Navigating the impact of U.S. tariffs – what infrastructure investors need to know (Part 1)

Navigating the impact of U.S. tariffs – what infrastructure investors need to know (Part 1) 

The evolving landscape of global trade, particularly the recent shifts in U.S. trade policy and its associated tariffs, is creating a complex web of risks for investors, municipalities, and businesses worldwide. Tariff changes are no longer merely a trade policy issue; they have a profound effect on private infrastructure investors, municipal bond markets, and broader economic stability. Understanding these impacts for GIIA members requires multiple considerations around the volatility in the bond market, rising project costs, shifts in global trade dynamics, and the broader geopolitical environment. 

Tariff impact on private investors 

Trump’s 10 per cent universal tariff (albeit with significant carve outs at the time of writing), targeted tariffs on Canada and Mexico, 25 per cent universal steel and aluminum tariffs, 145 per cent tariffs on China and the more recent slew of so-called “reciprocal tariffs” to over 180 countries has contributed to a significant drop in stock market valuations, pushing indices into correction territory. Despite Trump’s 90-day reprieve of the reciprocal tariffs markets have reacted and investor sentiment has soured. In fact, the 90-day reprieve is likely to have a damaging effect on deal flow, stopping any investment decision being made for the duration of the period, or until the Trump administration signals their decision. This volatility is particularly challenging for infrastructure investors, who are now at risk once again of facing the denominator effect* particularly if the U.S. is not able to de-escalate its trade war with China, and if reciprocal tariffs come back into play in early July. 

Impact on projects 

The rise in as well as threat of tariffs has driven significant increases in construction costs, particularly for essential materials like steel, aluminum, transformers, and semiconductors. This has placed private infrastructure investors at risk, as many ongoing and planned projects now face escalating costs, longer timelines, and heightened financial risks. The immediate consequence for these investors is a re-evaluation of project economics, with many facing increased CAPEX and OPEX. Projects in sectors such as energy, transport, and telecom, which rely on global supply chains, are particularly exposed to these risks. 

Infrastructure investments that were once considered strong and stable are now being delayed or restructured. The uncertainty driven by tariff policies, coupled with inflationary pressures, is forcing private investors to reconsider project timelines and financial models. As demand for trade-exposed assets like ports, highways, and freight corridors diminishes due to reduced trade flows, infrastructure projects that were reliant on optimistic economic growth projections are now being reassessed or shelved altogether.  

From a contractual perspective, current market conditions are driving changes in risk mitigation. Due to inflationary pressures over the last several years on the market, contractors have historically been hesitant to hold their bid pricing for longer than 90 days, pressuring developers and investors alike. This practice is now returning as tariff uncertainty is causing fresh concerns over inflation and supply chain disruption.  

The more enduring concern, particularly for asset managers, lies in lifecycle costs. In many P3 models, operation and management costs (O&M) are borne by the project company and not passed on to users or procuring agencies. When tariff-affected materials are needed throughout an asset’s operational life, escalating prices can erode margins and affect long-term returns. 

At the same time, there is a notable trend, encouraged by the Trump administration, of reshoring and nearshoring. This policy may boost local infrastructure investments, especially in digital networks and distributed energy systems. Interestingly, this same theme was underscored in a recent letter from four Republican Senators to Senate Majority Leader John Thune, who argued that the administration’s reshoring policy to increase manufacturing and increasing energy production as a key reason to defend the Inflation Reduction Act’s (IRA) energy tax credits. They argued that rolling back these credits would risk reversing progress on domestic manufacturing, undermining job creation, stalling development, and raising costs for American families and businesses. This is further highlighted by a recent report released by Energy Innovation, which projects that repealing the IRA would increase consumer energy bills by over $6 billion annually nationwide by 2030, a number projected to grow to more than $9 billion by 2035. On a per-household basis, that works out to an average increase in energy costs of $48 per year by 2030, and $68 per year by 2035.The study found that it would cost nearly 790,000 jobs and drop GDP by $160 billion.  

However, reshoring and nearshoring are inherently long-term processes. And while the support of these four Senators may be sufficient to block sweeping efforts in Congress to repeal the IRA’s tax credits, uncertainty remains over which incentives will ultimately be preserved. As a result, investors must carefully weigh the risks associated with long-term shifts in supply chains, market conditions, and the evolving U.S. policy landscape. 

U.S. municipal bond markets 

As tariff uncertainty shakes global trade, municipal bond markets are experiencing heightened volatility, this was particularly the case ahead of the 90-day reciprocal tariff reprieve, which affected issuers' ability to access favorable bond terms. Some experts said the disruption to the bond market may have been the main reason that Trump decided to correct course on his reciprocal tariff agenda. Industry professionals are noting that many municipal issuers are postponing or revising their debt issuance plans due to the increase in project costs and market instability caused by the tariffs. For issuers, the rising costs of construction materials and labor are leading to more cautious bond issuances, as the financial viability of infrastructure projects becomes increasingly uncertain. While some tariffs have been temporarily paused, market volatility remains high, prompting many issuers to wait for more favorable market conditions before launching new debt.  

Economic uncertainty and investor sentiment 

On a broader scale, the changes in trade policy have led to growing concerns about a potential global recession. With tariffs reducing trade flows and disrupting global supply chains, economists are revising forecasts for economic growth. This has caused investors to adopt a more cautious stance, shifting toward safer, more stable investments, and increasing their cash holdings. For municipal bond investors, this shift is particularly evident in the move away from riskier, infrastructure-related investments that rely on international trade or materials. 

As volatility continues, private infrastructure investors face greater challenges in decision-making, with many choosing to delay investments or renegotiate terms with contractors and suppliers. The result is a more selective investment environment where the risk of undertaking large-scale projects is now significantly higher. 

Private infrastructure investors need to adopt flexible, proactive strategies to navigate the current uncertainty. Recalibrating risk profiles and reassessing the economics of ongoing and future projects are crucial steps. Some sectors, such as digital infrastructure and renewable energy, may be more adaptable to these changes, while traditional sectors like core transmission grids will require more comprehensive de-risking strategies. 

Beyond Trump’s 100 days: preparing for the unknown 

The first 100 days of President Trump’s second term have been marked by dramatic changes in U.S. trade policy and the associated tariffs have significantly altered the global investment and economic landscape. For infrastructure investors looking beyond this milestone, the uncertainty surrounding tariffs, rising material costs, and shifting trade dynamics have created new risks and challenges. To navigate this volatile environment successfully, investors and issuers must adopt flexible strategies, reassess project assumptions, and stay agile in the face of changing market and political conditions – two key factors to watch out for are: the constantly developing trading relationship with China, as well as a key date, July 9, when the 90-day reciprocal tariff pause against over 180 countries, will end.  

** The denominator effect refers to the phenomenon where the value of an investment portfolio declines due to falling market valuations, thus increasing the relative weight of illiquid assets like infrastructure, in a portfolio. This phenomenon creates pressure for investors to rebalance their portfolios in an unattractive market.