Trump’s Tariff Policy: The Economic Impact

On February 1st, 2025, the Trump administration announced a series of tariffs set to be levied on Canada, Mexico, and China beginning on the 4th.

The immediate response from markets was unsurprisingly negative with global stock indices falling on the news. While we agree with the current consensus that a sustained policy of heightened tariffs and antagonistic trade tensions would be harmful to the U.S. economy and likely lead to continued pressure on the stock market, our base case is for these tariffs to at least be mitigated in severity and the worst-case impacts of protracted stagflation or recession to be avoided.

Under the declaration of a national emergency on the U.S. border, the President implemented a 25% tariff on imports from Canada and Mexico and a 10% tariff on those from China. A caveat has been made for energy imports from Canada in the form of a lower 10% rate.

Canada, Mexico, and China announced that they will be retaliating in kind with measures of their own. Canada has responded with 25% tariffs on various categories of U.S. goods, as well as suggesting that Canadian citizens should effectively boycott American products such as liquor imports.

At this point, Mexico has reached a deal with the U.S., where Mexican President Sheinbaum agreed to deploy 10,000 additional troops assigned to the security of the US-Mexican border in exchange for a temporary reprieve from the 25% tariffs. China has yet to put forward a full set of responsive policies, but has said that they will be filing a suit against the U.S.’s trade practices through the WTO.

While the effective substance and structure of the tariffs themselves are important, it is also important to note the purpose and intent of these policies, as it may suggest what could happen in the future. The rollout of the administration’s announcement was heavily focused on border security and the President’s dissatisfaction with illegal immigration along both the northern and southern border.

Particular emphasis was placed on the movement of fentanyl and adjacent products across the border; an issue that the new administration blames upon Canadian and Mexican border/trade policies. We are not commenting on the veracity of this reasoning, but state purely as a means to assess what further actions may be taken and what the outcomes ultimately may be.

While not a prominent focus of the current tariff announcement, there is also an economic desire from the administration to narrow the trade deficit of the United States with its trading partners. The administration’s economic thesis here is that increases in exports from the U.S. would necessitate onshoring of manufacturing and create jobs.

Given that the bulk of the messaging around this series of tariffs has been guided by the border security issue, we believe that there is a potential pathway for at least some form of alleviation from their current 25% rate.

Some form of commitment from Mexico and Canada to formally state with a level of detail that they are bolstering their border security measures along with a minor agreement to address some of the trade imbalances would likely provide a path for de-escalation of tariff policies and provide the political view of a “win” for both sides.

If there is one economic lesson to learn from the past three years, it is that Americans (and the world at large) have very little tolerance for inflation.

While tariffs have had their use cases as a tool when used to target specific industries and isolated purposes, their long-term broad implementation has historically resulted in a hit to economic growth and an increase in prices that can be passed on to the end consumer.

In terms of the economic impacts, the extent to which global trade contributes to economic growth is of higher significance to Canada, Mexico, and China – with these countries’ Trade-to-GDP ratios in 2023 amounting to ~67%, ~88%, and ~38% respectively compared to ~27% in the United States.

Our base expectation is for these tariffs to ultimately lessen in their severity over a time horizon short enough for the economy to maintain a healthy level of growth. A result that is likely a lower level of growth than would exist without tariffs, but one that should lend support to markets once the worst is avoided.

The path to this outcome, however, could continue to be unpredictable with threats of even further increases in tariffs and their expansion to other nations as a likely possibility. While the real economic consequences of these policies are, in our view, most likely to be less than feared, how the market grapples with this new trade policy will continue to be important to watch.

A rise in uncertainty revolving around trade is a risk that could create volatility. We continue to believe that a well-diversified portfolio designed around one’s risk tolerance is the best way to navigate these uncertainties. While volatility related to tariffs, geopolitics, or any other temporary catalyst can produce unease, the economy remains strong and the fundamental drivers of earnings in the market remain intact.