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Originally published in ABFJournal.
Economic nationalism has proven durable across administrations. For lenders, the real story isn’t politics but the financial strain: eroded borrower margins, unpredictable collateral values, and balance sheets stretched thin by policy-driven shocks.
Tariffs first reemerged as a centerpiece of U.S. trade policy during the Trump administration in 2018. At the time, many in finance dismissed them as political theater — headline fodder unlikely to endure. Yet those tariffs largely survived into the Biden years, signaling that economic nationalism had become more than a partisan experiment. Now, with a fresh wave of tariff hikes and new proposals on the table, tariffs are not just lingering policy — they are once again accelerating into the center of the economic debate.
Why the renewed push? The standard answer is politics: tariffs poll well with voters frustrated by globalization. But for lenders, the motivation matters less than the persistence. Tariffs have proven sticky across administrations, which means they should be treated not as a passing tactic but as a structural feature of U.S. economic policy. And when trade policy becomes structural, its ripple effects cascade into the fundamentals that lenders care most about: borrowing costs, collateral values and credit risk.
Why This Matters for Secured Finance
Whether tariffs are designed to win votes, protect domestic industries, or confront rivals, their persistence carries consequences for lenders. These aren’t abstract debates in Washington — they show up directly in loan books, spreads and collateral performance.
Rates, Inflation & Margin Pressure
Tariffs affect lenders through two separate but connected channels: inflation risk and interest rate risk.
On one side, tariffs act like a tax on imports. When input costs rise, businesses pass those increases down the supply chain. The result is margin compression for borrowers: higher costs, thinner profits and less capacity to service debt. Even if loan terms stay the same, inflation erodes repayment ability, raising credit risk and the likelihood of defaults.
On the other side, the Federal Reserve traditionally responds to tariff-driven inflation with tighter monetary policy. Higher interest rates increase lenders’ own cost of funds and push up borrowing costs for clients. Spreads can compress if funding costs rise faster than loan pricing adjusts, while borrowers face additional stress from steeper debt service. In the classic pattern, tariffs squeeze lenders from both ends — weaker borrowers and thinner margins.
A Shifting Monetary Response
Whether tariff inflation is considered “real” or not, the Fed has historically treated persistent price pressures as a reason to tighten its policy. But today’s environment complicates that pattern. Even as tariffs ramp back up, the Fed is signaling cuts rather than hikes. That divergence reflects two forces: open political pressure, with Trump already urging the Fed to prioritize growth over inflation control, and a deeper shift in how monetary policy may be framed.
Normally, the Fed’s first job is to tame inflation, even at the cost of slower growth. But the Fed also plays a less visible role: safeguarding overall economic stability. If ballooning deficits and geopolitical tensions start to test confidence, policymakers may lean toward supporting growth and liquidity rather than strict inflation vigilance. That could mean tolerating higher prices at home if lower rates are seen as reinforcing demand and projecting stability abroad.
For lenders, this creates a distortion. Inflationary pressures may persist, but the traditional buffer of higher rates may not materialize. Suppressed rates could coexist with eroded borrower margins — a dynamic that can hide credit stress until it surfaces in defaults. Fixed-rate debt may appear stable while inflation quietly eats away at borrower viability, and lending tied to import/export flows may carry added exposure if trade policy becomes the overriding priority.
Working Capital Strain and the Rise of MCA Exposure
That margin pressure, when paired with unpredictable tariff-driven cost shocks, doesn’t just weigh on earnings — it ripples directly into liquidity and working-capital management.
For manufacturers and other asset-heavy borrowers, higher input costs collide with longer fulfillment cycles and rising working-capital demands. Tariffs amplify those strains by making procurement more expensive and less predictable, leaving companies scrambling for liquidity to keep orders moving and payroll met.
In that gap, Merchant Cash Advances (MCAs) have surged from being a product previously associated with Main Street businesses into a recurring feature across portfolios. What was once viewed as a storefront financing tool is now endemic — showing up in middle-market credits, manufacturers and even sponsor-backed borrowers.
For lenders, this creates a double exposure: first, the borrower’s margins are eroded by tariff-driven cost inflation; second, the borrower’s balance sheet is quietly encumbered by high-cost, short-term obligations, which typically violate covenants, strain coverage ratios and lead to technical or even payment default. The result is that tariff-induced volatility doesn’t just show up in thinner spreads or stressed collateral. It accelerates the penetration of MCA liabilities into otherwise bankable borrowers, complicating workouts and raising intercreditor friction. At the recent Bank Special Assets Conference, one solution repeatedly raised was the use of Article 9 restructuring — a tool that can remove MCA liabilities from a borrower’s balance sheet, preserve going-concern value, and restore a viable capital structure in the face of tariff-driven pressure.
Price vs. Monetary Inflation
Some critics argue that tariff-driven inflation isn’t “real” monetary inflation, since higher prices from trade barriers don’t expand the money supply. That’s true in a technical sense — but in practice, persistent price shocks can mimic monetary inflation once they filter through wages and expectations. Rising input costs drive up consumer prices, which create pressure for higher wages, which in turn push prices higher still. Historically, the Fed has responded to that cycle with tighter policy regardless of its origin. For lenders, the takeaway is that even if tariffs don’t debase the dollar, they can still produce sticky inflationary conditions that compress margins and stress borrowers.
Collateral Volatility
In secured finance, lending depends on predictable collateral values. Whether you’re financing inventory, receivables, or equipment, the assumption is that the underlying assets can be counted on to protect the loan. Tariffs disrupt that assumption.
A container of parts that looked like strong collateral on Monday can lose value by Friday if a new tariff makes them unsellable at competitive prices. Likewise, receivables from overseas buyers can suddenly look shaky if retaliation hits cross-border trade. When a foreign buyer delays payment or defaults, an invoice that once looked like a sure thing suddenly isn’t. For lenders, that means collateral that is harder to value, harder to insure, and more likely to surprise you in the wrong direction.
During the trade disputes with China, U.S. farmers discovered that soybean contracts — normally seen as reliable receivables — could evaporate when Beijing retaliated with tariffs. For lenders financing those receivables, the collateral risk was immediate and tangible.
Industrial Policy Distortions
Tariffs rarely exist alone; they’re usually paired with government subsidies, reshoring incentives, or industry-specific protections. On paper, those supports can look like a credit backstop. In practice, they often distort markets by redirecting capital into politically favored sectors.
For lenders, the challenge is figuring out whether you are financing a sustainable business model — or one propped up by temporary government intervention. This creates bubbles of mispriced risk, especially in energy, manufacturing, and infrastructure.
Regulatory Spillovers
Finally, there’s the regulatory ripple effect. Protectionism almost always brings additional oversight, whether in the form of foreign investment restrictions, export controls, or stress test adjustments.
The logic behind export controls is straightforward: keep sensitive technologies and strategic goods out of the hands of rivals, use them as leverage in trade disputes, or ensure that critical supplies remain available at home. From a national security and policy standpoint, the rationale makes sense. But for lenders, the consequences can be abrupt and costly.
A borrower that once relied on overseas sales may suddenly lose access to its best customers. Entire industries — such as semiconductor equipment makers hit by recent U.S. restrictions on exports to China — can see their market shrink overnight. For lenders, this means covenants that looked rock-solid can weaken quickly, as revenue projections collapse and receivables lose value.
In other words: when tariffs set off regulatory dominoes like export controls, the risk profile of whole sectors can change faster than lenders can reprice.
Underwriting Policy-Driven Volatility
If tariffs and economic nationalism are treated as a structural feature of the landscape rather than a transitory policy swing, it shifts the way lenders think about risk.
In an environment where tariffs can alter the price of goods overnight, collateral tied to global trade becomes less predictable. Inventory values and receivables from foreign buyers may warrant more conservative advance rates or more frequent monitoring, not as a reaction to borrower weakness, but as recognition of policy-driven volatility.
In a setting where tariffs are linked to political durability and industrial policy, lenders should also consider the potential for funding costs to rise if market confidence wavers. Building that possibility into pricing models and liquidity planning helps ensure spreads remain resilient even if capital markets shift.
And in a market where protectionism brings regulatory spillovers — from export controls to industry subsidies — lenders are reminded that industry risk is no longer driven solely by fundamentals. Incorporating policy exposure into underwriting, stress-testing, and sector strategies becomes a way of guarding against sudden repricing events.
Conclusion
Taken together, these factors suggest that tariff-driven nationalism is best viewed as a lasting element of the credit environment. For secured lenders, the practical approach is less about predicting each policy move and more about adapting structures, pricing, and portfolio strategy to conditions that may now be permanent.
