Navigating tariff wars: managing investment risks and lessons from global supply chain resilience

As global trade tensions escalate, the threat of a new tariff war is again at the forefront of investor concerns. Tariff wars, by their nature, introduce systemic risks that ripple through financial markets, supply chains, and economic growth trajectories. For investors, these risks are not just theoretical—they manifest in heightened market volatility, disrupted corporate earnings, and structural shifts in global trade flows.

However, history provides critical lessons on resilience. The extraordinary adaptability of Ukraine’s supply chains amid a full-scale war with a nuclear power serves as a powerful case study. Despite facing existential threats, Ukraine managed to maintain key exports, particularly in agriculture, demonstrating that even the most fragile systems can adjust under pressure. This article examines the risks that tariff wars pose to investment portfolios, outlines our strategies for mitigating these risks, and explores the broader lessons of systemic resilience that shape our long-term investment outlook.

The risks of a tariff war: a systemic shock to global markets

Tariff wars disrupt the global economy in multifaceted ways, creating both direct and indirect risks for investment portfolios. Supply chain disruptions are often the most immediate consequence. Tariffs force companies to reassess and restructure their supply chains, leading to increased production costs, inventory challenges, and delays. For example, during the US-China trade war in 2018-2019, companies like Apple and General Motors faced significant disruptions as costs rose due to tariffs on key components. This led to production delays, margin compression, and increased capital expenditures to realign supply chains. Industries reliant on global manufacturing—such as technology, automotive, and consumer goods—are particularly vulnerable as these inefficiencies compress profit margins and erode competitiveness.

Earnings volatility is another direct consequence. The uncertainty surrounding trade policies makes it difficult for companies to forecast costs and revenues, leading to unpredictable swings in corporate performance. Companies with significant cross-border exposure face fluctuating input costs, shifting consumer demand, and foreign exchange volatility, all of which can dampen investor confidence and compress valuations.

Geopolitical tensions are often both a cause and a consequence of tariff conflicts. As trade disputes escalate, they can trigger broader diplomatic rifts, retaliatory measures, and even sanctions, amplifying risks related to political instability and market disruption. Over time, persistent trade conflicts can fragment global trade systems, reducing efficiency and increasing operational risks for multinational corporations. This shift towards de-globalization has long-term implications for economic growth, capital allocation, and investment strategy.

Mitigating tariff war risks in our Portfolios

Our investment philosophy is grounded in robust risk management, strategic diversification, and dynamic portfolio construction. To address the specific challenges posed by tariff wars, we employ several targeted strategies that are seamlessly integrated into our investment process.

Diversification remains our first line of defence. By allocating capital across multiple regions, sectors, and asset classes, we reduce exposure to localized economic shocks. Our multi-manager approach, combined with exposure to both developed and emerging markets, helps us maintain resilience in the face of global trade disruptions.

Our active investment strategies - emphasize companies with agile supply chains. Firms that can adapt quickly—whether through nearshoring, multi-sourcing, or leveraging technology for supply chain optimization—are better positioned to navigate the complexities of a shifting trade landscape. Companies like Taiwan Semiconductor Manufacturing Company (TSMC), our largest holding in most international equity portfolios, demonstrated resilience during past trade tensions by diversifying production across multiple geographies, thereby mitigating the impact of region-specific tariffs. Adaptable companies like TSMC often gain competitive advantages during periods of disruption, capitalizing on opportunities while less adaptable peers struggle.

Currency risk management is another critical component of our approach. For fixed income investments, we fully hedge currency exposure to eliminate the impact of foreign exchange volatility, ensuring that returns are driven by credit and duration risks rather than currency fluctuations. Conversely, we do not hedge currency exposure in our global equity portfolios. This deliberate choice reflects our view that Canadian dollar depreciations often enhance returns on foreign equity investments, providing a natural diversification benefit. Historically, during periods of global economic stress—such as the 2008 financial crisis and the early stages of the COVID-19 pandemic—the Canadian dollar tended to weaken, acting as a tailwind for global equity performance in Canadian dollar terms.

Additionally, we incorporate rigorous scenario analysis and stress testing into our investment process. By modelling the potential impacts of various trade conflict scenarios, we can proactively adjust portfolio exposures before disruptions materialize. This forward-looking approach allows us to manage risks dynamically, enhancing our ability to preserve capital and capture opportunities in volatile environments.

Global systemic resilience: lessons from Ukraine

While tariff wars present formidable challenges, they also highlight the inherent resilience within global systems. We need not look back far in history for an example of resilience in the face of supply chain disruptions.Ukraine’s ability to maintain critical exports during its war with Russia offers profound insights into supply chain adaptability and economic recovery.

Faced with blockades of key Black Sea ports, Ukraine swiftly redirected its grain exports through overland routes and alternative maritime channels. This rapid reconfiguration ensured the continuation of critical food supplies to global markets, even amid active conflict. Ukraine’s success was not achieved in isolation; it was bolstered by coordinated efforts with international partners. The establishment of the Black Sea Grain Initiative, brokered by the United Nations and Turkey, exemplifies how multilateral cooperation can stabilize supply chains during crises.

Technological adaptation also played a critical role. Ukrainian businesses leveraged digital tools to manage logistics, monitor supply chain disruptions, and maintain financial operations under extreme conditions. This underscores the growing importance of technology in building resilient economies, where real-time data and agile systems can make the difference between survival and collapse.

Despite the war’s devastation, Ukraine’s economy demonstrated remarkable flexibility. Businesses adjusted production priorities, secured alternative financing, and maintained key industries, reflecting the broader principle that economic systems, while vulnerable to shocks, possess intrinsic mechanisms for recovery and growth. This adaptability serves as a testament to the resilience of global markets, even in the face of profound disruption.

The long-term outlook: resilience as a strategic advantage

Tariff wars, like geopolitical conflicts, are stress tests for the global economy. They expose vulnerabilities but also catalyze innovation, adaptation, and strategic realignment. For investors, the key takeaway is not just to survive these disruptions but to identify and capitalize on the opportunities they create.

As supply chains diversify, emerging markets that offer cost-effective manufacturing, political stability, and favourable trade agreements are likely to attract increased investment. Vietnam, for example, experienced a surge in foreign direct investment during the US-China trade war as companies sought alternatives to Chinese manufacturing. These regions may become new hubs of global commerce, benefiting from shifts in trade dynamics and foreign direct investment.

Industries focused on supply chain technology, renewable energy, and critical infrastructure are well-positioned for long-term growth. As companies and countries seek to build more resilient systems, investments in automation, logistics, and sustainable energy will play an increasingly central role in economic development. The rapid adoption of technologies like blockchain for supply chain transparency and AI-driven logistics optimization highlights how innovation can turn disruption into competitive advantage.

In the Canadian context, a potential silver lining of escalating trade tensions is the renewed focus on domestic infrastructure development. For years, Canada’s ability to fully capitalize on its most valuable commodities—whether in natural resources, agriculture, or energy—has been constrained by infrastructure bottlenecks that limit access to global markets. A trade war could serve as the catalyst needed to accelerate investment in transportation corridors, port capacity, and energy infrastructure. This shift would not only strengthen Canada’s competitive position globally but also unlock new economic opportunities, enhancing long-term growth prospects and diversifying the economy’s reliance on traditional trade routes with the US. The ability to pivot towards broader international markets could become a defining feature of Canada’s economic strategy in the face of evolving global trade dynamics.

While globalization is evolving, it is far from over. Regional trade blocs, localized manufacturing, and resilient supply networks could define the future. This shift toward regionalization offers both challenges and opportunities, requiring investors to adapt their strategies to a more complex, multipolar world.

The path forward

The risks posed by tariff wars are significant, but they are not insurmountable. Through disciplined risk management, strategic diversification, and an emphasis on resilience, we are intentionally positioned to navigate these challenges. The lessons from Ukraine’s extraordinary adaptability remind us that even in the face of profound disruption, economies can recover, evolve, and thrive.

For investors, the focus must be on building portfolios that are not just diversified but designed to adapt—anticipating change, mitigating risks, and seizing opportunities in an increasingly complex global landscape.

As global markets shift, Canada faces a critical choice: will we rise to meet the infrastructure demands needed to unlock its full economic potential? Or will we miss the window opened by trade realignment?