Recently, the Trump administration imposed the strictest tariffs we’ve seen in decades on Mexico, China, and Canada. It’s caused quite an uproar among citizens, countries, news outlets, etc. What will happen with a trade war among countries? Here’s what we know about tariffs, how they work, and how they could impact your portfolio.
What Are Tariffs?
Tariffs are a type of tax that companies pay for importing products from outside their country.
Let’s use an example of lumber. Many US companies import Canadian lumber to sell. With Trump’s proposed tax, the importer will now have to pay an additional 25% fee on top of the normal price.
When are tariffs normally implemented? Tariffs are typically implemented when a country has a booming manufacturing base that it wants to protect from foreign competitors.
Trump aims to bring all manufacturing home to the US, hoping to “Make America Great Again.” But note how I said “existing” above – it takes time to build industry. It is a huge multi-year investment to build factories, design a supply chain, hire qualified workers, etc.
There’s no guarantee that any of this, once up and running, can be profitable in the long term. Who in their right mind will move their industry back to America when administrations change every four years?
It’s easier to pass the cost to the customer than to invest millions of dollars and try changing a global manufacturing economy to a domestic one.
What Are the Impacts of Tariffs?
Severe. Economists have warned that the tariffs will cool Global growth and Spark inflation. The most immediate and wide-sweeping impact will be the drastic rise in the prices of goods. You can count on the importer passing on the expense to the consumer.
Expect everything to get more expensive. Take the example of the tariffs on lumber given above. The effect of Canadian tariffs will significantly affect real estate investors. Approximately 30% of the softwood used in the US is sourced from Canadian imports, and a 25% tariff will raise those expenses.
Furthermore, 60% of the crude oil imported by the US originates from Canada. Consequently, there’s been a slight increase in oil futures since February 3rd.
Economist Thomas Samson at the London School of Economics says this trade war is bad for everyone. It’s a lose-lose situation for US, Canadian, and Mexican households. Analysis from the US Tax Policy Center found that US household income after taxes could drop by 1% due to the tariffs. This means the average US household could lose about $1,000.
We Depend on Other Countries for Goods
The world is also much more globalized than ever. Take, for example, a Boeing 787 with its final assembly in South Carolina.
Some don’t realize that it has parts from 5 different countries, from hundreds of different suppliers. Even if the US wants to make all these parts in America, it will take a lot of time, not to mention money, to get all these factories up and running.
Furthermore, some things just can’t be “made in America”. The last time I checked, bananas, coconuts, and coffee weren’t grown in the US. Implementing tariffs won’t “Make America Great Again”; if anything, it will make Americans poor as items are more expensive.
Why Is Global Trade a Good Thing?
Global trade is what staves off global war. There is a saying: “When goods stop crossing borders, soldiers will.” The only thing that has spared us from nuclear war so far is that the global economy is so interconnected that nobody dares push the button, or they lose all their money.
The more isolationist we become, the less interdependent we all become, and the more likely war becomes because nobody has as much to lose anymore.
Has havoc been unleashed? Trump revealed new tariffs on imports from Canada, Mexico, China, and the EU—25% on certain products and 10% on others. The market’s response late Friday was evident: the S&P 500 fell by 0.5%, the Nasdaq slipped by 0.3%, and investor confidence hit.
Even more alarming is that Trump openly stated he does not care about the stock market’s reaction.
The Stock Market Reacted Swiftly
As traders entered Monday morning thinking that tariffs were just around the corner, anxiety quickly surged regarding the risk of a worsening trade war that could adversely affect economies worldwide, including that of the United States.
Crude oil prices fluctuated on Monday amid the uncertainty. The benchmark US crude price jumped from $72.53 on Friday to nearly $75 before briefly retreating to around $72 as the US stock market opened.
At the start of the trading day, the US stock market appeared poised for a much steeper decline due to worries about the tariffs’ potential impact on US corporations. The S&P 500 briefly decreased by almost 2%, and the Dow experienced a drop of up to 665 points. It dropped by 0.8% after Asian and European markets experienced larger declines.
The S&P 500 declined by 45.96 points to close at 5,994.57. The Dow fell by 122.75 points to finish at 44,421.91, while the Nasdaq composite decreased by 235.49 points to end at 19,391.96.
Trade War Stock Losses
The largest losses were seen in Big Tech and other firms likely to suffer from higher interest rates due to the tariffs imposed on imports from Canada, Mexico, and China.
Constellation Brands, which markets Modelo and Corona beers in the US, saw its stock drop by 3.5%. Best Buy, known for selling electronics manufactured globally, fell by 2.4%. Brown-Forman, the maker of Jack Daniel’s, which sells alcohol in Canada, decreased by 3.3%.
Big exporters were some of the worst hit by fears of further tariffs. Honda and Mazda both fell around 7% in early trade. Taiwan Tech Giant Foxconn, which has a plant in Mexico, plunged 8%.
The US dollar increased in value, while stock markets and digital currencies fell sharply. Stock futures in Europe and the US dropped, and an index of shares in the Asia-Pacific region saw its largest decline in nearly six months.
Concerns that these tariffs could raise prices also led to higher yields on two-year US Treasuries.
Asian Stocks Slump With Trade War Tariffs
In the early trading hours on Monday, Japan’s Nikkei index fell by over 2.6%. Likewise, we saw similar declines for Benchmark indexes in South Korea and Australia.
Stocks in Hong Kong, which include listings of Chinese companies, fell half a percent. Meanwhile, markets in mainland China remained shut for the Lunar New Year holidays. They will resume trading on Wednesday after the holidays.
Stock markets in Asia dropped on Monday after US tariffs on China, Canada, and Mexico triggered fears of a hit to global growth. Japan’s Nikkei index tumbled as much as 2.6 percent in early trading.
Key Takeaways
- Stocks fell on Monday, February 3rd, after President Donald Trump imposed tariffs on America’s three largest trading partners: Canada, Mexico, and China.
- The S&P 500 declined by 45.96 points to close at 5,994.57. The Dow fell by 122.75 points to finish at 44,421.91, while the Nasdaq composite decreased by 235.49 points to end at 19,391.96.
- In stock markets abroad, indexes fell 1% in London, 1.2% in Paris, and 1.4% in Frankfurt. South Korea’s Kospi sank 2.5% in Asia, and Japan’s Nikkei 225 fell 2.7%.
- President Donald Trump has granted Canada and Mexico a one-month reprieve from 25% tariffs set for Tuesday.
- Analysts predict more severe outcomes for equities, which might result in an 8% decline in the total earnings of the S&P 500.
A Reprieve Is In Sight
US stocks reduced their losses after Mexican President Claudia Sheinbaum stated that tariffs on goods from her country would be paused for a month following discussions with Trump.
During the afternoon, the Dow even managed to turn positive briefly for a small gain. After closing the US stock market, Canadian Prime Minister Justin Trudeau mentioned that his conversation with Trump resulted in a 30-day tariff hiatus.
An Escalating Trade War Has The Potential To Undermine Stock Values
Some analysts on Wall Street remain doubtful about the duration of a trade war, especially given Trump’s keen attention to the stock market. An escalating trade war could undermine stock values, as evident from a swift market downturn on Monday.
One Trade War Continues: China
A trade conflict began after the US backed away from two previous ones. A 10% tariff became effective on Chinese goods at midnight on February 3rd, 2025. China responded immediately by imposing a 15% tariff on American coal, a 10% tariff on US crude oil, and large SUVs and pickup trucks. In addition, there is an investigation into Google for purportedly breaching its antitrust laws.
Even more worrisome is Trump’s recent announcement that the US Postal Service will stop all packages coming from China. Furthermore, Trump’s executive order has removed an exemption that permitted goods valued at $800 (£641) or less to enter the US without incurring duties or certain taxes.
The “de minimis” tax loophole has been under heightened scrutiny recently as Chinese e-commerce giants like Shein and Temu reached millions of customers in the US.
Investors Look to Bonds as Safer Investments
Investors turned to long-term US government bonds for safety as stocks and cryptocurrencies fell in value. This move caused bond prices to rise and lowered Treasury yields.
The 10-year Treasury bond yield dropped to 4.53%, down from 4.55% late on Friday, and reached a low of 4.46% earlier. This gives a short break from the rising Treasury yields that have worried Wall Street recently. The yield increase was partly due to concerns about higher interest rates caused by ongoing high inflation.
Short-term Treasury yields climbed on Monday as expectations for Federal Reserve rate cuts diminished. The two-year Treasury yield increased to 4.25% from 4.21%.
Rising yields are putting pressure on various investments, especially stocks that seem overpriced. This trend affects companies like Nvidia, which benefit from the growth in artificial intelligence. NVIDIA experienced a decline of 2.8%, which played a big role in pulling down the S&P 500.
How Will the Tariffs Impact Your Portfolio?
Stocks could sink.
According to the ex-JPM Strategy Chief, a stock correction is likely. Other analysts predict more severe outcomes for equities. On Monday, analysts at Bank of America projected that a trade conflict between the US and its key trading partners might result in an 8% decline in the total earnings of the S&P 500.
Final Thoughts: Trade War
The Wall Street Journal calls this “The Dumbest Trade War in History,” and I don’t disagree. The reality is that tariffs make everyone poorer; you cannot isolate the effect. Tariffs are not a zero-sum game.
Regarding your portfolio, if your investments are properly diversified, new tariffs shouldn’t be much of a concern. Gold is always a go-to and has stood the test of time. With the threat of tariffs, we’ve seen a rise in the demand for gold.
Frequently Asked Questions
What Is the Meaning of Trade War?
It’s an economic difference of opinion between countries where one country implements trade barriers against another country.
Why Are the US and China Fighting?
The US aims to protect itself and make money by implementing a Trade War with China. Whether that works or not remains to be seen.
Is the US in a Trade War?
China and the US have had a trade war conflict since 2018. Trump implemented tariffs, and Biden kept them.
Who Is the US’s Biggest Trading Partner?
Canada is the largest trading partner, followed by China and Mexico.