The Tariff Tango: A Trade Related Tug-of-War That May Have Nothing to do With Trade

President Donald Trump implemented tariffs as a strategic negotiating tool to address issues such as illegal immigration and drug trafficking, as well as to bolster U.S. manufacturing.

Tariffs on Canada and Mexico:

• On February 1, 2025, President Trump signed executive orders imposing a 25% tariff on all goods from Canada and Mexico, with a 10% tariff on Canadian energy exports. These measures were intended to pressure both countries to enhance border security and combat the flow of illegal drugs into the United States.
• To put this I perspective, the United States imported roughly 13.6% and 15% of goods from Canada and Mexico respectively. Concurrently, 78% of Canadian exports and 80% of Mexican imports are consumed by the US which shows their heavy reliance on the US.
• In addition, Canada receives approx. 55% of their imports from the US and Mexico also relies heavily on the US for their imports. This likely means that a tariff on Canada and Mexico, would have a substantial impact. A retaliatory tariff would not leave the US unscathed, however, it is in all country’s best interest to avoid tariffs if possible.edits, and overall tax rates. Staying informed will help you adapt your tax strategy based on potential policy changes.

In response, Canada and Mexico agreed to a one-month delay in the implementation of these tariffs, committing to increased border enforcement and cooperation with U.S. efforts to address drug trafficking.

Tariffs on China:

• Concurrently, President Trump announced a 10% tariff on Chinese imports, aiming to address trade imbalances and intellectual property concerns. This move was part of a broader strategy to renegotiate trade terms with China.

Since tariffs have been in the news as of late, we wanted to share the potential implications for both the U.S. economy and its stock market.

How tariffs may affect each is truly dependent on which ones stick and which ones are indefinitely postponed in order for the US to negotiate what they really want from each country. The implications listed below are possible implications if the tariffs stick and negotiations cause an impasse for both sides:

Implications for the U.S. Economy

1. Higher Costs for Consumers and Businesses:
   • Imported goods become more expensive due to the tariff, which can lead to higher prices for consumers. For example, if the U.S. imposes tariffs on Chinese electronics, American consumers will pay more for those products.
   • Domestic industries that rely on imported components will also face higher production costs, which can lead to increased prices for their goods, reducing consumer purchasing power.
2. Reduced Trade:
   • Tariffs can reduce trade between countries. As foreign goods become more expensive, U.S. companies may find fewer markets for their products abroad, and other countries may retaliate with tariffs on U.S. exports. This can negatively affect industries like agriculture, manufacturing, and technology.
3. Retaliation from Trading Partners:
   • If other countries retaliate with their own tariffs, U.S. exports may face higher prices in foreign markets, leading to a decline in U.S. exports. This can hurt sectors that are heavily dependent on international trade, such as aerospace, agriculture, and automotive manufacturing.
4. Supply Chain Disruptions:
   • Global supply chains are highly interconnected, and tariffs can disrupt this network. For U.S. companies, higher tariffs on imported materials or goods can make it more difficult and expensive to source raw materials, leading to supply chain delays and potential production slowdowns.
5. Inflationary Pressures:
   • The higher costs for goods and services can lead to inflation, particularly if the tariffs are on widely used products. If inflation rises too quickly, it could hurt the purchasing power of consumers, leading to lower overall demand for goods and services.
6. Impact on Job Markets:
   • Some sectors may lose jobs due to tariffs, especially industries that rely on exports or use imported materials. On the flip side, certain industries like domestic manufacturing might see an increase in demand as companies shift production away from overseas to avoid tariffs, potentially leading to job growth in those areas.

Implications for the Stock Market

1. Potential Increased Volatility:
   • Tariff-related news can create market uncertainty, leading to increased volatility. Stocks, especially in sectors directly impacted by tariffs (such as tech, consumer goods, and automotive), may experience sharp fluctuations in value.
2. Sector-Specific Impact:
   • Industries dependent on imports or exports will likely face the most significant effects. For example:
     • Tech companies that rely on Chinese manufacturing could be hit hard by tariffs on electronics or components.
     • Agricultural firms might suffer if tariffs are imposed on crops like soybeans or pork, as these are key U.S. exports.
   • On the other hand, domestic manufacturers might see some benefit, as tariffs can make their products more competitive compared to imported goods.
3. Impact on Corporate Earnings:
   • Higher tariffs can increase the costs of raw materials and components for U.S. companies, potentially squeezing profit margins. As companies face higher production costs, they might pass these costs on to consumers or absorb them, either of which could negatively impact their earnings.
   • If companies’ earnings decline, stock prices often fall, particularly if investors believe these companies will struggle to adjust to the higher costs.
4. Investor Sentiment:
   • Investor sentiment can be sensitive to tariff announcements. If investors perceive tariffs as part of a broader trade war or economic slowdown, they might pull back from equities, especially riskier assets, leading to market sell-offs.
   • Conversely, if tariffs are seen as a tool for improving trade imbalances or protecting domestic industries, some investors might view them positively and invest in certain sectors.
5. Currency Effects:
   • Tariffs can impact currency values, particularly the U.S. dollar. If tariffs lead to a trade imbalance or reduce exports, the U.S. dollar might weaken, which can affect multinational companies’ earnings and stock prices. A weaker dollar can also make U.S. goods cheaper for foreign buyers, which might benefit export-driven industries.
6. Long-Term Growth vs. Short-Term Disruptions:
   • In the short term, tariffs can be disruptive to the economy and the stock market. However, in the long term, if tariffs are part of a strategy to create a more balanced trade relationship, the economy may adjust, and the market might stabilize. The net effect on the stock market will depend on how businesses adapt to the new trade environment and whether other countries respond with their own protectionist measures.

In summary, while tariffs may serve as a tool for achieving trade policy objectives, they come with risks to both the U.S. economy and stock market. Mostly in the form of potential higher costs, reduced trade, or retaliatory measures from trading partners. Currently, it looks as though Trump is using the tariffs as a mechanism to get other countries to the table to discuss broader issues. However, there is no guarantee that the strategy will work and tariffs may ultimately be the outcome. The overall impact depends on the scope and duration of the tariffs, the sectors affected, and how businesses and governments adjust to the changing landscape. We’ll be keeping our eye on how things evolve.