On Saturday, 1 February 2025, President Donald Trump dramatically reshaped the global trade landscape, sending markets worldwide into a tailspin. In one move, he imposed a 25% tariff on imports from Canada and Mexico and a 10% tariff on Chinese imports. Citing concerns over undocumented immigration and the flow of illegal drugs such as fentanyl, Trump invoked the little-known International Economic Emergency Powers Act to issue an executive order. In response, both Canada and Mexico pledged retaliatory tariffs, while China has vowed to implement “corresponding countermeasures”. Trump has spared the European Union for now, but he has made threats against it in the past. Trump says these measures are intended to address unfair trade practices, boost American industry and raise tax revenue. In particular, the funds raised are intended to help finance his plans to extend the 2017 tax cuts and reduce the corporate tax rate from 21% to 15%.
The US is the world’s largest importer. In 2023, it imported over $3.1 trillion worth of goods, with Mexico, China and Canada collectively accounting for more than 40% of that total.
Mexico is a key US supplier of motor vehicles, auto parts and fresh produce. In 2023, Mexico supplied 63% of US vegetable imports and 47% of US fruit and nut imports.
Canada is the US’s biggest foreign oil supplier, accounting for about 60% of its crude imports (Trump capped the new tariffs on oil at 10% rather than 25%). It is also a key exporter of natural gas and lumber for the construction industry. The US mostly depends on China for smartphones, laptops and lithium batteries, essential for electric vehicles, consumer electronics and renewable energy storage.
Given the deep market integration, particularly between the US, Mexico and Canada, the tariffs will disrupt supply chains and impose higher costs across multiple sectors.
Tensions between the US and South Africa also escalated as Trump threatened to cut all aid to the country in response to its recently announced Expropriation Bill. However, the AGOA Act has just been resigned for one year, and the US imports 100% of its chromium and 25% of its manganese, titanium and platinum from SA.
The market impact is expected to be substantial in the short term and not dissimilar to the volatility experienced during the early days of the Covid-19 pandemic. The rush to safety has triggered outflows from equities, bonds and emerging markets and further strengthened the US dollar. US bond yields have spiked on the expectation of higher inflation and high interest rates for longer. Global GDP growth rates are expected to fall, with the US, perversely, affected the least.
Looking further ahead, Saturday’s action will likely trigger long-term structural shifts in global trade even if the tariffs are reversed within a short time frame. Diversifying export markets will become a strategic priority as companies scramble to mitigate their exposure to trade barriers. This could accelerate the shift to regional trade agreements and diminish the US’s traditional role as the central arbiter of global trade policy. Additionally, the perception of the US as a reliable and predictable trading partner has been eroded, which is likely to prompt other nations to re-evaluate their economic dependencies and trade alliances. In time, this may translate into new political alliances, with superpowers such as China and India strengthening their positions on the global stage.
In summary, while Trump’s tariffs and threats of tariffs may provide a degree of short-term protection for US domestic industries, the broader economic, political and strategic costs are likely to be considerable.
Investors should prepare for longer-term heightened market volatility. Unfortunately, the recovery is unlikely to mirror that of the post-Covid era this time around. The forced realignment of trade policies is likely to reshape market dynamics, introducing more risk than immediate opportunity. However, markets remain cyclical. The best strategy right now is to remain calm: avoid panicking or selling off assets at a loss. Remember, savings are a long-term game, and market fluctuations are temporary.
ENDS
