President Trump’s “Liberation Day” tariffs – Should we prepare for more financial distress and restructuring?

On Wednesday, 2 April 2025, President Trump announced tariffs on nearly all imports to the US. The markets responded with significant falls in both equity and debt markets. Market volatility has continued into this week. Our global restructuring team considers whether this could result in increased financial distress and restructuring activity.

What happened?

Following a press conference on 2 April, President Trump signed an executive order imposing "reciprocal tariffs" on nearly all imports to the US. Broadly the executive order established a universal 10% tariff on all imports from US trading partners (with a few exceptions) effective from 5 April 2025. From 9 April 2025, the tariff rates increase for a number of countries to higher individualised rates. For more detail on the tariffs see our article: President Trump’s sweeping “reciprocal tariffs” Executive Order: Key points and our tariff tracker.

The markets responded with significant falls in the equity and debt markets, though the reaction in European debt markets was more subdued than in the US. There have since been further declines in the markets and the sell off has extended into government bonds, which you may remember was something we saw following the mini budget put forward in 2022 by Liz Truss, the UK Prime Minister at the time.

Could this result in increased financial distress for businesses?

It might. There is still uncertainty around whether the tariffs will remain in their current form or if negotiated trade deals will alter the position. There is also uncertainty as to where in the supply chain the costs of the tariffs will end up being absorbed, which may not be the same for all sectors.

It is also unclear when markets will stabilise or what the ultimate macroeconomic consequences of the recent market volatility will be. Market volatility causing investors to derisk and sell all at the same time can exacerbate the decline in value leading to further issues. It is too early to say if we are headed for a financial crisis or recession, but economic commentators have been mooting the possibility.  That in itself may affect consumer confidence and impact businesses reliant on discretionary spend, such as those in the hospitality and leisure or retail sectors, where we have already seen distress prior to the tariff announcements.

What should debtors be doing now?

Some companies may have begun contingency planning or taken precautionary measures to mitigate the impact of tariffs before the 2 April announcement. Others may be beginning that process now.

Businesses will need to consider supply chain risk, and where in the supply chain the tariff costs will be absorbed. How much of the cost will be passed on to the ultimate user? Will some be borne by manufacturers through negotiations of lower prices for supply? This will be a careful balance as if too much cost is left with a part of the supply chain that cannot absorb it and remain profitable, we may begin to see failures. Changes to the supply chain, for example moving manufacturing away from countries where higher tariffs have been imposed also has the potential to result in failures of businesses which lose an income stream for exports to the US. Those businesses which don't have a high concentration of business with the US may fare better in this scenario. 

From a finance perspective, covenants may be affected by the fall out from the tariff announcements, so covenant compliance should be monitored closely.

Sectors which may see increased distress

Automotive and retail (particularly of clothing and footwear) are examples of two sectors where we can see potential for distress. Both sectors have already been distressed and these tariff changes will increase the pressure.

For the automotive sector, a 25% global tariff on imports to the US has been established. The automotive industry already faces challenges, including the move to electric vehicles. This additional burden may mean we see further distress.

Retailers have also faced challenges including changes in consumer behaviour requiring right sizing of leased premises portfolios. Some of the higher tariffs are on countries such as Vietnam (46%), Cambodia (49%), Sri Lanka (44%) and China (84%) which have significant clothing and footwear manufacturing operations exporting to the US. This presents an additional challenge for the clothing and footwear retail industry.

Other sectors which could be affected are: shipping and transportation, if global trade levels decrease; the steel industry, where a 25% tariff applies and again there has already been distress; and infrastructure, if tariffs result in higher prices for materials.

Contact our Restructuring professionals

Experience shows that early engagement with restructuring advisors is key to achieving the most successful outcomes following financial distress. If these tariff changes negatively impact your business, please get in touch with one of the authors.

With 200 lawyers across the Americas, Asia Pacific, Africa, Europe and the Middle East, the DLA Piper Global Restructuring Group is ready to support our clients in whichever markets they do business. We have the knowledge, experience and resources to address our clients’ restructuring and insolvency needs on a national and international basis.