President Donald Trump didn’t waste any time after taking office for his second term, quickly rolling out his ‘America-first’ tariff plan.
Trump said his administration would slap a 25% tax on goods from Canada and Mexico, the biggest buyers of US products, and a 10% tax on imports from China.
Bloomberg reported that Trump’s proposed trade levies against China, Canada and Mexico include plans to end the “de minimis” exemption for small packages worth less than $800.
This change would probably hit big Chinese online stores like Alibaba and JD.com, which have been taking advantage of the exemption.
The total volume of de minimis shipments into the US hit 1.4 billion packages in fiscal year 2024, according to US Customs and Border Protection, which is roughly double the volume in 2022.
The executive order also included a retaliation clause making provision for further increases if the countries choose to “fight back”.
This escalation in trade wars is the biggest move towards protectionism by a US president in nearly 100 years.
The policies triggered a sell-off across asset classes because they affected everything from inflation rates to geopolitics and economic growth.
While the US dollar surged in response to the executive order, stock markets, including the US, took a hit.
The US textiles and clothing sector was one of the hardest hit, losing about -4.5% due to the industry’s reliance on imports. These companies include the likes of Nike (NKE-NASQ), Ralph Lauren (RL-NASQ) and Lululemon (LULU-NASQ).
Currencies also took a hit, with the euro extending its decline after Trump said tariffs on EU goods would “definitely happen”.
However, Trump later agreed to delay the tariffs for a month after Canada and Mexico promised to crack down on migration and drug trafficking at their borders.
Mexico’s President posted on social media platform X that the US and Mexico had reached an agreement that would postpone tariffs for one month while Trump and Canadian Prime Minister Justin Trudeau announced their agreement in separate social media posts.
The Mexican Peso and the Loonie (Canadia Dollar) rallied on a renewed sense of optimism following the announcements, and the decision to delay broad tariffs boosted confidence that the EU could also negotiate an acceptable deal.
Bloomberg reported that Trump’s reversal in the Americas has informed the strategy of the European Commission, the EU’s executive arm that’s in charge of trade matters, to prepare a proportionate response to the president’s tariff threats to not provoke Washington’s ire. As market fears abated, US equity markets also managed to claw back some losses.
However, President Trump has now also threatened to expand his trade war, warning BRICS countries not to replace the US dollar (USD).
In a post on Truth Social, President Trump said that BRICS countries will face “100% tariffs” should a new BRICS currency or any other currency replace the USD.
“There is no chance that BRICS will replace the U.S. Dollar in International Trade, or anywhere else, and any Country that tries should say hello to Tariffs, and goodbye to America,” his posted warned.
China promised to hit back after Trump announced a 10% tax on Chinese imports. China’s Commerce Ministry said they would sue the US at the World Trade Organization, calling the tariff a “serious violation” of international trade rules.
The US motor industry is a key sector that will likely feel the immediate impact from the move to levy an additional 10% in tariffs on Chinese imports. While this will only affect a small number of US vehicles, increased auto part costs could affect already heightened car prices.
CNBC reported that the US has imported $15.4-17.5 billion worth of auto parts and accessories for vehicles and tractors, among other special purpose vehicles, from China, according to the U.S. International Trade Commission.
Besides the specific industry impacts, the biggest worry about Trump’s tariff spree is how it might affect US inflation.
China supplies a massive amount of furniture, around 80% of all imported toys, and nearly 100% of all footwear, according to The Toy Association.
Roughly 50% of all petroleum imports of the US come from Canada. Canada is also a big supplier of cherry tomatoes to the US. Five automakers — Ford (F-NASQ), General Motors (GM-NASQ), Stellantis, Toyota Motor and Honda — produced an estimated 1.3 million light-duty vehicles in 2024 in Canada, largely for the U.S. market, according to a Canadian manufacturing nonprofit research group.
As the impact could take 3-6 months to filter through as companies have probably stockpiled ahead of tariffs, the short-term impact will be negligible for the US, likely keeping sentiment risk-off amid US dollar strength.
The major concern is the longer-term impact on the US and global economies. While the US economy is currently performing well, with growth at around 3%, imposing tariffs (and other extremist policies like mass deportations) will led to increasing isolation for the US while hurting growth and driving up inflation over the medium term.
Global growth will likely also slow, and could be disinflationary for the rest of the world, which could keep interest rates higher.
Investors should remember that market moves won’t be straightforward from here on out, and things have gotten more uncertain and volatile. As such, defensive stocks and sectors, especially those that offer protection against a weakening rand, are probably a good place to shelter for now.
