring thesis

  Tariffs and energy differentials narrow the cost gap between U.S. and overseas production; if companies must serve the high-demand and high-margin U.S. market, they are more likely to increase domestic investment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CARR, LII, SWK

  Negative consumer-related exposure

  Strengths

  If they have pricing power, they can partially pass through costs.

  Weaknesses

  Consumer demand is more elastic, making tariff costs harder to pass through in full.

  Comparison

  Less favorable than exposure to data centers and electrical equipment.

  Risks

  Price increases could reduce volumes and pressure margins.

• EMR, IR, OTIS

  Negative exposure to international capex

  Strengths

  Some companies may buffer the impact through supply-chain adjustments or pricing.

  Weaknesses

  Overseas production or cross-border supply chains face a larger tariff bill.

  Comparison

  Less attractive than U.S. domestic capacity and reshoring beneficiaries.

  Risks

  Erosion of cost advantage and downward revisions to orders or earnings.

• GWW, FAST, WSO

  U.S. distribution beneficiaries

  Strengths

  May benefit from inventory holding gains and upward pricing.

  Weaknesses

  If demand slows later, inventory gains may not be durable.

  Comparison

  More favorable than manufacturing importers.

  Risks

  Weaker-than-expected price pass-through or a pullback in inventory revaluation.

• VRT, ETN, TT

  Beneficiaries of data centers and electrical equipment

  Strengths

  Demand is relatively inelastic, pricing should move higher, and long-term margins can recover.

  Weaknesses

  Contracted backlogs may create a lag between pricing and cost pass-through.

  Comparison

  The report sees them as more resilient than consumer verticals.

  Risks

  Near-term costs rise first while price realization is delayed.

• ROK, ETN, HUBB, PH

  Beneficiaries of the U.S. reshoring theme

  Strengths

  Greater domestic investment and higher U.S. manufacturing premiums should support demand.

  Weaknesses

  They still need to bear direct or indirect imported metal costs.

  Comparison

  More advantaged than producers with a higher share of overseas value added.

  Risks

  If policy shifts again or companies delay capex, the reshoring benefit will take longer to materialize.

• AME, MMM, RAL

  U.S. export risk exposure

  Strengths

  AME has niche markets and strong pricing power; MMM has limited metal exposure.

  Weaknesses

  Higher domestic metal costs may weaken export competitiveness.

  Comparison

  Face overseas competitors in international markets that have not borne the same cost burden.

  Risks

  Wider U.S.-Asia steel price spreads and margin pressure on exports.

Key data

• Domestic value added as a share of U.S. manufacturing salesAbout 40%The report says domestic value added accounts for about 40% of U.S. manufacturing revenue at the industry level, leaving roughly 60% potentially exposed to higher 232 tariffs.
• Main rate on the latest 232 tariffsMost around 25%The new rule levies tariffs on the total value of cross-border products rather than only on metal content.
• Typical change in tariff burden for industrial goodsUp 10-15 percentage pointsThe report estimates that when metal-derived products cross into the US, both USMCA-compliant and ROW goods could see a similar absolute increase.
• Price increases over the past 12 months in U.S. industrialsAbout 5%The report says typical U.S. industrial companies raised prices by roughly 5% to respond to tariffs and broadly maintained margins.
• Assumed metal share of COGSAbout 40%If direct and indirect metal account for about 40% of COGS, a prior roughly 50% Section 232 tariff would theoretically have implied 20-25% COGS inflation.
• Investment horizon12-18 monthsMorgan Stanley's rating definition typically refers to relative performance over the next 12-18 months.

Impact & implications

The investment implication is that relative performance within the U.S. industrials sector is likely to remain differentiated. Companies with U.S. domestic capacity, data-center demand, strong pricing power, or distribution inventory gains are more likely to benefit, while companies exposed to consumers, price-sensitive demand, offshore production re-exported to the U.S., or U.S. export businesses are more likely to face pressure. Over the long term, the 232 update raises the cost of foreign 'value added' entering the U.S. market, further increasing the strategic value of domestic U.S. capacity.

Risks

• Policy uncertainty and complexity may delay market reaction, and later interpretive changes could alter the impact path.
• Companies' actual import shares, metal content, customs values, and supply-chain structures differ widely, so model estimates may diverge from their real tariff bills.
• If demand elasticity is higher than expected, price increases could reduce volumes and lower earnings revisions.
• The applicability boundaries among USMCA, IEEPA, global minimum tariffs, and Section 232 are complex and may affect relative cost advantage assessments.
• U.S. exporters may lose competitiveness in global markets as domestic metal and manufacturing costs rise.

What to watch

• Next earnings releases for disclosure on 232 tariff bills, price pass-through, and margin recovery.
• Whether industries with a high share of domestic value added in U.S. manufacturing accelerate capex and capacity expansion.
• Whether volume elasticity and order trends in consumer-related industrial goods deteriorate.
• Whether data-center, electrical equipment, and distribution companies can successfully implement price increases.
• The spread between U.S. and Asian steel prices and how Mexico and ROW supply chains respond to the new 232 rules.