On February 1, 2025, the White House announced new tariffs on imports on its three top trading partners, Canada, Mexico and China.
Within almost 72 hours, the tariffs on Mexico and Canada were postponed by 30 days. This early trade policy enacted by the new administration is a sign of the potential volatile times to come as the policy landscape is in continuous flux.
Retaliation and Potential Escalation
The tariffs were implemented under the International Emergency Economic Powers Act (IEEPA), which grants the president authority to impose tariffs in a response to a national emergency for 120 days, after which they can be extended. The White House cited the “extraordinary threat posed by illegal aliens and drugs” as the requisite national emergency1. The initial tariffs that were planned to be implemented were a 25% tariff on Mexican imports, 25% tariff on Canadian imports, and an additional 10% tariff on already current Chinese tariffs. The respective countries responded almost immediately with retaliation of their own. Canada was the first country to respond with specific retaliatory plans, quickly announcing a 25% tariff on imports from the U.S. to be introduced in two waves. Both Mexico and China have indicated that retaliatory measures would be forthcoming, though neither have released details. The U.S. has said any retaliation could lead to additional tariffs.
Source: Tax Foundation, United States International Trade Commission, U.S. Department of Commerce, J.P. Morgan Asset Management. Imports for consumption: goods brought into a country for direct use or sale in the domestic market. *Estimate is by the Tax Foundation as of October 2024 and assumes a 20% universal tariff as well as a 60% tariff on Chinese imports. May not be updated as of the latest announcements regarding tariffs and U.S. trade policy and is subject to change. Forecasts are based on current data and assumptions about future economic conditions. Actual results may differ materially due to changes in economic, market and other conditions. Guide to the Markets – U.S. Data are as of February 5, 2025.
Impact on Consumers and the Economy
The current effective tariff rate on all U.S. imports remains historically low at around 2%. If across-the-board tariffs are implemented, the effective U.S. tariff rate would rise considerably. Given the broad-based application of tariffs without an exclusion process, the tariff cost to consumers will likely be a multiple of what it was previously. Estimates suggest an at least $2,000-$3000/household annual cost if global tariffs were implemented, along with 60% tariffs on China2. At the end of the day, tariffs create stagflation, meaning that they lead to higher inflation and less growth. Given that over 75% of Mexican/Canadian exports are bound to the U.S. and a larger share of their GDP is driven by trade, a persistent escalation in trade without resolution presents significant challenges to both U.S. trade partners. Keep in mind that China, Canada, and Mexico, in aggregate, accounted for more than 40% of U.S. imports during the first 11 months of 2024. Any potential trade war with our closest trading partners will likely have a negative impact on the U.S. economy (not just other economies).
In summary, we believe tariffs of the proposed magnitude on the country’s largest trading partners are likely to raise U.S. consumer prices, lower U.S. GDP growth, and increase uncertainty in capital markets. While President Trump likes tariffs and think they work, we believe they are more of a negotiating tool than proposed permanent trade policy. In the evolving landscape of global trade, the dynamics between the United States and its key trading partners are undergoing significant shifts. While the past does not always predict the future, we expect sudden bouts of volatility followed by recovery (similar to Monday) with high asset dispersion to be an ongoing feature for markets in 2025.
If you have questions, please reach out to our Schneider Downs Wealth Management Advisors team.
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
Sources:
1. Trade War 2.0
2. J.P. Morgan Equity Strategy & Quantitative Research, Tax Policy Center, Center for American Progress Action Fund, Peterson Institute for International Economics, Budget Lab, Tax Foundation
3. Trump Tariffs: The Economic Impact of the Trump Trade War
