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On the 1st of February, President Trump’s administration imposed a series of tariffs on China, Canada and Mexico. The latter two nations have been long-standing U.S. allies via the North American Free Trade Agreement (NAFTA) since 1994 – which reduced trade barriers and even enabled some U.S. businesses to compete with China on global trade – and since upgraded via the United States-Mexico-Canada Agreement (USMCA) in 2020. China, on the other hand, has been a subject of much bipartisan deliberation on the matter of containment for a while now.
Cumulatively, these new tariffs cover 43% of the United States’ imports — or approximately $1.3 trillion worth of goods. Over decades, all four countries have been integrated into a complex supply chain ecosystem which the tariffs could potentially strain. For instance, through most of 20241, Mexican factories directly supplied trucks, cars and wires to the U.S.; Canada exported telephones and batteries; while China exported both crude and refined petroleum.
Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
Source: U.S. Census Bureau; customs data in 2024 through November
Mexico and Canada also export the likes of fruits, vegetables, grain, alcohol, steel and lumber to the U.S.
Next on the list for the current administration is potentially the European Union which, like the three nations, runs a trade surplus against to the U.S. While tariffs might be considered part and parcel of statecraft, they have a particularly trenchant impact on U.S. consumers and businesses in the present day.
How Tariffs Impact CitizensIn the runup to the election, President Trump had touted that the tariffs are essentially taxes on foreign country with no impact on the U.S. at all. This isn’t strictly true. In the previous Trump administration, increased tariffs on imports from China were estimated by the New York Federal Reserve2 to have increased costs for average American households by about $831 per year, after accounting for direct costs and efficiency losses. The tariff regime on China was largely carried forward into the Biden administration.
The latest round of promised tariffs isn’t expected to leave American consumers unscathed either: estimates or 2026 largely pin the bulk of the impact on the bottom 60% of U.S. income earners.
Source: Institute on Taxation and Economic Policy, October 2024
One argument made is that tariffs compel domestic manufacturing, thus securing employment and incomes for U.S. citizens. This is complicated by the fact that tariffs also have a deleterious effect on exchange rates: if tariffs threaten imports from County A into the U.S., that means there will be less transactions of A’s Currency relative to the U.S. Dollar. This means that the U.S. Dollar rises, thus making it even more expensive for a U.S. consumer to access foreign-made goods and make U.S. exports less competitive. On the other hand, if the U.S. dollar didn’t rise, domestic producers would essentially be close in price relative to tariff-loaded products – which ultimately impact the domestic consumer.
Source: Cato Institute, „Defending Globalization“
However, Country A’s central bank might also seek to defend its currency by selling U.S. dollar assets, thus negating the impact of U.S. dollar rises. At least at this moment, this hasn’t happened: while both the Canadian dollar and the Mexican peso have slipped against the U.S. dollar, neither country – nor for that matter, China – has offloaded significant volumes of U.S. dollars to make a dent in the rising U.S. dollar levels.
Notably, while China has been offloading its held U.S. Treasury assets since 2018, there has been no significant downturn in the U.S. dollar index. Sold volumes have been relatively small: as of November 2024, China continues to hold on to nearly $769 billion in U.S. Treasury bonds.
Tariff Threats to Other CountriesIn the course of the tussle between the U.S. and China in recent times, Canada and Mexico have both registered increases in imports from both the U.S. and China. Similarly, a number of countries in Asia – mostly Vietnam and Malaysia – have also registered increases.
Source: MUFG Americas, „Trade War 2.0 Will Be Different”, February 2025
The European Union (E.U.) – as represented by powerhouses France and Germany – have either held steady or decreased exports from both countries. As it stands, it could be extrapolated that threats of increasing tariffs on the E.U. is unlikely to make a significant threat to E.U.-based businesses. However, the effect on strategic relationships will likely be telling. Furthermore, increased retaliatory tariffs from the E.U. will likely be an impediment on growth prospects for U.S. businesses and their European leg of their supply chains.
India has also been a recipient of President Trump’s threats of tariff hikes, principally as it is a member of the BRICS coalition. It bears remembering, however, that – unlike, say, NATO – BRICS is neither a military alliance nor an economic coalition in the vein of NAFTA, et al. For instance, while Russia witnessed a giant hike in imports from China and a decrease in imports from the U.S., India registered a decline in imports from China – on the back of a vigorous indigenous manufacturing promotion programme primarily to cater to its billion-plus citizens – while registering a relatively slight hike in U.S. imports, likely as a result of greater inclusion into U.S. supply chains.
The India example highlights the complexity of the global economy: while it is true that the U.S. is a massive consumer, the rest of the world is open for business as well. Tariffs are not a “one size fits all” solution for the U.S. As a policy to meet non-economic goals, however, it might be.
In ConclusionIn the White House communiqué3 announcing the tariffs, the administration made it very clear that the objective of the tariffs was to promote greater cooperation in stemming the flow of migrants and narcotics through the U.S.‘ vast borders. The ability to effectively and minutely police the borders will likely remain in question even with the proactive military and law enforcement involvement of both Canada and Mexico. However, this „strong-arm“ measure is likely to resonate with a substantial bulk of the U.S.‘ weary citizenry, regardless of costs. China has always been a bipartisan bugbear and likely to remain so in the near future.
The threat of „tariffs“ on other countries, however, might be largely counterproductive in the near term. While it is entirely possible that sustained tariffs might promote domestic manufacturing, it will remain a pain point on U.S. citizens and businesses alike. The rising U.S. dollar index, additionally, has some interesting effects on markets.
The appreciation of the U.S. dollar tends to have manifold impacts. Morgan Stanley estimated4 that the tariff hike regime would potentially drag down real GDP growth by 1.9% (essentially negative growth), create an inflationary spike of 2.9% to 3.2%, and knock down consumer spending by 5.5%. In contrast, government coffers would see a net increase of $2.8 trillion after accounting for reduced tax receipts due to slower growth. But despite the decrease, the fact remains that a higher dollar would mean higher earnings for businesses, at least in dollar terms.
Hence, if enforced and collected on, tariffs will likely be a bullish signal for U.S. markets – such as the „broad market“ S&P 500 – in the near term. Over the long term, retaliatory tariffs will create competition and create alternative alliances that exclude or replace U.S. businesses‘ foothold in foreign markets.
All in all, tariffs are likely to be contributory factors in markets being choppy-to-bullish in the year to come and even prove to be an inflationary accelerant. But, for voters, it might prove to be a distinctive point in favour of the administration.
Footnotes:
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