On 1st Feb, President Trump signed orders for levies of 25% on Mexico, 25% on Canadian non-energy goods, 10% on Canadian energy, and a 10% increase to tariffs on China. The above tariffs on imports from the US’ three largest trading partners will affect trade worth about $1.3 trillion, representing 43% of US imports based on 2023 data and close to 5% of US GDP. The action will raise the average US tariff rate from its current level near 3% to 10.7%, based on current import patterns, and deal a significant supply shock to the US economy. This could shave off 1.2% off GDP and add around 0.7% to core PCE. Mexico, China and Canada are the United States’ three largest trade partners. The tariffs will have no exemptions, and the executive action Trump signed Saturday will close the so-called de minimis loophole that had allowed shipments of $800 or less to come into the United States tax-free. Hours after Trump’s action, Canadian PM Trudeau announced retaliatory 25% tariffs on US goods. Mexico too is likely to respond with retaliatory tariffs as well as China. Summary: The above reflects a serious upswing in tariff wars and could potentially lead to large fall in US equities (around 5-10%) as well as CAD & Mexican Peso. It also implies a large uptick in short end-up to 2-year UST yields & US yield curve flattening by 10-15 bps. While the 10yr UST might initially see higher yields, as risk off gathers globally we might then see 10yr UST yields falling sharply. On FX front CAD is likely to test 1.50 levels if the tariffs continue. MXN can easily test 25 levels and CNH can breach 7.35 levels. Gold might rally because of safe haven demand.
