Update: Hours before they were set to kick in, Donald Trump announced he would postpose tariffs on both Canada and Mexico by some 30 days, having struck deals with Canada's Prime Minister Justin Trudeau and Mexico’s President Claudia Sheinbaum. Tariffs on China have not yet been delayed, but it is believed Trump is due to speak to with Chinese President Xi Jinping in the next few days.
US President Donald Trump’s latest tariff escalation against Canada, Mexico and China has sent shockwaves through global markets, with investors scrambling to reassess the economic outlook.
The 25 per cent tariffs on Canadian and Mexican imports, alongside a 10 per cent levy on Chinese goods, triggered swift retaliation over the weekend, raising fears of a full-blown trade war.
Starting Tuesday, most Canadian imports will face a 25 per cent tariff, with a lower 10 per cent rate on crude oil and energy resources, while all Mexican imports will be hit with a 25 per cent tariff. China will face an additional 10 per cent tariff, with the removal of the US$800 “de minimis” exemption, significantly impacting e-commerce retailers like Temu and Amazon that rely on Chinese suppliers.
All three countries targeted by Trump responded swiftly, with Canada imposing 25 per cent duties on US$105 billion of US imports, starting with alcohol, clothing and household goods before expanding to cars, steel and aerospace products. Mexico pledged countermeasures, though details remain unclear, while China denounced the tariffs as a violation of trade rules and said it plans to challenge them at the World Trade Organisation.
Trump, undeterred, signalled further action, stating he would “absolutely” impose substantial tariffs on the European Union. In a Truth Social post, he also defended the tariffs, accusing Canada, Mexico and China of exploiting the US through trade imbalances and illegal activities.
Stock markets reacted sharply, with the S&P 500, Dow Jones and Nasdaq all falling. Australian shares also suffered, with the S&P/ASX 200 dropping 1.7 per cent in early trading on Monday and the Australian dollar slipping to US61.56 cents.
Bond yields climbed as investors sought safer assets, while commodities were also rocked, with oil prices slipping. Gold rallied as investors sought a safe haven, while the price of bitcoin fell to below US$100,000 after a steady period on the back of positive developments in the cryptocurrency space.
Commenting on Trump’s decision to follow through on the promises he made throughout his election campaign, AMP’s Shane Oliver told InvestorDaily that the newly announced tariffs lift average US tariffs by about 6 per cent, increasing them from around 3 per cent to 9 per cent – marking a much larger escalation than the tariffs introduced in 2018.
“Maybe Trump felt he had to ‘kill some chickens to scare the monkeys’ so the whole world knows that he is serious,” Oliver said.
Markets are adjusting, he said, with expectations that Trump could impose more tariffs, including on China.
“As a result, markets are now really starting to adjust and allow that he will go further – as he has been talking about in relation to much more on China, a tariff on all imports and tariffs on specific goods like steel, semiconductor chips and pharmaceuticals,” the chief economist said.
“There is also a high risk of escalation as already looks to be happening with the Canada and Mexican tariffs as they announce retaliatory tariffs, resulting in tit for tat tariff hikes and a global trade war.”
This trade war, Oliver said, will likely slow global growth and increase inflation in the US and tariff-imposing countries.
ANZ Research warned on Monday that the US could see inflation rise significantly. Citing Bloomberg economists, ANZ said the tariffs could knock 1.2 per cent off US gross domestic product (GDP) and add 0.7 per cent to personal consumption expenditure inflation, assuming retaliation of equivalent magnitude.
“Unless there is a quick deal to remove the tariffs, markets could be in for a rough ride for a while,” Oliver said, though he believes political pressure may eventually constrain Trump.
“He wants shares to go up rather than down and Americans will not be too happy to see their cost of living rise even further after voting for Trump on the hope that he will bring it down and this could put political pressure on Republicans and hence Trump,” the economist said.
However, Oliver cautioned that in 2018, shares had a near 20 per cent fall due to tariffs and Fed rate hikes before Trump got too concerned.
In his market note, John J Hardy, chief macro strategist at Saxo, emphasised that markets must quickly adapt to the new reality and brace for further countermeasures from US trading partners.
“The market reaction will be quite negative as market participants failed to take Trump’s threats seriously until he actually delivered at the weekend,” Hardy said.
Hardy, like Oliver, believes the fallout’s extent will depend on whether the tariffs are reversed quickly or escalate into a full trade war.
“Goldman Sachs has already been out saying it sees the Mexico and Canada tariffs as likely proving short-lived,” he said.
Hardy also pointed out that America’s global brand is already feeling the impact, further adding to speculation regarding whether Trump will persist with the tariffs.
“Already at the weekend, Canadian hockey fans were booing the singing of the US national anthem at NHL hockey matches in Canada and social media saw widespread demands for boycotting US products, with Tesla and Amazon especially in focus,” Hardy said.
“Canadian liquor stores are being asked by provincial premiers to remove all US products from liquor stores. Tesla has additional considerable risk in China and especially in Europe if Trump moves forward with tariffs against the EU. Already Musk’s brand is under siege in Denmark,” he said, adding that Tesla sold about half of its cars outside the US in 2024.
Impact on Australia
While the ASX was sent tumbling on Monday morning, Oliver said for Australia, the direct impact of Trump’s tariffs should be minor. However, Australia remains highly vulnerable to indirect impacts, particularly from a decline in global trade and reduced demand for raw materials from China.
“Exports to the US are only 4 per cent of Australia’s total exports and may be spared from Trump’s tariffs as Australia has a trade deficit with the US, but they could still be hit if Trump’s motivation is mainly to shift production back to the US and raise tax revenue.
“As an open economy with high trade exposure to China, our main vulnerability is to an intensification of global trade wars under Trump as Trump imposes tariffs and other countries respond with tariffs on the US resulting in a fall in global trade, particularly if it weighs on demand for Chinese exports,” the chief economist said.
An OECD study showed that Australia could suffer a 1.2 per cent reduction in GDP as a result of a 10 per cent reduction in global trade between major countries.
“Much will depend on how hard Trump goes, how other countries respond and how long the tariffs remain in place,” Oliver said, adding that US tariffs won’t add to Australian inflation unless Australia imposes tariffs on US products or the Australian dollar plunges.”
Another question on many minds on Monday was whether the trade wars could delay the long-awaited first rate cut in Australia, which the Reserve Bank is widely expected to implement later this month.
Betashares chief economist David Bassanese said he believes new global trade war risks don’t threaten this month’s RBA rate cut.
“Though a trade war is potentially inflationary to the extent the Australian dollar weakens further, more than likely offsetting this risk for the RBA are new downside concerns with global and local economic growth if the tariff fight escalates,” Bassanese said.
Similarly, Oliver believes the RBA is likely to cut rates by 25 basis points at its meeting on 18 February.
