US tariffs shake north American trade as Mexico and Canada retaliate

What’s going on here?

The US put in place a hefty set of tariffs this week, slapping 25% import taxes on goods from both Mexico and Canada and an additional 10% on energy products specifically from Canada, on top of a 10% tariff targeting China. This move, which the White House is aimed at curbing fentanyl flows, took markets by surprise with a lot of folks expecting a last-minute resolution like the ones reached in the past.

What does this mean?

These tariffs have already set off a wave of retaliatory measures, with Canada planning an aggressive response — imposing 25% tariffs on 30 billion Canadian dollars ($21 billion) in US imports, which it said could potentially scale up to 125 billion Canadian dollars. China, too, has announced up to 15% tariffs on US agricultural products. Analysts foresee a tangible impact on the US economy: the nonpartisan Budget Lab at Yale predicts a 1% price increase and a 0.6% dip in economic output this year, while Oxford Economics estimates a slightly different outcome, with a 0.6% rise in prices and a more concerning 1.3% economic contraction. And sure, the Federal Reserve could keep interest rates high – or raise them even higher – to counter inflationary pressures, but it will have to keep its eye on what's happening with the economy at the same time. If the job market starts to seriously falter, it might need to ease rates to meet its mandate.

Why should I care?

For markets: Tracking economic volatility.

The tariffs' introduction has stirred significant uncertainty, as reflected in market volatility and fluctuating investor confidence. Construction spending dropped by 0.2% in January. And weaker manufacturing surveys signal some rising concerns over trade policy and the potential for rocky terrain ahead. But perhaps most worryingly: the Atlanta Fed is projecting that the US economy will see a 2.8% decline in annualized growth in the first quarter.

The bigger picture: Navigating through the trade storm.Integrated North American markets now face a potential economic squeeze, with Canada and Mexico potentially sliding into recession if tariffs remain. This situation emphasizes the delicate balance of international trade dynamics and the ramifications of political actions. Companies and governments alike may need to pivot their strategies now, embracing diplomatic engagements and revamped supply chains to try to make the best of the new situation.

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