By Brian Swint

The trade war promised by President Donald Trump stepped up a gear overnight, with 25% tariffs on goods from Mexico, Canada, and an additional 10% on China taking effect.

No one was really sure that it would actually happen -- a month ago, they were delayed at the last minute. Within hours China and Canada announced retaliatory measures. Mexico is expected to take similar measures soon.

China raised tariffs on food and other farm products, as well as adding to export restrictions on American companies. It also filed suit with the World Trade Organization. Canada increased tariffs on nearly $100 billion U.S. imports.

The reaction from markets was even more swift. Stocks and the dollar slumped Monday afternoon. That isn't what was supposed to happen -- the main concern about the tariffs is that they will drive up inflation by bolstering the cost of imported goods for consumers, which should, in theory, lead to higher interest rates and a stronger currency. But the worry has shifted to how much the tariffs might hurt growth by prompting shoppers to spend less, disrupting supply chains, and hurting U.S. exports as trade partners retaliate.

Some of the worst-hit sectors are car makers such as Ford, General Motors, and Stellantis, as their production lines were deeply integrated with U.S. neighbors after decades of enjoying unencumbered trade. Stocks related to food production such as Deere, the tractor maker, and AGCO, which also makes machinery, took a hit as well.

Nevertheless, the market jitters may not last, as Trump could reverse course at any minute, and the impact of the latest round of tariffs may not be as severe as feared.

"In the immediate short term, the prospect of trade retaliation will help to tarnish the U.S. dollar's prospects," said Tan Kai Xian, a strategist at Gavekal Research. "But in the longer run, theoretically the dollar and U.S. equities should benefit in an all-out trade war. This is because trade is a smaller share of GDP in the U.S. compared with other major economies."

The S&P 500 finished 1.8% lower on Monday. The Atlanta Federal Reserve's GDPNow indicator, a real-time estimate of what gross domestic product growth will be in the current quarter, plunged to a 2.8% contraction. A month ago, it was indicating an almost 4% expansion. The dollar index, a measure of the greenback against a basket of peers, was down 0.5%.

The next target for tariffs are likely to be goods from the European Union, and other countries will also be affected. For example Japan, home to car brands Toyota and Honda, makes a lot of vehicles in Mexico to export into the U.S., too.

Write to Brian Swint at brian.swint@barrons.com

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March 04, 2025 05:46 ET (10:46 GMT)

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