President Trump’s tariffs: six questions for private equity investors

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the proposed tariffs and other cross-border policy developments on the horizon.

1. How will U.S. policy impact M&A activity at the portfolio company level (e.g., follow-on acquisitions, potential sales)?

Tariff uncertainty may have a dampening effect on M&A activity in Canada and the United States. Sellers may opt to defer transactions, with prospective buyers likely to show greater caution as they assess trade implications for targets. Those deals that will proceed may see lengthier diligence periods, and more guardrails put in place (e.g., earnouts, contingent payments, changes to MAE clauses and indemnities) to adjust for risk. Canadian and U.S. companies reliant on trade will face growing pressure from the uncertainty posed by tariffs, which may lead to discounted valuations. For public companies, depressed valuations may give rise to activism and potentially unsolicited bids.On the flip side, tariff-immune businesses may command premiums.

2. What should PE sponsors and pension plans prepare for in anticipation of proposed M&A activity in the pipeline for 2025? (e.g. more due diligence, longer closings, earn-outs, etc.)

At this time, there is significant uncertainty regarding what specific measures will be implemented by the Trump Administration. Various government departments are tasked with reporting back to President Trump by April 1 on how to address perceived “unfair” trade practices, though it is possible that certain measures will be adopted sooner. With a high degree of uncertainty for the next several months, some buyers may wish to consider extending transaction timelines, closing conditions/termination rights tied to the adoption (or the impact) of tariffs or earnout structures.

3. Will the proposed tariffs impact services businesses? If so, how should services businesses mitigate risk?

So far, President Trump’s focus appears to be primarily on tariffs on goods. However, the scope of potential trade-related measures may expand to address services. One of the areas of review due on April 1 includes assessment of the United States-Mexico-Canada Agreement (USMCA)—specifically, the agreement’s impact on American workers, farmers, ranchers, service providers, and other businesses. As USMCA covers trade in goods, as well as many other sectors, including services, government procurement, digital trade, we may see implications emerge for trade in services. USMCA review is scheduled for July 2026, though the Trump Administration may seek to accelerate it.

4. What factors should services and manufacturing businesses consider in selecting the jurisdiction of providers across their supply chains, and the location of their business and production lines?

It is too early to identify the jurisdictional scope and duration of proposed tariffs. We are seeing Canadian businesses respond to broad uncertainty by undertaking an analysis of options across jurisdictions in the short and medium term so they can nimbly adapt as trade and tariffs developments unfold. Potential options for Canadian businesses include: a) substituting existing activities in the United States with activities in more stable free-trading jurisdictions with which Canada has agreements, including the EU, and through the CPTPP countries; and b) locating or relocating certain activities (including using existing subsidiaries) to the United States to avoid tariffs.

5. How will U.S. policy affect transfer pricing?

The contemplated Trump Administration policies are likely to adversely affect transfer pricing within multinational groups. The arm’s-length pricing principle, which ensures that taxable profits reflect economic activity, will face challenges as countries like Canada and the U.S. vie for remaining group profits. Canadian subsidiaries, often rewarded on a cost-plus basis, may struggle to maintain profitability if tariffs force them to reduce prices. U.S. parent companies might argue that tariff costs should be shared, but this could lead to increased scrutiny and audits by revenue authorities. Multinationals will need to document and justify any changes in pricing methodologies to navigate these challenges effectively.

6. Other knock-on effects of tariffs?

Tariffs and retaliatory tariffs raise prices. Price increases could portend a resurgence of inflation, which in turn could mean higher rates and higher borrowing costs (or, at least, the hoped-for rate relief being delayed further). Portfolio companies should brace for the possibility of higher financing costs in the near term, including making sure that they stay on-side any maintenance covenants in their existing credit agreements. They may also consider availing themselves of the otherwise favorable financing markets to execute re-financings that were pushed off in hopes of a more favorable rate environment.

 
Read more Tariffs and trade briefs.