Tariffs and Global Market Fallout

Global markets have reacted in a resoundingly negative fashion since the afternoon of April 3, 2025, when President Trump used emergency executive branch authorities to enact a broad swath of tariffs with practically every U.S. trading partner of note. While markets anticipated the enactment of a broad range of tariffs and some negotiability, the positions staked out by Trump are extreme. Trump is well-understood to be a transaction-oriented President and tends to stake out extreme positions only to negotiate many of them back; that said, the magnitude of proposed tariffs, even if negotiated down, seem difficult for the world to swallow. Given the United States’ position as the world’s largest economy (~25% of global GDP), the U.S. dollar’s dominant status as the world’s primary reserve currency (about 58% of global reserves), and extremely high share of global trade (about 90% of the $33 trillion in global trade is denominated in dollars), the implications of this upheaval of global trade dynamics are apt to be quite substantial and generally negative.

Following a 90 day stay of execution on April 9 with respect to so-called “reciprocal tariffs” while country-by-country negotiations take place, a base 10% tariff remains in effect for the balance of the 2^nd quarter.  This is accompanied by a somewhat confusing array of automotive tariffs, metals tariffs, and a decidedly unclear set of exemptions for imports of these items from Mexico and Canada under the USMCA agreement, many of which are duplicative.

At Cambiar, we are taking actions as needed to deploy capital intelligently through this process.

After careful consideration, we are vacating or reducing positions in areas that we view to be most vulnerable to the pending global storm: investment banking, commodities, and certain unit-driven business models… 

This piece represents our current thinking, not only about the here and the now but also about the eventual destination and how/why the world got here in the first place. Hopefully, enough of these thoughts are reasonable and correct. In this time, when there is a higher premium placed on correct decisions, the value of real live breathing, thinking, sweating, and poorly sleeping financial professionals happens. That puts our client base in a distinct minority, with some 58% of public market assets invested in indexes that don’t make active choices about what to own or not own. We will be making active choices here. And while some portfolio moves won’t work as well as others and/or be hard to time very well, the senior team at Cambiar has been through our fair share of market shocks: the collapse of the internet bubble in 2000, the shock of 9/11, European financial crises in 2011-2012, emerging market devaluations and defaults galore, the COVID meltdown of 2020, and of course the Global Financial Crisis of 2008. We have rebounded from each of these periods rather well, applying the same playbook each time (what’s going on, what stocks/sectors are problematic and what are not, and what is the eventual destination). We aim to do the same thing here. The big money is made in bear markets- it just tends not to be apparent in the moment! For our clients and the various intermediaries that we work with, now is very much the time to have some faith!

Let’s Start with the Conclusions:

• We believe a period of substantial economic weakness and probably a global recession or period of very low growth are inevitable – barring a sudden reversal of tariffs and some disavowal of any attempt to revive them in their current form at a later date. In the U.S. specifically, a combination of negative economic multipliers and a bit of consumer/business shock is likely to freeze some purchases in the near term.
• • Related to the above, we believe most of the tariffs, especially the surcharges above a base 10% rate, are intended to be “negotiable”, and expect to see a flurry of negotiations in the coming days.
• • Will the Chinese negotiate under these aggressive tactics? Very unclear.  China remains an important piece of the global economy, and continuing to ramp up pressure on them, even if it results in a (perhaps intentional) massive reduction in the longer term volume of trade with China, does not seem beneficial.
  • There are substantial constitutional questions about whether Presidential “emergency” authorities can be deployed as Trump is doing, as it amounts to broad-based legislation on taxes and commerce. These are constitutionally delegated to Congress and could create the basis for a quick reversal of the whole affair. However, markets are not likely to price in an intervention by courts until they have in fact intervened, which will not happen overnight.
  • The 90-day stay execution of April 9^th (assuming this holds) does not constitute a reversal or disavowal of bringing these back in the future. For manufacturing-based businesses, planning horizons will remain frozen without more definitive clarity.  In financial-markets speak this remains a “left tail” event.  We suspect somebody in Trump’s inner circle successfully conveyed a message of an economic train wreck if the tariff locomotive was not slowed down.  However the message was conveyed or the decision reached, there is some “thinning of the left tail” in terms of the President’s calculus and the degree of economic risk.  While this is good, there is a substantial degree of damage to planning horizons and cumulative confidence that  seems unlikely to reverse, meaning that an economic shock has been delivered.
• Companies at the “center of the storm” may have particularly tough outlooks. These include export-driven manufacturers, particularly in lower-margined products that require high factory utilization rates, and even higher-margined components that feed into this food chain seem rather vulnerable.
• Outside the “center of the storm,” most commodities will face weaker outlooks. Commodity markets are driven by the value of the incremental bushel or barrel, as the case may be, and small amounts of excess capacity can be very damaging, leading to disadvantageous pricing that forces supply curtailment.
• American brands may not travel very well… It is hard to gauge what this may mean given American corporate dominance in fields like technology and media. In many cases, there are not a lot of “good” alternative choices for customers looking for critical software solutions as one example. However, we sense that the global reaction to restrictive trade policies and coercive deals may blunt any number of prominent brands.
• Maybe America’s debt problem gets kicked down the road? – Federal government debt was 124% of GDP and climbing at the end of 2024, with Federal outlays set at 24% of GDP, well above any tax take ever achieved in modern U.S. history! This is a basic problem that requires spending cuts. Unfortunately, an economic contraction is not going to help this situation at all, though it may be offset by much lower longer-term interest rates. Given an inbound funding wall of $trillions in debt issued at far lower interest rates, this may improve government finances a bit. Harder to say how this situation evolves.

Net, the totality of tariffs could be a good deal “less bad” than the initial reaction suggests and could possibly be vacated by courts in a few months. But near-term damage shall occur.

Tariffs and Multipliers

Economic “multipliers” are a core/bedrock principle in any classic discussion of economics as a field. Example: a new factory is built, it creates jobs for the employees (and a whole lot of other jobs for the services and products they will doubtlessly buy living their lives), tax revenue for the municipality, physical demand for the materials and components that will be built in the factory, etc. This is particularly relevant in the world of exports and imports, where companies with superior products or costs can export them the world over and employ more people than could ever be needed to serve domestic demand only, augmenting the local multiplier effect. The multiplier concept works in both directions, however, and shocking the world with tariffs, as well as clobbering the volume of global trade via sticker shock – even if final tariff rates settle closer to the 10% base rate – are going to have a lot of negative multiplier effects. Unfortunately, the outrageous nature of the initial tariff ask (even if it’s kind of obviously outrageous) is provocative and will lead to adverse reactions, as we can see from China’s reaction to impose their own reciprocal 34% tariff on inbound U.S. goods thus far.

While President Trump has proved to hold a variety of rather malleable positions on many topics and appears to be presenting the extreme tariff regime as intentionally negotiable, it’s clear enough that he really believes in tariffs and in deploying them broadly and punitively. This means that a reversal of Wednesday’s Rose Garden announcements is unlikely, although some forbearance seems possible if markets continue lower. Hard to say. It is disappointing, and it sounds as though there were a number of less extreme proposals being kicked around. The extreme reaction last week (one of the top five short-term drawdowns of all-time) suggests few on Wall Street expected a tariff package so outlandish.

Was There a Credible Economic Case for Some Change in Global Trade Policy?

We had been of the view as of late 2024 that a broad-based global tariff was likely to be implemented by Trump, with 10% at the high end of our range of expectations and more punitive rates of 20%-30% for global “adversaries” such as China. Additionally, there was some expectation that policies of this sort would be implemented gradually (or at least not on ultra-short notice), giving any number of businesses time to make adjustments and for larger trading partners to engage in some outright “horse trading” on key products well in advance of implementation.

There are no classic economics textbooks that will tell you any kind of tariff-driven policy is optimal policy. Global trade has all kinds of positive economic multipliers and improves efficiency; erecting barriers in the form of tariffs or quotas does the opposite. However, textbooks don’t assume that a gigantic trading partner such as China could grow to be the world’s second-largest economy and continue to have a controlled currency, or impose acute ownership and operating limitations on subsidiaries of foreign businesses. Or ditto similar functional trading challenges in countries such as Japan and Korea. The textbooks also don’t really have great answers to “king dollar”, or a situation where the currency of just 4% of the world’s population is used for 90% of global trade (!) These unusual phenomena lead to a general tendency for the dollar to be overvalued on a trade-weighted basis by some 10%-20% over most periods of time, and for trade deficits with certain trading partners to indeed be rather “structural”. Likewise, the U.S. is unique among most countries in not deploying a VAT-type broad-based consumption tax, leading to much higher propensities by Americans to consume imports versus the opposite outside the U.S.  Adding these factors together, there are (some) reasonable arguments favoring a broad-based tariff as a way of mitigating these factors.

The above thought process may explain why investors were rather unperturbed by the prospect of tariffs going into the announcement, believing it would pass the reasonability test and lead to some strategically sensible re-domiciling of certain industries. But the higher tariffs go, and the more unreasonable the basis is for them (achieving across the board bilateral trade balances on a country-by-country basis is highly unrealistic), and the negative multiplier effects will dwarf the overall situation. Given the substantial cost and complexity of various global supply chains, it is highly impractical to attempt to replicate them elsewhere on short notice.

What is the Destination?

A lot depends on the answer to this question. How negotiable is Trump? Will a rapid “consensus recession” collapse in consumer and business confidence cause the Republican Party to rebel? Will courts intervene and declare that Trump has overstepped his authorities, deploying the same logic as with Biden’s attempts to grant student-borrowers $ billions in debt relief without any authorization from Congress? These and other questions will be answered in coming weeks.

Under the first Trump administration, many were quick to declare an end to “globalization”, or the process of increasingly global supply chains for all manner of products. That would be an overstatement in our opinion. “Slobalization” (or a slower rate of globalization) was a more apt descriptor. Tariffs and other functional restrictions on trade were enacted, but many major manufacturing businesses simply diversified their supply chains into other lower-cost regions and have continued on. We are reluctant to declare a new era just now – we don’t see athletic shoes or flat panel televisions ever being produced in the U.S., for example – but some degree of “strategic fragmentation” seems more likely, with other aspects of slobalization continuing to roll along. (we suspect the financial press may arrive at a more memorable name than that.) Would strategic fragmentation lead to a less central role to the U.S. dollar in global trade? This seems like an intended goal, but there are a lot of reasons why the dollar-based global trade system exists in its current form, including far better financial technology and scaled transaction networks. These can be built elsewhere, but thus far nobody has had much success at it. Other candidates for the global reserve currency (the Euro, Yen, and Renminbi are the only ones taken semi-seriously) quickly reveal themselves to be unserious candidates given various domestic problems that far exceed the prevailing political issues in the U.S.

What are We Doing at Cambiar?

After careful consideration, we are vacating or reducing positions in areas that we view to be most vulnerable to the pending global storm: investment banking, commodities, and certain unit-driven business models. These businesses are all vulnerable to a sharp reduction in trade, global volumes of “stuff”, and risk appetite. Credit risks are apt to rise as well, although the credit landscape in the U.S. was fairly benign at last check. It will deteriorate, either briefly or durably, with too many business models impacted by a sharp increase in costs and other supply chain challenges. Our goal at Cambiar is not to take much credit risk in general with our holdings, as it impairs the risk/reward calculation. Leaning into credit risk (if bank stocks decline further, for example) isn’t our first destination.

On the more positive side, Cambiar seeks to deploy capital into “better businesses” which are so because of durable market structure elements. These can include unique products and services, network effects from scale, unique technical requirements, or other elements that make it difficult for customers to switch away to other suppliers. Rapid drawdowns such as the last few sessions hit everything, including businesses of this sort. We will be casting a wide net to add to exposures that fit this description. At first glance, tariffs don’t change “market structures” broadly speaking. They do change relative costs and prices – extremely so in some cases. Markets and businesses can solve the problem that significant price/input changes represent given enough time and stability. We are not so sure how much stability to expect from here, adding to the challenges present in lower margined manufactured products.

Planning Horizons: An Unfortunate Casualty

Brian M. Barish, CFA

Brian Barish is the President and CIO at Cambiar Investors and is responsible for the oversight of all investment functions…

These legislative and regulatory forms of protection are unique in the world, and allow businesses to plan over far longer time horizons than is possible in most other countries. It’s one of many reasons why a preponderance of the world’s greatest technologies and advancements tend to happen in the U.S., and lies at the foundation of America’s far more “risk-tolerant” business culture than is found in most other advanced nations. Businesses can invest with an eye far into the future. This… key feature of what it means to be an American, or an American business or entrepreneur… should not change. It’s at risk of changing if Presidents can declare an emergency on specious grounds and legislate unilaterally.

Whatever form Trump’s tariff plans ultimately take, we strongly suspect major corporations will have a hard time “trusting” the stability of the prevailing environment, leading to less capex, less R&D, etc. In effect, the implied “cost of capital” for longer-term financial decisions has risen very substantially overnight. We could be mistaken here, but suspect putting this particular form of toothpaste back into the tube will not be easy. This is truly unfortunate, but a direct consequence of circumnavigating the slower and more deliberate legislative process. For these reasons and others, we tend to think courts will eventually enjoin aspects of the tariff policies unveiled on April 3. But probably not in time to avoid a lot of damage first.

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