On 3rd February 2025, President Donald Trump reignited trade tensions by imposing fresh tariffs on three of the United States’ largest trading partners—China, Canada, and Mexico. The financial markets caught off guard, reacted sharply to the announcement, leading to temporary volatility.
Key Tariffs & Market Response
Trump’s move included a 25% tariff on imports from Canada and Mexico (with a lower 10% rate for Canadian energy products) and an additional 10% tariff on Chinese goods—significantly lower than the previously anticipated 60%. In response, Canada retaliated with 25% tariffs on $30 billion worth of U.S. goods, while Mexico initially planned similar measures but agreed to a temporary 30-day pause after negotiations with the U.S.
China also imposed tariffs, targeting U.S. coal, liquefied natural gas (LNG), and other goods with rates ranging from 10% to 15%. More concerning, however, were Beijing’s export controls on critical metals essential to U.S. industries such as defence and clean energy. Despite these measured responses, tensions between the U.S. and its trade partners remain high.
It is observed that the financial markets initially slumped but partially rebounded, with global indices recovering after signs of potential negotiations. The Hang Seng Index surged 2.8% on 4th February, reflecting China’s restrained approach and the hope of diplomatic discussions.
Potential EU Tariffs: The Next Front?
Beyond North America and China, Trump has certainly hinted at tariffs on the European Union (EU), citing an unfair trade balance. The EU has already signalled that it will retaliate, causing concerns among investors. This resulted in the euro weakening to near parity with the U.S. dollar in early February, its lowest level since November 2022. Economists at Deutsche Bank estimate that a 10% tariff could shave between 0.5% and 0.9% off the EU’s GDP, worsening existing economic struggles.
Economic Implications on the U.S
If the temporary pause in trade disputes is not extended, these tariffs could have far-reaching consequences for the U.S. economy.
Higher costs for consumers are one of the most immediate concerns. Tariffs increase costs within the supply chain, particularly for goods that cannot be easily sourced domestically. This could reignite inflation, despite the Federal Reserve’s efforts to control it.
Fig 1. U.S. Top 15 Importing Partners in 2024 (%)
As seen in Figure 1, Mexico, China, and Canada collectively account for 41.5% of the total gross value of all imported goods into the U.S. (with the top 15 trading partners making up nearly 80% of total imports). Over the past year, the U.S. imported more than US$1.3 trillion worth of goods. The introduction of sweeping tariffs could have a significant impact on inflation, with certain industries and goods being affected more than others.
Energy prices are yet another potential pressure point. Canada supplies 60% of U.S. crude oil and nearly all of its imported natural gas. Higher tariffs on these imports could drive up energy costs, especially in regions heavily dependent on Canadian oil. However, Goldman Sachs analysts believe the overall impact may be limited, as Canadian and Mexican exports could find alternative buyers.
Food and consumer goods are also likely to experience inflationary pressures. Canada and Mexico supply over 40% of U.S. food imports, particularly perishable goods. Since stockpiling options are limited, price increases could materialise quickly. Retailers may struggle to maintain inventory buffers, resulting in higher prices on everyday items such as furniture, electronics, and household goods.
Key industries will also face disruption. The automotive sector, which relies heavily on imported parts, may experience significant supply chain challenges. Meanwhile, the healthcare industry could see price increases, as China remains a crucial supplier of essential drug ingredients.
Interest rate uncertainty is another factor investors must consider. The U.S. 10-year Treasury yield climbed to 4.8% in mid-January, reflecting inflationary concerns. In response, the Federal Reserve has revised its 2025 rate cut projections, lowering expectations from 1% to just 0.5%. If inflation accelerates further, additional interest rate hikes could follow, increasing borrowing costs and market volatility.
What Lies Ahead?
With the situation still unfolding, there is no clear conclusion on the final effects this will have on the U.S. or its trading allies. As we speak, President Trump has just announced his intention to impose more tariffs on reciprocal countries, while China has escalated its retaliatory actions, including investigations into Apple and Google.
While the inflationary impact on the U.S. will depend on the extent, degree, and number of tariffs implemented globally, America’s trading partners are also expected to bear the consequences of President Trump’s actions. This is evident in China’s manufacturing sector, where the latest data shows factory activity grew at a slower pace in January, while staffing levels fell at their fastest rate in nearly five years as trade uncertainties mount.
Fig 2. Effects on Chinese Manufacturing Activities
While it would be premature to attribute China’s recent struggles solely to global trade tensions—since sluggish domestic demand has also played a role—the World Bank estimates that a 10% increase in U.S. tariffs on all trading partners would reduce global economic growth by 0.2% for the year. Moreover, proportional retaliation by other countries could further escalate this crisis.
On the other hand, optimists argue that President Trump is leveraging the art of negotiation, using tariff threats to extract non-tariff concessions, such as securing deportation agreements and curbing drug flows into the nation, which was illustrated earlier this year in his negotiations with Colombia.
For investors, this remains a critical time to monitor trade developments. The potential for inflationary pressures, rising interest rates, and supply chain disruptions makes it essential to stay diversified and prepared for market volatility. With global trade relations in flux, risk management is more important than ever.