2025 Perspectives in Private Equity: International Trade Regulations & Tariffs
If there is one thing that we can be sure of as the new administration settles into the White House, it is that there will be a heightened focus on, and more aggressive use of international trade regulatory, enforcement and policy tools in 2025. At a high level, the new administration enters the White House with a clear remit on trade, promising to institute higher tariffs targeting substantial markets such as China, Mexico and the European Union (EU). President Trump has already used tariff threats to pressure Canada, Mexico and Colombia, with substantial repercussions for global markets. Additionally, we can expect more strategic and sectoral use of trade policy, with some of the big moves on tariffs being framed in the context of revenue raising to help fund extended tax cuts on the U.S. domestic front.
For private equity (PE), this shift represents a pivot point that puts a high premium on evaluating and understanding potential legal exposure and business risks for investment funds, investment targets and existing portfolio companies with respect to evolving impacts of U.S. trade regulation. Particularly in the context of doing deals, PE sponsors can address these considerations by calibrating due diligence to effectively identify evolving trade risks shaped by new priorities of the Trump administration and updating contractual protections to safeguard their interests and provide a sound basis for a nimble response should related legal and business challenges arise.
By understanding and anticipating international trade as a gating consideration and integral element of market strategies from the outset in evaluation of investment opportunities and ongoing portfolio management, investment funds can track, map and adapt supply chains of investment targets and established holdings to more effectively manage fluctuations in market supply or restrictions on access to foreign markets driven by escalating tariffs and retaliatory measures. In the new U.S. trade environment, doing so will be more important than ever to mitigate, manage and leverage business risk and generate a higher return on investment.
Background
Over the past four years, the Biden administration was characterized by a cautious approach to all aspects of U.S. trade policy. It pursued fewer trade enforcement actions, achieved relatively little meaningful progress in trade agreement negotiations and maintained tariff burdens established by the preceding Trump administration on imported Chinese goods, and global steel and aluminum. The Biden era did produce a substantial increase in U.S. coordination of U.S. trade measures with major U.S. trading partners and allies, including in Europe, especially in the deployment of export controls and sanctions as instruments of U.S. foreign, national security and economic policy, and in response to China’s overcapacity, interest in asserting control of sensitive sectors and safeguarding interests in U.S. technologies in areas such as semiconductors and artificial intelligence (AI).
Conversely, President Trump has clearly signaled that his administration will pursue a more aggressive and unpredictable approach. Since winning re-election, President Trump has already imposed significant new tariffs against China and increased the tariff threat for Mexico and Canada. These major U.S. trading partners have responded with both initial efforts to address President Trump’s stated concerns and the promise of retaliatory measures.
In addition to wielding tariffs as both a source of leverage to induce negotiations and a means of rebalancing trade deficits, we expect the new administration to deploy a variety of tools to address alleged unfair trade practices concerns regarding China, including enforcing prohibitions on goods made with forced labor, reviewing cross-border subsidy practices and restraining the export of sensitive technology. Other regions, including Europe and Southeast Asia, may also be in President Trump’s cross hairs.
Key Considerations
This shift in the narrative of U.S. trade policy and enforcement presents both challenges and potential opportunities for private equity. On the one hand, market distortions will escalate and that will create uncertainty; on the other hand, we can expect President Trump to be an aggressive advocate for U.S. companies abroad, having forceful conversations about market access and potentially negotiating new trade agreements with the likes of the U.K. and Kenya, while seeking a better deal with Mexico and Canada, which could create upside opportunities for U.S. businesses.
Given this evolving landscape, private equity investors should consider several key factors when making investments:
- Due diligence questionnaires and processes must be updated and tailored to address both current and evolving trade risks. This includes probing more deeply into supplier and customer relationships to better understand potential vulnerabilities.
- Contractual protections should also be augmented to reflect newly enacted U.S. trade measures, as well as changes in how existing trade laws may be applied to address evolving foreign policy priorities and national security concerns. Such updates may be critical to mitigate potentially substantial trade risks.
- With the potential for increased divergence between the U.S. and its allies on their approach to global interests, along with the implementation of countermeasures, a multijurisdictional approach to due diligence and contractual protections will be crucial. This approach is essential to help effectively identify and mitigate potential liability, legal exposure and trade-related business risks across relevant jurisdictions.
- Private equity sponsors should also evaluate how the evolving trade policies and the responses of U.S. trade partners may impact their existing portfolio companies. This evaluation should take into account factors such as the companies’ respective industries, geographical footprint and involvement with emerging technologies. By identifying potential areas of risk and opportunity, sponsors can help prepare their portfolio companies for upcoming changes so they can adapt and thrive as the regulatory environment in which they operate changes shape.
Additionally, PE sponsors should consider using questionnaires and established mechanisms of governance and communication to monitor how portfolio companies address such concerns on an ongoing basis. Such action may be essential to ensure that companies manage their business effectively to stay ahead of regulatory shifts and remain compliant with shifting conditions as the trade policy, regulatory and enforcement environment continues to evolve.
