The Perfect Storm:
Trade Tariffs, Nearshoring & the Iran War

1. Executive Summary

As of April 2026, three powerful forces are converging to create what may be the most consequential operating environment for manufacturers, apparel producers, and small businesses in a generation. First, a historically aggressive U.S. tariff regime — surviving a Supreme Court challenge and now anchored in Section 122 and expanding Section 232 authority — has pushed the average effective U.S. tariff rate to roughly 11%, the highest since 1943. Second, a structural shift toward nearshoring in the Western Hemisphere is accelerating, driven by tariff arbitrage, preferential trade agreements, and the simple math of shorter lead times. Third, the U.S.-Israeli military campaign against Iran, which began on March 1, 2026, has effectively closed the Strait of Hormuz, disrupted roughly 20% of global oil supply, and sent Brent crude surging past $110 per barrel — injecting an energy cost shock into an already fragile global economy.

These are not three separate stories. They are one interconnected system. Rising energy costs amplify the landed-cost advantage of nearshore producers. Tariff exemptions for CAFTA-DR and USMCA-qualifying goods create a tangible competitive moat for Western Hemisphere sourcing. And the financial market turbulence triggered by all three forces is repricing risk in ways that favor businesses with shorter, more transparent, and more resilient supply chains.

This briefing connects the dots for professionals who must act — not merely observe — as conditions shift.

2. The Tariff Landscape: From IEEPA to Section 122

The Supreme Court Reset

On February 20, 2026, the U.S. Supreme Court ruled 6-3 that the International Emergency Economic Powers Act (IEEPA) does not authorize the President to impose tariffs. This struck down the broad, country-specific tariff regime that had been the centerpiece of trade policy since April 2025 — a regime that at its peak pushed the average effective tariff rate to roughly 16%, the highest since 1936.

Within hours of the ruling, the White House pivoted. President Trump invoked Section 122 of the Trade Act of 1974 — a provision that had never been used by any president — to impose a flat 10% surcharge on virtually all imports, later signaling an increase to the statutory maximum of 15%. The tariff took effect February 24, 2026 and is authorized for 150 days, expiring July 24, 2026 unless Congress votes to extend it.

What Stays, What Changed

The structural architecture of U.S. tariff policy survived the Supreme Court ruling largely intact. Section 232 tariffs on steel, aluminum, copper, automobiles, semiconductors, lumber, and other strategic goods remain in force — these were never dependent on IEEPA. On April 2, 2026, the administration restructured and in some cases reduced the Section 232 metals tariffs while simultaneously imposing tariffs of up to 100% on patented pharmaceutical imports.

Section 301 tariffs on Chinese goods — now accounting for roughly $77 billion in duties on initial import values — also remain untouched. The administration has directed USTR to initiate new Section 301 investigations targeting additional trading partners, building a more durable legal foundation for long-term tariff policy.

The Exemptions That Matter Most

For apparel and textile professionals, two exemptions in the Section 122 proclamation are critically important. First, goods qualifying for duty-free treatment under the USMCA remain exempt from the surcharge — provided they meet rules-of-origin requirements at the HTS code level. Second, the proclamation formally exempts textile and apparel articles entering duty-free under CAFTA-DR, covering Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua across 1,610 apparel product codes. This CAFTA-DR carve-out is a new standalone provision — under the prior IEEPA regime, only some of these countries had received equivalent treatment through separate bilateral deals.

This structural exemption creates a meaningful cost advantage for Western Hemisphere sourcing over Asian imports, which face the full Section 122 surcharge on top of any existing MFN duties and Section 301 tariffs.

3. Nearshoring in the Americas & Caribbean

The Pendulum Swings Back

After two decades of offshoring production to Asia for labor cost advantages, the economics are shifting. According to AlixPartners, the 2025 tariff regime reignited interest in nearshoring for U.S. apparel brands, with their analysis suggesting the economics are now attractive for specific product categories. Major Asian suppliers have already made the calculation: Hansae announced a planned expansion of its Nicaragua plant by 60 sewing lines in 2026, and Jay Apparel announced a strategic Central American expansion in May 2025 following the tariff announcements.

Foreign direct investment into apparel manufacturing in nearshoring regions for the U.S. has increased by 20 percentage points over the past five years, according to the Business of Fashion / McKinsey State of Fashion report. More than 70% of North American apparel executives surveyed by McKinsey plan to increase nearshoring or reshoring in the next five years, with Central America, Mexico, and the Caribbean cited as top destinations.

The CAFTA-DR Advantage

The formal CAFTA-DR exemption from Section 122 tariffs has created what may be a historic opportunity for Western Hemisphere textile and apparel production. Since February 2026, apparel imports from Asian suppliers face the Section 122 surcharge, while qualifying CAFTA-DR products enter duty-free. Trade data shows improvement: approximately 75.7% of U.S. apparel imports from CAFTA-DR members claimed duty-free benefits in 2025, up from 73.0% in 2024 and 70.5% in 2023.

Countries like Honduras, El Salvador, Guatemala, the Dominican Republic, and Nicaragua are positioned as beneficiaries — though significant challenges remain. Manufacturing capacity in the region still lags Asia. The USMCA "yarn-forward" rule of origin requires that yarn used to make fabric originate in North America, not just the final garment — a requirement that cannot be met simply by relocating a finishing operation while still purchasing fabric from Asia.

What Nearshoring Delivers Beyond Cost

The value proposition for nearshoring extends well beyond tariff arbitrage. Nearshore supply chains can offer lead times three to five times faster than Asian sourcing. For brands operating in an environment of volatile consumer demand, faster trend cycles, and pressure for smaller batch sizes, this speed-to-market advantage can increase full-price sell-through by 5% or more — a margin improvement that, in some analyses, makes even U.S. onshoring break even. Additionally, shorter supply chains reduce carbon emissions, an increasingly important consideration as ESG reporting requirements expand and consumers demand more sustainable sourcing.

The AAPN's 2026 Carolina Mill Tour and pro:Americas Conference reflect this strategic pivot. These events are specifically designed to highlight fabric, trim, and manufacturing capabilities in the U.S. and Western Hemisphere for brands and retailers interested in regional sourcing.

4. The Iran War: An Energy Shock with Global Reach

What Happened

On March 1, 2026, the United States and Israel launched military strikes against Iran. Iran retaliated with missile and drone strikes on U.S. and Israeli targets across the region, including attacks on Gulf states hosting U.S. military forces — the UAE, Saudi Arabia, Bahrain, and Qatar. Infrastructure in the region sustained significant damage, including portions of Qatar's LNG facilities, Saudi oil fields, and UAE port infrastructure at Jebel Ali.

Iran effectively closed the Strait of Hormuz to commercial traffic. Approximately 20 million barrels of crude oil per day — roughly 20% of global petroleum consumption — normally transits the strait. Commercial shipping came to a near-total halt as attacks on vessels and navigation interference made passage too dangerous for operators and insurers alike.

The Energy Shock Mechanics

This crisis differs fundamentally from the 2022 Russia-Ukraine energy disruption. The 2022 shock involved sanctions and price caps that rerouted Russian oil and gas through alternative trade channels — Russia continued producing and exporting. The 2026 Iran crisis involves a physical chokepoint closure. Gulf producers, including Saudi Arabia, the UAE, Iraq, and Kuwait, have been forced to curtail production as onshore storage fills up. Saudi Arabia and the UAE have attempted to reroute oil via pipelines that bypass the strait, but these pipelines lack the capacity to compensate for the loss of seaborne exports.

The International Energy Agency coordinated a record release of strategic petroleum reserves. U.S. Energy Secretary Chris Wright indicated the release could reach 3 million barrels per day, though analysts at Morgan Stanley estimate a more conservative 2 million. Even so, the shortfall remains substantial. The global LNG market is even tighter than oil, with no spare production capacity and limited short-term supply flexibility.

Ripple Effects on Trade

The strait is a chokepoint not only for energy but for an interlocking web of commodity flows. More than 80% of global trade moves by sea, according to the World Bank. Disruptions to the Strait of Hormuz are increasing freight costs and delaying deliveries of goods far beyond the energy sector. Insurance premiums for Gulf shipping have surged. Investment decisions are being deferred. Supply chains are being rerouted at significant cost. European gas storage, estimated at just 30% capacity following a severe 2025–2026 winter, is particularly vulnerable — Dutch TTF gas benchmarks nearly doubled to over €60/MWh by mid-March.

5. Where the Three Forces Collide

The interaction effects between tariffs, nearshoring, and the Iran war are compounding in ways that no single analysis captures. Consider the mechanics:

Energy costs amplify the nearshoring advantage. Asian-sourced goods must travel 12,000–16,000 nautical miles to reach U.S. ports. With bunker fuel prices surging alongside crude oil, the landed cost of Asian goods is rising faster than the landed cost of Western Hemisphere goods. Container shipping rates on Asia-to-U.S. routes had already increased 165% between December 2023 and February 2024 due to Red Sea disruptions. The Iran war adds another layer of shipping cost inflation and transit uncertainty. By contrast, goods from Honduras, El Salvador, or the Dominican Republic travel a fraction of that distance, face no Middle Eastern chokepoint risk, and qualify for CAFTA-DR tariff exemptions.

Tariffs and energy costs compound to create a cost vise. An Asian apparel supplier now faces the Section 122 surcharge (10–15%), plus any applicable Section 301 tariffs on Chinese content (which can exceed 25%), plus elevated shipping costs, plus longer and less predictable transit times, plus the elimination of de minimis duty-free treatment for small shipments. A CAFTA-DR supplier faces none of these on qualifying goods.

Financial market volatility is repricing risk. Investors and lenders are increasingly differentiating between businesses with long, Asia-dependent supply chains and those with shorter, regional ones. The combination of tariff uncertainty (Section 122 expires July 24 — then what?), energy price volatility, and geopolitical risk is making supply chain resilience a balance-sheet issue, not just an operational one.

6. Financial Market Impact

Equities

U.S. stock markets have experienced significant turbulence. The S&P 500 suffered its worst two-day drop since April 2025's tariff panic, falling 3.4% and sinking to 8.74% below its late-January peak. The Dow Jones, Nasdaq, and S&P 500 all approached correction territory (a 10%+ decline from recent highs). Markets have subsequently stabilized on periodic hopes of conflict de-escalation, but remain volatile — with intraday swings of 600+ points on the Dow becoming routine as headlines shift.

International markets have been hit harder. European and Asian indexes, far more dependent on Middle Eastern energy imports, fell 1–2% in the conflict's opening days and have continued to underperform. Japan's Nikkei dropped over 2%. Pakistan's KSE 100 experienced its largest-ever single-day decline, triggering a market halt. The CNN Fear and Greed Index hovered in "extreme fear" territory, hitting its lowest level since November.

Bonds & Interest Rates

The 10-year U.S. Treasury yield rose from 3.96% at the end of February to 4.26% by mid-March, its largest weekly increase since the April 2025 tariff shock. Rising yields reflect investor fears that higher oil prices will fuel inflation. Goldman Sachs pushed its forecast for the next Fed rate cut from June to September. Traders began pricing in no rate cuts for 2026. The European Central Bank postponed planned rate reductions, raised its 2026 inflation forecast, and cut GDP growth projections. UK inflation is expected to exceed 5% in 2026.

Currencies & Commodities

The U.S. dollar has strengthened approximately 3% in March as energy-driven stagflation risks support the greenback in the near term. Gold surged as a safe-haven asset, with UBS forecasting prices of $6,200/oz by the end of June. Aluminum prices have been volatile amid Iranian attacks on Gulf producers. Copper markets reflect broader economic pessimism. The commodity complex as a whole is showing signs of what some analysts describe as the beginning of a new supercycle — a prolonged period of structurally elevated raw material prices driven by supply-demand imbalances.

7. What This Means for AAPN & SPESA Members

SPESA President Michael McDonald captured the industry mood in his March 2026 "State of the Industry" address: the sewn products sector is emerging from one year of uncertainty into another, with volatility running parallel — an unstable tariff regime, fragmented trade relationships, and geopolitical turbulence that changes faster than supply chains can adjust.

For AAPN and SPESA members specifically, several dynamics deserve attention.

The CAFTA-DR exemption is a strategic asset — use it. The 1,610 apparel product codes exempted under Section 122 represent a tangible competitive advantage for brands sourcing from the six CAFTA-DR countries. But exemptions are triggered by HTS code classification, not product description. Misclassification means the exemption does not apply, even if the product appears to qualify. Invest in getting classifications audited now.

The USMCA review process begins in 2026. The formal six-year review of USMCA creates uncertainty for brands dependent on duty-free treatment for Mexican and Canadian goods. The administration could seek significant renegotiation or even replace USMCA with bilateral deals. The yarn-forward rule of origin may be revisited, with potential implications for how "China content" in nominally North American goods is treated.

Energy costs will hit operational budgets. Higher fuel prices increase the cost of running factories, shipping goods, and powering warehouses. Chemical and textile manufacturers in Europe have already imposed surcharges of up to 30% on feedstock costs. Expect similar pressure on dyestuffs, synthetic fibers, and other petroleum-derived inputs throughout 2026.

Technology is a lever. SPESA's emphasis on automation, AI-driven optimization, and improved analytics is not abstract. In a cost environment where tariffs, shipping, and energy are all rising simultaneously, manufacturers that invest in technology to improve yield, reduce waste, and accelerate throughput will outperform those that absorb costs through margin compression alone.

8. Government Contractors & Small Businesses

Government Contractors

The tariff and energy environment creates both risk and opportunity for government contractors. Federal procurement regulations (FAR/DFARS) contain Buy American and domestic preference requirements that interact with the tariff regime in complex ways. Contractors using imported raw materials or components face elevated input costs — Section 232 tariffs on steel, aluminum, and copper directly affect defense and infrastructure contracting. At the same time, the administration's stated priority of reshoring domestic production aligns with existing preference programs and may create new contract opportunities for U.S.-based manufacturers.

Watch for changes to the Trade Agreements Act (TAA) designated country list. The ongoing Section 301 investigations and tariff negotiations could alter which countries' products are eligible for government procurement. Contractors should verify TAA compliance for all goods in their supply chains and build cost escalation provisions into proposals to account for tariff volatility.

Small Businesses Looking to Scale

For small businesses, the current environment is a test of supply chain architecture. Businesses that built their models around cheap imports and thin margins are most exposed. Those with diversified sourcing, regional supply chains, and pricing flexibility are best positioned. The IMF projects global GDP growth of 3.1% in 2026, with U.S. growth around 2.1% — modest but positive. The apparel market is growing slowly (low single digits), but within that, specific categories and channels are growing faster.

The SBA and DFC resources available for nearshoring investment, combined with the potential Americas Act funding, represent financing pathways that did not exist two years ago. Small manufacturers in the Western Hemisphere that can demonstrate WRAP compliance, supply chain transparency, and regulatory readiness are increasingly attractive to U.S. brands seeking to de-risk their sourcing.

9. Triple-Horizon Analysis

10. Recommended Actions

For Apparel Manufacturers & Brands (AAPN/SPESA Members)

For Government Contractors

For Small Businesses Looking to Scale