ASM Session Discussed Economic Impact of Recent Trends in Politics and Policies

With domestic and foreign economic policies (and potentially laws and regulations) undergoing a seismic shift in the U.S. and around the world, a panel of experts gathered at ABI’s Annual Spring Meeting in Washington, D.C., on April 25 to consider the business impacts of tariffs, trade policies, tax reform, changes in the regulatory environment, and disruptions in both the public and private sectors. Given the rapid pace of proposed and actual changes, the panelists offered a snapshot of current events at the time of the session and explored areas of increased or potential financial distress.

Ted Gavin of Gavin/Solmonese LLC (Wilmington, Del.) moderated the expert panel, which featured John Bringardner of Debtwire (New York), Prof. Susan Franck of American University Washington College of Law (Washington, D.C.), Rafael Klotz of The Brattle Group, Inc. (Boston) and Gabriel Esteban Lopetegui, former executive director of the International Monetary Fund (Washington, D.C.). The following provides a brief summary of their discussion.

Tariffs and Historical Context

Kicking off the discussion, Gavin said that the Trump administration’s reciprocal tariff strategy (at the time of the conference) aimed to increase the effective tariff rate from around 2.5 percent to an estimated 29 percent — a level not seen since the start of the 20th century. “The general sense is that the new tariff scheme is a tool to get parties to the negotiating table in hopes of striking a grand deal, which could include large bond purchases by our trading partners,” Gavin said in his opening comments. However, Gavin pointed out that the tariff policy unveiled on April 2 had led to a precipitous drop in the stock markets and clouded economic outlooks.

Prof. Franck then provided historical and legal grounding, focusing on trade policy’s inconsistency across political lines. “Since the founding of our country, international trade regulation has never been reliably associated or aligned with any one political party,” she said. Referencing one of the more challenging moments in U.S. trade policy, she referenced the 1930 Smoot-Hawley Tariff Act and how those tariffs, made famous in a scene featuring Prof. Ben Stein in Ferris Bueller’s Day Off, deepened the Great Depression.

She cautioned that contemporary models fail under extreme conditions like 125 percent reciprocal tariffs. “There’s no automatic stay for economic pain,” Prof. Franck said, stressing the inadequacy of traditional economic models to handle current shock levels.

Macroeconomic Impacts

Lopetegui analyzed global economic indicators, citing April IMF projections showing U.S. economic growth expectations being cut nearly a full percentage point to 1.8 percent for 2025. He emphasized that “models tend to work well when you have shocks at the margin,” but fundamental rule changes — like widespread tariffs — make these models unreliable. Lopetegui warned of high economic uncertainty stalling business investments and consumer spending. “A world that is more protected everywhere is a world that probably is going to grow less, because it loses the dynamic gains of deeper trade,” he said.

On monetary policy, Lopetegui said that the Federal Reserve faces a double bind: tariffs raise production costs while also lowering output. The Fed’s dual mandate — stable prices and full employment — could become an even more difficult challenge.

Capital Markets and Lending Environment

Taking the perspective of the lender and the business looking for capital, Klotz examined the current lending environment, focusing on valuation uncertainty. “Uncertainty creates a tremendous reduction in liquidity,” he stated. The number of policies and subsequent changes that have taken place since the beginning of the year “makes it literally impossible for anyone to reasonably plan,” according to Klotz. “No project finance lender would get into a new deal without knowing the risk,” he added.

One particular sector that Klotz examined was the automotive industry. With car parts continually crossing North American borders, he cited economic estimates saying that some of the proposed new tariffs could dramatically increase the average price of a car by potentially $25,000 to $30,000. “Even if the estimates are widely wrong by 50 or 70 percent, you still have massive impact on one of the most important industries,” Klotz said.

He also warned that the proposed policies would impact the lending industry. For asset-based lenders, he said that the underwriting of risk is going to be difficult, as loans that were typical just a few years ago will be much harder to obtain in the current economic environment. “If I’m having to testify on evaluation, the level of uncertainty creates just massive reduction in asset values in business realm,” Klotz said.

Stress in Business and Financial Markets

Bringardner began his segment by predicting that first-day motions in bankruptcy filings that had been blaming the impact of the COVID-19 pandemic are likely going to be shifting the causes for distress on tariff-related challenges. Bringing the perspective of his publication’s coverage of nearly 50,000 leveraged-loan and high-yield-bond issuers, he said that about 1 percent were already classified as distressed.

Bringardner said that companies most vulnerable include those importing finished goods from China, especially retailers and restaurants. Shipping slowdowns due to halted Chinese exports were already affecting trucking and intermodal freight, and he said that these effects would soon ripple through supply chains. “I think it’s far too soon to predict another wave of distress there, but these elements are bubbling up,” Bringardner said.

He predicted that private credit funds might fill gaps left by shuttered public credit markets, but added that many firms might not survive. Bringardner said that businesses that rely on goods coming from China, especially small businesses and retailers, would be impacted first, as they “will not have goods to sell because those shipments have stopped.”

International Trade Policy and Legal Framework

Prof. Franck returned to analyze the policy implications of using national security as a justification for tariffs. She said that international economic law and national security have traditionally been separate but have recently been intertwined. “International economic law is not just tariffs; tariffs are a small slice of the cake,” Prof. Franck said. “There’s non-tariff barriers, there are services, there’s a whole bunch of different things that relate to international economic law. But right now, there’s always an exception in international law agreements for national security.”

Since national security exemptions in trade agreements are self-judging, no international body can challenge their use — making global coordination difficult. “We’re using national security as a concept to basically buttress a whole bunch of other changes that are happening through the economy,” Prof. Franck said.

Global Realignments

Prof. Franck and others on the panel noted the international shift away from reliance on U.S. security and trade guarantees. “If countries don’t think that they can trust us to be part of their national security regime, just think what they’re going to do with international economic law,” Prof. Franck said.

She noted that from a business perspective, both democracies and autocracies offer predictability, albeit through different mechanisms. Democracies have replicable legal processes; autocracies have centralized decision-making. However, when meandering between the two systems, “you can’t price risk,” Prof. Franck added.

This comment sparked discussion on the implications of deals-based governance, as opposed to rules-based, being inherently unstable. Bringardner added that without a predictable policy and regulatory roadmap, companies would have a difficult time justifying investments in factories or operations if policies could shift in just a few years.

On a question about the U.S.’s reliance on Chinese goods, Lopetegui pointed to the problem of imbalance in economies. “In China, consumption as a share of GDP is very low and saving rates are overly high,” he said. “China has spent a lot of money developing the industrial complexes that export rather than in supporting incomes of the households for the consumption to increase. What they produce is consumed here [in the U.S.]. If you can’t rebalance that, [then] the U.S. will have to do its part, which is to cut the fiscal deficit. You will have less of a surplus in China and less of a deficit in the U.S.”

However, Lopetegui cautioned that that discussion has been going on for many years in economic and political circles because the measures needed to promote this rebalancing are not easy, and there are many political economic issues, interest groups and other factors. “What the U.S. is suffering [from] in terms of export from China is also happening in other places like Europe,” Lopetegui concluded. “So it’s not only the U.S.”

Be sure to visit cle.abi.org to access a replay of this session. Looking to join in-person discussions on the impact of trade policies on restructuring? ABI events in the coming months will feature expert panelists providing updates on developments, so be sure to visit abi.org/events and register for a program near you!