To Tariff or Not to Tariff?
Weathering tariff threats during the week, financial markets closed lower after the White House confirmed an upcoming official announcement before the closing bell on Friday, January 31. After the formal announcement Saturday, markets reacted predictably at the open this past Monday, with stocks down 2%, the U.S. dollar up, the Mexican peso down and oil up 2% in early trading.By Monday afternoon, markets began to normalize as news broke that Canada and Mexico’s 25% tariffs would be delayed 30 days while the sides draft plans to reinforce their respective borders as part of negotiations. The 10% tariffs on China were imposed on Tuesday, and China said it will impose tariffs on U.S. imports of coal, crude oil, farm equipment and some vehicles.
We’re just a few weeks into the Trump presidency and it’s clear that he views tariffs, and the threat of tariffs, as an impactful negotiating tool. But at what economic cost? The answer isn’t so clear.
According to Torsten Slok, chief economist at Apollo, 43% of all U.S. imports come from Canada, China, and Mexico, and he estimates that 5% of U.S. GDP is directly impacted by higher tariffs on these countries. Additionally, Strategas says they generate about 7% of S&P 500 revenue.
So, Monday’s market reaction has some justification, as there are economic impacts to more constrained trade relations with our three major trade partners. The impact becomes even greater if we include potential tariffs on European Union imports.
Monday’s early session action also shows that markets are leery of a possible multi-front trade war, especially with the prospect of higher-for-longer interest rates and stubborn inflation data already on the minds of investors.
The only certainty with tariffs is that they add more uncertainty, and uncertainty often leads to more volatile environments. It’s clear that President Trump is aggressively seeking to implement his political agenda and is willing to use all available means to do so—including potentially disrupting trade. What’s unclear is how long Trump is willing to trade political gains for potential short-term economic pain.
