The United States first used tariffs in 1789, primarily as a source of revenue for the new nation. The introduction of the income tax in the early 1900’s largely eliminated the need for tariffs for revenue, but tariff policies existed in various forms to protect and promote domestic industries. Eventually, in the second half of the 20th century, the United States and many other countries began promoting free-trade policies and tariffs were seen as roadblocks to trade. However, President Trump’s America first policy in his first and current terms have again brought to light the notion of tariffs as a necessary tool to protect America. The big question is how tariffs will impact the markets and what people can do to protect their own finances.
In early February 2025, President Donald Trump imposed various tariffs on imports from Canada, Mexico, and China, with the stated goal of addressing national security concerns related to drug trafficking and illegal immigration, as well as to reduce the U.S. trade deficit. The tariffs on Mexico and Canda went into effect today, March 4, 2025, and the markets are having quite the reaction. Up until now, the markets have reacted fairly mildly to the potential tariffs, possibly under the premise that a deal would be brokered between the countries, but today’s deadline has ushered in more volatility and pessimism. Let us take a quick look at the tariffs as they stand today and their potential impact on the market. The tariffs are structured as follows:
- Canada and Mexico: A 25% tariff on most imports, with Canadian energy products facing a 10% tariff.
- China: An increase from a 10% to a 20% tariff on Chinese goods.
Market Reactions and Economic Impact
The announcement and implementation of these tariffs initially led to very little changes in the market until recent weeks when the looming tariffs (along with other economic and social issues) have created increased market volatility. Yesterday, on March 3, 2025, as it became clear the deadline for a tariff deal would pass without a deal, the S&P 500 index fell by 1.8%, reflecting investor concerns over the economic repercussions of the trade policies.
There are concerns that tariffs could disrupt established supply chains, particularly in industries like automotive manufacturing, where the U.S., Canada, and Mexico have deeply integrated operations. The tariffs may lead to increased production costs, which would likely be passed on to consumers in the form of higher prices. For instance, grocery prices (already high) could rise due to tariffs on Mexican produce, as Mexico supplies a significant portion of U.S. vegetables. Higher prices will put added pressure on inflation at a time when most people are still feeling the pinch from the increased costs over the past few years.
Retaliatory Measures
In response to the U.S. tariffs, Canada announced retaliatory tariffs on $155 billion worth of American goods, and China imposed reciprocal tariffs on key U.S. agricultural products, including chicken, pork, soy, and beef. The current leader of Ontario recently threatened to cut off the U.S. from electricity the region produces and sends to the U.S. These measures are set to escalate trade tensions and could further strain international relations.
Broader Economic Considerations
While tariffs are often used as tools to protect domestic industries, their broad application in this instance raises concerns about potential inflationary effects and the impact on consumer prices. Retailers have issued warnings about the potential negative impacts of tariffs on their profit margins, driving down stocks in that space.
Furthermore, as mentioned above, the energy sector is expected to be significantly affected, as Canada is a major supplier of oil and gas to the U.S. The 10% tariff on Canadian energy imports could lead to increased energy prices for American consumers, particularly in regions heavily reliant on Canadian energy.
The newly imposed tariffs are generating considerable uncertainty in the markets and could have far-reaching implications for the U.S. and global economies. While intended to address specific policy objectives, their broad application may lead to increased consumer prices, disrupted supply chains, and strained international trade relations.
What about your portfolio in the current environment
First, we want to acknowledge that concerns about the market and economy are valid, especially as we face so much uncertainty. The strategic investing philosophy that we follow at Gordian means that we set up portfolios with long-term goals in mind. As we often discuss with clients, changes to portfolios are not made in anticipation of certain events or in reaction to them. Instead, we seek to establish portfolio allocations that will help clients participate in the market during times of growth and withstand market turmoil in times of uncertainty. While domestic stocks have virtually erased the post-election gains, foreign stocks are positive year-to-date and bonds are holding steady so far, up slightly year-to-date. Of course, when those times of uncertainty and corrections occur, it can be hard to watch but we encourage our clients to maintain the disciplined, long-term approach. Guessing how the market will react and timing when to make moves is a fool’s errand and one that ultimately does a disservice to clients. The market reached an all-time high only a month ago, and market corrections are bound to happen (and should happen). We can only maintain our discipline and focus on what we can control, like portfolio allocation and taxes. Gordian will continue to look for opportunities and we are always here to discuss the market, your concerns, and how these issues may be impacting our clients.