Cambashi’s View: The impact of US tariffs on the engineering and industrial software market

Current state of play – Economic climate with US tariffs on physical goods only

After a chaotic start, tariff negotiations have settled down to detailed negotiations between specific countries. The first ‘trade agreement’ (actually more of a ‘framework’) was announced between the US and UK on 8th May 2025. China did not initially engage with the US (focusing on its domestic market and near neighbors) but is now in discussion and there has been some movement on the very-high tariffs that were in place.

This initially led to a ‘pause’ in capital investment and consumer spending – pending certainty on interest rates and general stability of tariffs – although the markets have rallied since some initially high tariffs were rolled-back.

Global Economic Outlook

The IMF’s latest World Economic Outlook report (April 2025) projected a slowdown in global GDP growth to 2.8% in 2025 and 3% in 2026 (a cumulative downgrade of about 0.8 percentage points compared to its January 2025 forecast). This slowdown applies to all major economies with for example, the US projection down to 1.8% growth and the UK down to 1.1% in 2025.

Consumer spending has also stalled in most countries; for example, in the UK the saving rate has increased to 12p in the Pound, the highest in 10 years. This means that consumers are not spending as much now but will do in the future when they are more confident and have built up savings. However, in the US the opposite effect was evident in Q1 2025 leading up to the imposition of tariffs as consumers and retailers bought ahead to stock up before the tariffs came into effect (on April 2nd, 2025). This is likely to unwind in the next quarter as the tariffs come into effect.

Impact on the engineering/industrial software market

Cambashi’s experience is that Value Added in any industry is a good indicator of software consumption and growth in the software market. The downturn in industrial output will have an overall negative impact on Value Added in all industries and therefore on growth. Cambashi will reflect this impact in its global software figures in the near future, but meanwhile we will explain the mechanisms by which they are impacted by tariffs on physical goods.

As long as tariffs do not directly impact cross-border software sales (the current position), their effect on the software market is indirect, primarily through slowing industrial production and delaying or postponing software purchases.

Software growth is unlikely to be affected in the short-term (through 2025) because of existing subscription contracts, but slower in the medium term because customers may, for example, opt for shorter-term subscriptions, reduce the number of seats purchased (especially in the case of lay-offs), downgrade their subscriptions, delay upgrades, or transition to more affordable products.

Despite this, software remains a key driver of productivity improvements and, in a challenging economic environment, companies often turn to software to improve the efficiency of design and manufacturing. The resilience of the software market, as seen during the COVID-19 pandemic, further supports this observation and suggests that the impact may not be as bad as the reduction in Industry Value Add suggests.

Because of the US-imposed tariffs, many companies are looking for alternatives to the US market – for example, targeting China, which is now the largest available growing market. But it is getting harder to sell software there as a ‘made in China’ policy has been introduced – initially for state-funded projects, but also affecting wider industry.

The risk of software being directly included in the ‘tariff war’

US tariffs currently only apply to physical goods; they do not directly impact cross-border software sales as a digital service. A digital services (software) tariff would be difficult to impose because most software is now sold by subscription which could be paid to an overseas subsidiary of the US parent software provider. But there are various scenarios in which the software market could be impacted:

a) If a country decided to retaliate to US (physical goods) tariffs by applying a tariff on software:

• US-based providers would be affected directly (lower sales in that country due to tariffs) and they may need to switch attention to other markets that don’t impose the ‘software tariff’.

• Non-US-based providers’ revenues would increase as they can sell into the non-US country at a lower price than the US providers. If the US retaliates, then the situation would revert. Note that embedded software is already subject to the same tariffs as the physical goods in which it is embedded.

b) If the US itself decided to apply tariffs on software (e.g. in retaliation):

• This would exacerbate the impact of a) above.
• The US is unlikely to initiate this as it runs a trade surplus on software and services with most countries and this would damage its leading software companies.

Although not actually a tariff, President Trump recently imposed an embargo on Electronic Design Automation (EDA) software in China – essential for electronic chip and PCB design, the brains behind all smart munitions and modern military hardware.

This is Cambashi’s high-level view on the impact of the current tariffs on engineering/industrial Software. We will issue further views in more detail – by industry, country, and product – in our next Observatory release scheduled for July 2025. Request a sample of Cambashi`s Product / Country / Industry (PCI) database here.

Cambashi can also provide a briefing on “The Impact of US Tariffs on the Engineering/Industrial Software Market,” which provides critical insights into the effects of global trade tensions on software consumption trends. This market briefing is part of Cambashi’s continued commitment to equipping global stakeholders with clear, data-driven insights. For more information, contact us: https://cambashi.com/contact-us/