The most volatile risk factor of 2025 has been tariffs, and technology has arguably been the sector most impacted.
Aaron Brown
While the tariff policy changes we’ve seen under the Trump administration have certainly had wide-ranging financial and economic impacts, the risks created by the technology underlying the collection of tariffs is one under-the-radar issue we should consider. Risk managers, at least initially, may have unintentionally neglected this issue when focusing on the Sturm-and-Drang of political debates.
Most of the risk attention on the tariff kerfuffle has focused on the chance protectionism will cause a recession or that soured international relations will lead to more general geopolitical crises. Serious as these dangers are, it’s worth taking a minute to think about a different one: a massive supply-chain disruption caused by a breakdown in tariff-collection technology.
The Trump Effect
Before Donald Trump, large tariff changes were negotiated over years and smaller ones were published in the Federal Register with plenty of notice. Firms subject to making tariff payments had time to prepare — either developing internal systems or contracting with customs processing firms.
Under the Trump administration, in contrast, sweeping changes are often suddenly announced by executive order, and importers and service providers must scramble to comply. This new approach draws in many firms that had not previously paid tariffs.
Moreover, the new tariff rules can be modified, postponed or reversed as quickly as they were proposed. And other countries are changing their own protectionist rules in response to U.S. changes. This would challenge even a well-designed, integrated, cutting-edge technology system, and it’s overwhelming to the system we currently have in place for collecting tariffs.
Obviously, this creates risks for companies involved with imports or exports. There are the operational risks of making errors in tariff calculations, leading to overpayments or penalties; the financial risks of the tariffs themselves; the supply-chain risks of foreign suppliers or customers suddenly disappearing (or radically changing terms); and the risks from miscalculating production plans due to bad estimates of tariffs and protectionist rules.
The Evolution of Tariffs
A relevant discussion on tariffs must begin by abandoning the concept of free trade. While tariffs have been falling over the last three decades, they have been replaced by more surgical protectionism.
The Transpacific Trade Partnership (TPP), for example, is more than 5,000 pages, with rules micromanaging every aspect of trade among the signatories. Many of these rules impose costs considerably higher than the tariffs they replaced.
For instance, the TPP cut tariffs on US wheat shipped to Japan. But the wheat must be sold to a government entity, which resells it at a higher price to Japanese users — which is effectively a tariff. The profit is paid as a subsidy to Japanese producers, which also has the economic effect of a tariff.
While the TPP had 12 signatories, the United States-Mexico-Canada Agreement (USMA), which replaced NAFTA, is smaller (2,082 pages) – but it covers only three countries. Meanwhile, the supposedly “free trade” European Union has no single source for trade restrictions, but it does have a 443-page high-level summary and many thousands of pages of ancillary material. Included in this material are 1,200 new annual directives from the EU, as well as a larger number from individual countries.
A simple tariff has reasonably predictable economic consequences: less international trade, higher prices for consumers, lower economic growth, less-efficient production and slower innovation. Complex trade protectionism allows negotiators to build in goodies for donors and special interests, but inevitably results in unintended consequences. Moreover, if the technology for enforcing the rules is not up to the task, it creates the possibility of severe disruptions.
In one important aspect, tariff technology has not progressed since ancient times. Tariffs still rely on physical goods arriving in a port or other import facility. That means services — which now represent nearly 80% of the U.S. economy — are ignored.
While we now have computer software to handle the accounting details, tariffs still require goods to be mapped to one of the 10-digit codes from the voluminous “Harmonized Tariff Schedule,” and assigned to the country that supplied the “essential character” of the goods. Given that most finished goods that arrive contain parts from many countries, and that many codes involve hair-splitting and subjective distinctions, there’s obviously great potential for gamesmanship.
The risks of a highly complex system of overlapping multilateral and bilateral protectionism regimes with frequently changing rules and primitive technology are compounded by the complex web of modern global trade. Commodities, components and finished goods move through many countries before a final consumer takes delivery.
Many tariffs are collected along the way, and highly detailed rules can apply. A small change to one tariff or rule could force a restructuring of the entire process. Moreover, if these types of adjustments were to cascade, they could change other markets.
Fortunately, both blockchain and artificial intelligence technologies offer promising ways to manage tariffs more reliably — and at a lower cost. These technologies could handle services as well as goods, meaning governments could get the same revenue with much lower rates. Broader tax bases with lower marginal rates generally means less economic distortion and evasion.
Parting Thoughts
The 21st century has seen three major global supply-chain disasters: the 2001 aftereffects of the 9/11 attacks, the 2011 fallout from the tsunami and nuclear disaster in Japan, and the 2021 disruptions as the world emerged from COVID-19 lockdown. Risk managers are well aware of the massive effects of these events – costs and uncertainties that grow every year as international trade becomes larger and more complex and interconnected.
The three historical examples were the results of physical issues, unlike the crisis we're now facing. Indeed, 2025 might be the first supply-chain disaster to be generated entirely within the global trading system, with no external shock to trigger it.
It’s another reminder that the time to examine the robustness of technology systems is before they get unexpected stresses, not during a crisis. That’s a general lesson for all technology.
Aaron Brown worked on Wall Street since the early 1980s as a trader, portfolio manager, head of mortgage securities and risk manager for several global financial institutions. Most recently he served for 10 years as chief risk officer of the large hedge fund AQR Capital Management. He was named the 2011 GARP Risk Manager of the Year. His books on risk management include The Poker Face of Wall Street, Red-Blooded Risk, Financial Risk Management for Dummies and A World of Chance (with Reuven and Gabriel Brenner). He currently teaches finance and mathematics as an adjunct and writes columns for Bloomberg.
Topics: Data
