Trade War Redux: The Economic and Market Impact of New U.S. Tariffs

The global trade landscape has taken a sharp turn as the U.S. government has implemented a series of aggressive tariff measures targeting key trading partners. In addition to previously imposed 20% tariffs on steel and aluminum and a 10% overall tariff on China, a 25% tariff on Canadian (10% on Canadian energy exports) and Mexican imports has now been implemented, though Ford, GM, and Stellantis imports and any others that abide by the US-Canada-Mexico trade agreement (USMCA) have been granted a 30-day grace period.

China’s tariff rate has been increased to 20% applied across all Chinese imports. These measures signal a decisive move toward protectionism, raising critical questions about their long-term impact on global trade, corporate profitability, and economic growth.

History suggests that such aggressive trade actions rarely go unanswered. Key U.S. trade partners—Canada, Mexico, and China—are preparing to respond in kind.

• Canada has announced 25% tariffs on CAD$155 billion worth of U.S. goods, with a phased implementation over 21 days.
• Mexico has yet to reveal its response, though history suggests a targeted approach affecting industries reliant on cross-border supply chains.
• China has unveiled a multi-pronged strategy, including export controls on critical minerals, tariffs on U.S. energy (coal, liquified natural gas, and crude oil), agricultural products, machinery, and automobiles, and economic measures targeting U.S. businesses operating in China.

The structure of these retaliatory measures suggests that Canada and Mexico are focused on consumer discretionary goods and construction materials—autos, electronics, food, and steel/aluminum products. If fully implemented, these measures could increase consumer prices, disrupt supply chains, and dent corporate profit margins.

Financial markets have been quick to price in the risks associated with these tariffs. The most heavily affected sector has been consumer discretionary goods, which have suffered a 13.2% decline over the past month¹. This sector, which includes automobiles, electronics, and retail goods, is particularly vulnerable given its dependence on cross-border supply chains.

On the other hand, consumer staples (+2.87%), healthcare (+1.42%), and real estate (+0.1%) sectors have shown resilience, reflecting investor rotation toward defensive sectors². Despite broad market volatility, sector dispersion remains high, and the sell-off has been uneven. While correlations have risen, this is not a broad-based downturn but rather a selective repricing of risk in exposed industries.

The market reaction aligns with expectations of a stagflationary shock—mild to moderate in severity. If trade relationships remain unchanged, inflation is expected to rise by 0.46%–0.82%, while GDP growth could take a 0.4%–0.5% hit in the long run³.

Economic data from February provides a glimpse into how businesses and consumers are reacting to these tariffs:

• Corporations have accelerated imports to get ahead of the tariff deadlines, evidenced by a notable uptick in import/export activity.
• Consumer spending has declined, as seen in the latest Personal Consumption Expenditures (PCE) report, with the steepest pullback in goods-related spending.
• Manufacturing and service-sector price indices have exceeded expectations, while new orders have fallen into contractionary territory—a warning sign for future growth.

While the consumer remains in a strong financial position (with stable net worth, manageable debt levels, and rising income), expectations remain the key risk factor. The latest survey data shows that 1-year and 5–10-year consumer inflation expectations have surged, while consumer confidence has deteriorated⁴.

The Federal Reserve’s regional business survey confirms this trend, with inflation expectations among manufacturing firms rising to 3.5% and service-sector expectations climbing to 4%. While longer-term inflation expectations remain anchored at around 3%, the rise in short-term expectations suggests mounting pricing pressures⁴.

As U.S. trade policies shift, global economies are responding with increased fiscal and monetary stimulus.

• Europe is ramping up defense spending in response to geopolitical uncertainty, taking U.S. policy shifts at face value.
• China is implementing broad-based stimulus measures across multiple fronts, including monetary easing, fiscal stimulus, real estate support, consumer subsidies, and high-tech investment (AI and semiconductors). Notably, Beijing appears to be warming up to the private sector, suggesting an effort to stabilize economic growth.

While international markets have staged a near-term rally, questions remain about the sustainability of growth and the evolving nature of geopolitical relationships.

From a portfolio management standpoint, it is still too early to make widespread allocation changes. While certain sectors have suffered short-term losses, tariff-driven economic shocks tend to evolve over time, making long-term positioning more important than short-term reactions.

In the near term, defensive sectors such as consumer staples, real estate, and healthcare appear relatively insulated, while consumer discretionary, manufacturing, and technology face greater headwinds. Investors should also keep an eye on policy adjustments—particularly potential corporate tax cuts or regulatory rollbacks—which could provide partial offsets to the current growth drag.