Shares in Caterpillar (CAT -1.98%) were down by 3.2% as of 11:30 a.m. ET today. There's little doubt over the reason for the decline: the coming into effect of 25% tariffs on products imported from Mexico and Canada, alongside raising tariffs on products from China to 20%.

Why Caterpillar is impacted

The sell-off is understandable given the company's negative exposure to an escalation in trade tensions. Caterpillar is a truly international company in its sales and operations. It has more employees outside the US (61,400) than it does in the US (51,500) , and it has plenty of competitors in local and regional markets across all of its businesses.

As such, an escalation of trade conflict could lead to its products becoming uncompetitive due to retaliatory tariff action. In addition, Caterpillar has numerous manufacturing plants worldwide, including plants in China and Mexico. An increase in tariffs is likely to increase the costs of components manufactured at these plants, and that will eat into profit margin.

In addition, as investors learned from the supply chain crisis that followed the COVID lockdowns, trade disruptions can significantly raise the cost of procuring supplies and create logistical nightmares as supply chains adjust to a new pricing environment.

Finally, if the tariff actions lead to a series of retaliatory actions that negatively impact the global growth environment, Caterpillar's construction machinery sales will be hit. Worse, its commodity-related sales (mining machinery, oil and gas equipment, and construction machinery for energy projects) will be severely hit if capital spending plans are cut due to tariffs on commodities.

Time to panic?

Perhaps not. The tariffs can be eased once President Donald Trump achieves his aims.