By Reshma Kapadia
President Donald Trump made his threats a reality on Saturday, starting a trade war as Canada and Mexico said they would retaliate.
Trump announced 25% tariffs on Canada and Mexico -- with only 10% on Canadian oil exports -- and 10% on all Chinese goods.
Canada and Mexico both responded. Canadian Prime Minister Justin Trudeau announced plans for tariffs on $155 billion of U.S. goods, starting with $30 billion on Tuesday. Mexican President Claudia Sheinbaum said she had ordered a "Plan B" response including tariff and non-tariff measures.
China said it would lodge a complaint with the World Trade Organization.
The developments are likely to rattle markets and force Wall Street to reassess its expectations that dealmaking would, in the near-term, shield the economy and markets.
Up until Trump launched the trade war, investors had largely viewed the tariff threats as bluster, a tool for dealmaking, and most expected China -- not America's closest trading partners and allies -- to be the biggest targets. After all, China is sitting on the largest trade deficit with the U.S. -- one of the points Trump often has pointed to in his call for tariffs.
A reassessment is likely needed: "The currency markets will have massive move as the Mexico and Canada moves weren't expected," says Jens Nordvig, founder of Exante Data via email. "Then the question is if the equity market can handle it."
The breadth of the hit to markets will depend in part on what comes next -- how Canada, Mexico and China retaliate and what Trump does next. In addition to tariffs, British Columbia banned sales of U.S. alcohol. Trump in his executive order warned that retaliation risks higher tariffs.
How these tariffs will hit consumers and impact the Fed's inflation fight will be front and center. While the administration has noted that Trump's tariffs in his first term didn't raise inflation, the backdrop was different -- and companies were able to substitute Mexican imports for Chinese imports -- something companies won't be able to do this time around, says Derek Scissors, a senior fellow at the American Enterprise Institute.
Of note, the 10% tariff hike is across all Chinese goods -- including the consumer-oriented goods that had been excluded from the existing tariffs on Chinese imports because of concerns about inflationary pressures. Combine that with the grocery items -- from avocados and tomatoes -- that come from Canada and Mexico, and economists caution this could sting consumers already grappling with high grocery prices.
"Most immediately, Americans will see food prices rise. Mexico is the source of around half U.S. fruit and vegetables. Gas prices, especially in the Midwest, may also rise," says Marc Chandler, chief strategist at Bannockburn Global.
For China, the hit isn't that hard, especially as the country has spent much of the last eight years trying to reduce its reliance on exports to the U.S. even as its dependence on exports broadly has increased.
"This is more of a slap than a gut-punch for China," says Louis-Vincent Gave, co-founder of Gavekal Research via email. "For Canada and Mexico, this is far more problematic. They have spent the past few years totally tying their economies to the U.S."
Some analysts expect China to respond by weakening the yuan to absorb the tariff hit. They also caution that investors should prepare for this to just be the beginning.
A sustained market decline of several days could get the administration to adjust its approach on this batch of tariffs -- even lift them. But Stephen Myrow, managing partner of Beacon Policy Advisors, cautions that investors aren't taking the tariff threat seriously enough because they think Trump is sensitive to market moves.
That view, Myrow says, underappreciates just how much tariffs are part of the administration's policy to restore manufacturing and raise revenue -- and how broadly those in this administration are on board. "Trump believes tariffs are good and market shouldn't get upset about them," Myrow adds.
While the first batch may be for leverage and could be rolled back once there's an acceptable deal or if the market protests with a sustained drop, Myrow says other tariffs are coming and won't just be for leverage. Myrow expects universal tariffs, starting likely at 5% and probably with myriad exemptions to minimize the hit. Also expected, possibly by April 1, more tariffs on China as the administration reviews the Phase One trade deal signed during the first administration.
The aim isn't just leverage but to reshape trade and bring manufacturing back to the U.S., as well as to raise revenue. Key officials in the Trump administration appear on board. Some investors had viewed Treasury Secretary Scott Bessent, with his long experience in the markets, as a potential moderator on trade policy. But Myrow expects his role to be more about slowing how the administration turns up the heat on trading partners, not countering the push to do so.
Marc Chandler notes that many of the U.S. imports from Mexico and Canada are from U.S. companies -- a reason he thinks the real target of the tariffs aren't the trading partners but rather U.S. businesses with production offshore.
"Since the pandemic, the neoliberal position evolved to nearshoring and friend-shoring. The tariffs say that isn't good enough. Onshoring only," Chandler says.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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February 02, 2025 02:30 ET (07:30 GMT)
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