Worked Example (illustrative scenario)

How a medium-sized West Midlands manufacturer is responding to the US 15% Section 122 tariff

A practical walkthrough of what the US Section 122 tariff — effective 24 February 2026 — means for a medium-sized precision engineering manufacturer in the West Midlands, where 35% of revenue comes from US export contracts priced under the now-superseded 10% EPD rate.

Change event: US 15% global tariff under Section 122 — effective 24 February 2026 Effective 24 February 2026

The scenario

This worked example follows a fictional business to show how the Section 122 tariff changes apply in practice. The business, its figures, and the individuals named are entirely illustrative.

Midlands Precision Components Ltd is a limited company based in Tipton, in the West Midlands. The company manufactures hydraulic valve assemblies and machined aluminium subassemblies for industrial automation equipment — components used in factory machinery, conveyor systems, and process-control equipment. It employs 112 people across manufacturing, engineering, sales, and administration.

The business has been exporting to the United States since 2018. By 2025, US customers account for approximately £3.2 million of Midlands Precision's £9.1 million annual turnover — around 35% of total revenue. Most of this trade is with three long-standing US industrial buyers in Ohio and Michigan, supplied under annual framework agreements that set out pricing in US dollars for twelve-month periods. Those agreements were renegotiated in October 2025, after the UK-US Economic Prosperity Deal (EPD) came into force, and were priced on the assumption of a 10% US import tariff applying to UK-manufactured goods.

The business already has some exposure to tariff costs on its steel and aluminium inputs. It sources steel bar stock and aluminium billet from a mix of UK, Spanish, and Turkish suppliers. The Section 232 25% tariff on US imports of steel and aluminium does not directly affect Midlands Precision's outbound exports, but the company is aware that its US customers who re-use its components in their own end-products have been managing complex tariff stacking issues of their own.

The finance director, Sarah Okafor, first heard about the Section 122 tariff via a British Chambers of Commerce (BCC) alert on the evening of 21 February 2026 — three days before it took effect.

What the change means for this business

The Section 122 tariff raises the applicable US import duty on Midlands Precision's products from 10% to 15% — a 5 percentage point increase. Because the tariff is non-discriminatory under Section 122 of the Trade Act of 1974, it overrides the UK's negotiated 10% EPD baseline. The company's hydraulic valve assemblies and machined aluminium subassemblies are classified under HS chapters 84 and 76 respectively; neither falls within the exempt categories (steel/aluminium, pharmaceuticals, aerospace, semiconductors, or critical minerals).

The direct financial impact depends on how the additional duty cost is shared between Midlands Precision and its US buyers. Under Midlands Precision's standard Incoterms (DAP — Delivered at Place), US customs duties are the buyer's legal liability. However, the company's existing framework agreements with all three US customers include a clause stating that pricing is "based on the current applicable tariff rate" but does not contain an explicit tariff adjustment mechanism that triggers automatically. This creates an immediate pricing dispute risk.

The commercial exposure can be modelled in two scenarios:

  • Scenario A — buyer absorbs the full additional duty: The 5 percentage point increase raises landed costs for US buyers by approximately 5% on the invoice value. On £3.2 million of annual exports (approximately $4.1 million at current exchange rates), the additional duty burden on buyers is around $205,000 per year. At current margins, this is enough to prompt at least one US buyer to seek lower-cost alternatives, particularly from domestic US suppliers or Canadian competitors no longer facing the same tariff disadvantage relative to the UK.
  • Scenario B — Midlands Precision reduces its prices to hold the buyer's landed cost: To maintain competitive pricing, the company would need to reduce invoice prices by approximately 4.3% to offset the effect of the additional 5% duty (the precise offset depends on the tariff base). Applying this reduction across all US sales would reduce annual revenue by approximately £138,000. At an operating margin of around 12%, this would eliminate approximately £108,000 of operating profit — roughly 10% of the company's total operating profit on US sales.

The reality is likely to fall between these scenarios: Midlands Precision will absorb part of the cost and seek to pass part to customers through renegotiation. The BCC estimates the total additional cost to UK exporters across all sectors at approximately £3 billion — a figure that reflects precisely this kind of margin compression across 40,000 businesses.

A further complication is the 150-day sunset on the tariff. The Section 122 measure expires on 24 July 2026 unless the US Congress votes to extend it. This creates an unusual planning problem: the business faces immediate disruption but cannot be certain whether the disruption will last five months or longer.

Annual US export revenue (Midlands Precision)
£3.2 million (35% of total turnover)
Tariff rate increase
10% to 15% — a 5 percentage point rise
Estimated annual impact if full price reduction passed to buyers
~£138,000 reduction in revenue
Estimated operating profit impact (Scenario B)
~£108,000 — approximately 10% of US-derived operating profit
Tariff expiry date
24 July 2026 (150-day statutory limit under Section 122)
HS chapters affected
Chapter 84 (hydraulic valves), Chapter 76 (aluminium subassemblies)
US customers
Three long-standing buyers in Ohio and Michigan on annual framework agreements

Immediate challenges

Contract renegotiation under time pressure. Within 24 hours of the BCC alert, Sarah Okafor emailed all three US customers to flag the situation and set up calls. The conversations revealed different positions: one buyer, a large publicly listed manufacturer, said it would absorb the additional duty cost itself but wanted a goodwill price reduction of 2% in the next contract cycle as compensation. A second buyer asked for an immediate 3% price reduction, citing competitive alternatives. The third — and smallest — buyer said it had no immediate concerns, given the uncertainty about whether the tariff would last beyond July 2026.

Incoterms ambiguity and liability. The company uses DAP (Delivered at Place) terms, under which the buyer bears import duty costs. Technically, Midlands Precision has no legal obligation to adjust prices. However, in practice, if the effective landed cost rises by 5%, the competitiveness of UK-manufactured goods relative to US domestic alternatives deteriorates. Maintaining the legal position while losing the customer is the worst commercial outcome. The company's solicitors confirmed the existing framework agreements do not require automatic repricing, but advised that commercially, negotiation is preferable to litigation in the current environment.

Cash-flow pressure from forward orders. Midlands Precision had approximately £280,000 of goods in production or ready for shipment for US customers at the time the tariff was announced. These shipments were already covered by purchase orders issued under the old framework agreement. Because the duty cost falls on the buyer under DAP terms, there is no immediate cash-flow impact on Midlands Precision — but if buyers respond by cancelling or deferring forward orders, working-capital assumptions for Q2 2026 will need revision.

Commodity code and classification review. Sarah Okafor contacted the company's customs agent, Whitfield Trade Services Ltd (Birmingham), to confirm that all HS codes used in US export declarations are accurate and that none of the company's products fall within an exempt category. The agent's review confirmed the classifications were correct and that no exemptions applied to Midlands Precision's product range. This exercise took approximately two working days and cost £350 in agent fees.

Steps taken to prepare

Week 1 (24–28 February 2026): Immediate triage. Sarah Okafor worked through a prioritised checklist in the first week. The first priority was confirming which shipments were in transit or imminent: goods that had already left UK ports before 24 February 2026 were not subject to the new rate. The company's freight forwarder confirmed three consignments were in transit and would clear US customs under the old 10% rate.

The second priority was reviewing all outstanding US purchase orders and framework agreement terms. The company's in-house lawyer reviewed whether the "applicable tariff rate" wording in contracts could support an argument for price renegotiation, and concluded that, while it did not create an automatic right, it created a reasonable commercial basis for a renegotiation request.

Tariff adjustment clause for future contracts. The company's solicitors drafted a standard tariff adjustment clause for inclusion in all future international framework agreements. The clause links the invoice price to the applicable US import duty rate at the time of shipment, with a defined mechanism for notification and adjustment if the duty rate changes by more than 2 percentage points. The legal costs for drafting this clause were approximately £800. It will be inserted into all three framework agreements at their next renewal in October 2026.

UKEF Export Insurance enquiry. Sarah Okafor contacted UK Export Finance (UKEF) via the free Export Finance Manager service for the West Midlands region to ask about short-term export credit insurance options. The UKEF adviser explained that the Export Insurance Policy (EXIP) could cover up to 95% of losses arising from buyer non-payment, including non-payment triggered by the buyer's own financial difficulties if the tariff increase makes their business unviable. The company is evaluating whether to take out EXIP cover for the two buyers in the less secure commercial positions. Annual premium cost was estimated at approximately £6,500–£8,000 for the relevant trade volumes.

Supply-chain and market diversification review. The managing director, Rajiv Dhaliwal, commissioned a brief market scoping exercise with the Department for Business and Trade (DBT) trade team at the West Midlands Growth Hub to assess whether equivalent buyers could be identified in Canada, Germany, or the Netherlands — markets where UK manufacturers face no comparable tariff shock. The Growth Hub connected the company to a DBT export adviser who specialises in industrial automation components. An initial scoping session was arranged for March 2026 at no cost to the business.

Scenario planning for the 150-day window. The finance team prepared three scenarios for the board: (1) the tariff expires as scheduled on 24 July 2026 and the EPD 10% rate is restored; (2) Congress extends the tariff for a further 150 days; (3) the tariff becomes permanent or is replaced by an alternative mechanism. For each scenario, the team modelled the revenue impact, the probability of losing each US buyer, and the cash-flow implications for the rest of 2026. The board agreed that, if the tariff extends beyond July 2026, the company would accelerate the European market diversification programme and review the level of US exposure it is willing to sustain.

Communication to staff. Rajiv Dhaliwal briefed the sales and customer service teams in a short all-hands meeting on 25 February. He was clear that the disruption was real but manageable, that no redundancies were being considered, and that the 150-day sunset clause meant the situation could resolve quickly. Keeping the team informed avoided speculation and helped the US account managers handle customer calls confidently.

💡 Lessons learned

Tariff adjustment clauses are essential, not optional. Midlands Precision's framework agreements assumed a stable tariff environment. In practice, any business with significant export exposure to a single market should include a contractual mechanism for adjusting prices when tariff rates change materially. Retrofitting this clause after an event is costly and disruptive; building it in at contract renewal costs almost nothing.

Know your Incoterms — and their limits. DAP terms meant the duty liability sat with the buyer, which provided legal protection but not commercial protection. The competitive impact of a higher landed cost is real regardless of who writes the cheque. Understanding where the economic burden actually falls — even when it is technically the buyer's liability — is essential for realistic pricing strategy.

Engage your customs agent proactively. The HS code review was completed quickly and cheaply because Whitfield Trade Services already had all the necessary records. Businesses that handle their own customs declarations, or that switch agents frequently, may find this exercise takes longer. Maintaining a single, well-briefed customs agent with up-to-date records for all commodity codes is good practice year-round, not just in a tariff crisis.

The 150-day window cuts both ways. The defined expiry date on Section 122 tariffs creates an unusual planning environment: disruption is real, but could be short-lived. For businesses considering costly strategic responses — relocating production, setting up US-side distribution, or walking away from US customers — the uncertainty argues for measured, reversible steps rather than irreversible commitments made in haste. Wait for the legal landscape to clarify before making structural changes.

UKEF is accessible to mid-sized manufacturers. The free Export Finance Manager service provided genuinely useful, no-obligation advice within a week of first contact. Many medium-sized manufacturers are unaware that UKEF's remit extends to businesses of this scale. The West Midlands region has a dedicated UKEF Export Finance Manager; other regions have equivalent provision.

Related updates