NEW YORK September 2, 2025: Successful investing is the art of filtering out noise so that you can focus on signals leading to long-term gains. But how do you do that when markets are constantly jolted by changing tariffs—and shifting sentiment about their potential impact?
While there is no definitive strategy, the past offers some valuable clues about what to watch out for. As Mark Twain said, history doesn’t repeat itself, but it often rhymes. In this post, we will take a brief look at tariffs and trade restrictions over the past few decades and offer insights about their possible impact on today’s interest rates and default risk.
Post WWII to 1994: From Tariffs to Trade Restrictions
Global tariffs during this period were falling due to various GATT negotiations. By the late 1990s, average tariffs among GATT participants had plummeted from around 22% in 1947toless than 5%. At the same time, non-tariff barriers were being imposed in the form of quotas, licensing requirements, and state trading practices to restrict U.S. exports. For example, Japan, South Korea and the EU often restricted U.S. agricultural goods and pharmaceuticals by imposing health and safety standards. Following the Soviet invasion of Afghanistan, the U.S. embargoed grain exports to the USSR—which in turn closed its markets to U.S. exports in response. So while tariff regimes were falling, trade was not free and fair—it was simply subject to other means of control and influence.
1990s: International Organizations and Dispute Resolution
Establishment of the WTO in 1995 led to a decline in tariffs on U.S. goods across many countries. Nevertheless, American beef, poultry and biotech crops faced EU barriers and restrictions. The U.S. filed and won numerous WTO cases, including one that nominally ended the EU’s ban on hormone-treated beef ban, but the ban remained in place despite the WTO ruling. Subsidies, local certification rules, quotas, import licensing, and cultural protections were all used to restrict trade. They were mostly aimed at restricting the import of U.S. goods or services.
NAFTA took effect in 1994 to promote economic cooperation among Canada, Mexico, and the U.S. One of its goals was to enhance trade among the three partners, including reducing non-tariff barriers and restrictions.
2000’s: China’s Rise, Protectionism, and Strategic Competition
In July, our monthly commentary reviewed the evolution of trade with China to competition between the two nations. In 2001, China joined the WTO and opened its markets to U.S. goods—but barriers in the form of quotas on U.S. agricultural products and opaque regulatory approvals remain, especially for tech and media.
The hope was that global trade restrictions would ease over time, but non-tariff restrictions remained in place, and the U.S. resorted to selective tariffs to try to even the playing field. Steel tariffs were put in place by Bush in 2003-2005 but rescinded when the EU threatened over $2 billion in retaliatory tariffs. In response to the Obama-era tariffs on Chinese tires, China imposed tariffs on U.S. poultry and auto parts in 2009.
During the first Trump administration, China retaliated with tariffs on nearly all U.S. exports. The EU, Canada, Mexico, and other nations also retaliated against U.S. steel and aluminum tariffs. This is just a very brief summary of trade actions. In general, the U.S. imposed tariffs and the EU, China, and other nations responded with non-tariff restrictions placed on U.S goods and services.
These sustained barriers evolved into strategic competition and protectionism. The Biden administration kept most of the Trump-era tariffs in place, especially with respect to China. Following Covid, much of the public dialog shifted to supply chain resiliency and “friendshoring.” In fact, the Biden administration increased tariffs on EV’s, semiconductors, and critical minerals.
Under the current Trump administration, tariffs are being used as a blunt force weapon to remake trading rules. Markets are confounded by the inability to predict when tariffs may be imposed, modified, or suspended, depending on the status of trade talks. Since markets hate uncertainty, the result is increased volatility. But regardless of day-to-day announcements, it is clear that tariffs—which displayed a downward trajectory from the end of World War II through 2017—are once again rising.
The Current Tariff Situation: Moving into Uncharted Territory
Classical and neoclassical trade theories both describe rising tariffs as negative, since they reduce comparative advantage and cause deadweight loss as consumers pay more. Historically, tariffs have protected domestic industries from competition while they were still in a nascent stage. Normally, these countries and industries were relatively small compared to overall global trade volumes. But given that the U.S. is the largest global economy, predicting the effects of tariffs becomes an exercise in modeling, since there are not scenarios that can be built from historic occurrences. The U.S.-China trade war of 2018-2019 is the only recent real-world example, but it was limited in scope and duration compared to what we are currently experiencing.
Non-tariff restrictions hurt U.S. exports but also amount to a tax on consumers in the country that limits trade. The use of broad tariffs as a response not only risks retaliatory tariffs, but also imposes a tax on imports. Regardless of whether the importer absorbs some part of the tariff or passes it to the end consumer, make no mistake: It is a tax, which translates into lower corporate earnings, higher prices, or both. Of course, the goal of the current tariff policy is to increase domestic production but very few products today are created with totally domestic resources. Corporate retooling will take time, money and effort, and the results are uncertain. Markets primarily respond to near-term events with greater probabilities of certainty.
How do tariffs impact interest rates? Economic theory gives us the Taylor Rule, a formula to set interest rates based on inflation and economic output. To the extent that tariffs are inflationary, they imply a need for higher interest rates. To the extent that they reduce corporate earnings, they imply lower levels of investment and slower economic growth. This conundrum, along with the uncertainty about timing and results, is causing the volatility we are witnessing in the markets today. It is likely to persist until the global trading reset plays out, allowing investors, manufacturers and consumers to adjust to the new global rules.
Another variable is tariffs’ impact on employment. While recent employment numbers have been weak and salary increases have been muted, the unemployment rate remains low. Depending on your point of view, you could conclude that interest rates need to remain high to offset inflationary risks—or that they should be lowered to support employment and reverse eroding purchasing power.
Yet another factor that enters the tariff question is currency valuations. Exchange rates can amplify or offset the effects of tariffs. For example, a strong dollar can offset the effect of a tariff on imports. Often, we see a country depreciate its currency relative to the dollar in order to offset a small rise in tariffs. But given the magnitude of the tariffs that have been announced, it is unlikely that currency fluctuations will have a material effect on offsetting them. It is more likely that currency movements will reflect global capital flows, depending upon whether or not tariffs are seen as a threat to growth.
Tariffs and Credit Default Risk
Though there is no precedent for today’s tariff situation in its entirety, there is plenty of empirical evidence about the typical effects of its components, as you can see in Table 1. While tariffs are not credit events themselves, they can raise default risk because of their effects on economic growth, inflation, interest rates, and the creation of fiscal and market uncertainty.
Table 1: Triggers for Tariffs and Their Effect on Economic and Credit Risks
Despite the uncertainty around tariffs and interest rates, markets, continued to perform well in August, despite a small pullback at month’s end. Credit markets also continued to perform well. While tariffs and geopolitical developments represent high default risks actual defaults continue to be driven by company-specific triggers. As you can see in Table 2, the median 3-year default probability for all sectors are lower now than they were at year-end.
Table 2: Median 3-year Cumulative Probability of Default for Top 3000 US Companies
Contemporaneous Credit Conditions
The Kamakura Troubled Company Index® closed the month at 6.71%, down 0.32% from the prior month. The index measures the percentage of 42,500 public firms worldwide with an annualized one-month default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.
At the end of August, the percentage of companies with a default probability between 1% and 5% was 4.99%. The percentage with a default probability between 5% and 10% was 0.92%. Those with a default probability between 10% and 20% amounted to 0.62% of the total; and those with a default probability of over 20% amounted to 0.18%. For the month, short-term default probabilities ranged from a low of 6.63% on August 25 to a high of 7.39% on August 5.
Figure 1: Troubled Company Index®, August 29, 2025
At the end of August, the riskiest 1% of rated public firms within the coverage universe as measured by 1-month default probability included eleven companies in the U.S. and one in France. QVC Group, Inc (NASDAQ:QVCGA) remained the riskiest rated firm in our universe, with a 1-month KDP of 58.51%–up 11.94% over the past month.
Table 3: Riskiest Rated Companies Based on 1-month KDP, August 29, 2025/
The Expected Cumulative Default Rate, the only daily index of credit quality of rated firms worldwide, shows the one-year rate of 0.44% down 0.03% from the prior month, with the 10-year rate down 0.27% at 6.99%.
Figure 2: Expected Cumulative Default Rates, August 29, 2025
About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 42,500 public firms in 76 countries that have an annualized one-month default risk of over one percent. The average index value since January 1990 is 13.94%. Since July 2022, the index has used the annualized one-month default probability produced by the KRIS version 7.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.
The KRIS version 7.0 models were developed using a data base of more than 4 million observations and more than 4,000 corporate failures. A complete technical guide, including full model test results and key parameters, is provided to subscribers. Available models include the non-public-firm default model, the U.S. bank model, and the sovereign model.
The version 7.0 model was estimated over the period from 1990, through the Great Recession and ending in February 2022. The 76 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.
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Editorial contacts:
- Martin Zorn – Martin.Zorn@sas.com
- Stas Melnikov – Stas.Melnikov@sas.com