Tariffs have been front and center for investors, companies and governments since the 2024 U.S. presidential election. The Trump administration’s new trade policy is not only creating uncertainties for the global economy and markets, but also accelerating the shift to a multipolar world, in which national security takes precedence over the efficient flow of goods and services throughout the global economy.
The heightened focus on tariffs is forcing companies to speed up efforts to diversify their sources of raw materials and intermediate goods. In doing so, they face slower, costlier and riskier outlooks, with far-reaching implications for economies and financial markets.
“The last few months in particular have made it very clear that policymakers, starting with the U.S., want to promote their visions of national and economic security through less open commerce and more control of supply chains and key technologies,” says Michael Zezas, Global Head of Fixed Income and Public Policy Research at Morgan Stanley.
The multipolar theme is playing out in very real terms, posing a persistent risk to company profits and balance sheets, and at the macroeconomic level, slowing growth and boosting inflation.
More Pressure on Companies
Events such as the U.S.-China trade tension in the first Trump administration, the Covid-19 pandemic and the invasion of Ukraine by Russia exposed supply-chain vulnerabilities. Companies started reorienting their sources of goods to adapt to changing policies.
In the first phase of the multipolar rewiring, some productive capacity moved to places like Mexico and India, mainly by the expansion of businesses or productive capacity in segments that already existed.
“The prior phase of the transition to a multipolar world was likely the easiest for companies, because it involved sectors that preexisted in those economies,” says Morgan Stanley Senior Global Economist Rajeev Sibal.
Now, the multipolar world has entered a second phase, with more pressure for productive capacity migration. With its new trade policy, the Trump administration wants both local and international companies to step up announcements of investments in the U.S.
“Companies will have to start producing in countries that are not traditionally associated with the manufacturing of some goods. And that completely changes the risk,” Sibal says. “If you don't already have labor or capital investments in those economies, it’s going to take a lot longer to make the decision to produce in that country.”
Expensive and Lengthy Solutions
Shifting production closer to the U.S. or to countries with fewer trade barriers is a complex decision that involves considerations around supply chain, labor, market competition and geopolitics. It’s especially difficult to relocate production for high-tech and specialized goods.
In Mexico, for example, producers of electrical machinery have seen significant growth in exports to the U.S., but exports for more complex IT hardware have lagged.
“Our supply chain data show that, across many goods, dependence on China and other geopolitically distant exporters cannot be easily reduced,” Sibal says. “These challenges imply that solutions will take years, not months, and costs could remain elevated in the interim.”
Higher Inflation and Lower Growth
The current phase of supply chain restructuring could have a broad impact on the global economy, as companies may be more likely to pass the higher costs that result from their investments on to consumers.
“The main change relative to prior phases of near shoring is that in earlier phases, margins absorbed a good amount of these costs,” says Morgan Stanley U.S. Equity Strategist Andrew Pauker. “In today's environment, firms are indicating that they have less capacity and less willingness to take that on.”
As investment decisions become slower and more difficult while costs increase, the new multipolar world exacerbates risks of slower growth and higher inflation.
“Because production cannot shift quickly, higher costs from tariffs and other trade barriers will come into play,” Sibal says.
Investment Opportunities
Despite higher costs, some industries are well-positioned to cope with the growing supply chain strain across different regions.
“In the U.S., services sectors such as financials, software, media and entertainment, and consumer services will fare better than consumer goods,” says Pauker.
In the Asia Pacific region, aerospace and defense, capital goods, and critical minerals have a better chance of weathering the change, according to Morgan Stanley Research.
In Europe, companies that derive most of their revenue from beyond the continent face significant exposure to U.S. tariffs. European companies with local-to-local production capabilities in the U.S., such as pharmaceuticals, defense and energy, will fare better than those that export to the U.S., such as medical tech, biotech, life sciences and aerospace.
“The transition to a multipolar world and the resulting supply chain strain will create both challenges and opportunities for investors,” Zezas says. “Companies’ success will depend on their ability to navigate complex geopolitical relationships, manage increased costs and adapt to changing production landscapes across regions.”
