Investment Implications of Trump’s Latest Trade Tariffs

 Overview

Just before sweeping tariffs on Mexico and Canada were set to take effect, former President Donald Trump announced a last-minute 30-day delay following bilateral discussions with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau. This sudden reversal was welcomed by markets, as the tariffs could have inflicted immediate economic shocks on North America and beyond. Given the magnitude of trade between the U.S., Canada, and Mexico, economic growth losses could have reached between 0.5% and 1.5% of GDP.

The market reaction was swift: the Canadian Dollar and Mexican Peso rebounded from earlier losses, and equity markets stabilized. While Trump secured concessions on non-trade issues, demonstrating his negotiating approach, uncertainty remains. The delay is contingent on a “final economic deal,” leaving open the possibility of future disruptions. Meanwhile, the Trump administration is set to engage in trade talks with China, with indications that even if tariffs were imposed, their implementation could be gradual.

Investment Implications

1. Macroeconomic Effects

• From a U.S. macroeconomic standpoint, inflationary pressures from tariffs may be mitigated by "relative price shifts," where price increases in tariffed goods could be offset by currency adjustments.

• However, the broader impact on growth could be significant, as real incomes get squeezed and demand contracts.

2. Supply Chain and Business Impact

• While the immediate effects may be subdued, prolonged uncertainty and potential tariffs could erode trade relationships and accelerate supply chain realignments.

• Small businesses, which lack the flexibility and scale of larger firms, may bear a disproportionate burden. In contrast, publicly listed companies, typically larger entities, might be less affected.

• Asset-light businesses, which rely less on international supply chains, could have a relative advantage over firms with extensive global manufacturing and sourcing networks.

3. Historical Precedents and Market Reaction

• The U.S.-China trade tensions in 2018-2019 led to market disruptions, stalled business investment, and triggered capital flight into safer assets. Periods of significant market volatility were observed during this time.

• Market sentiment improved once the Phase I trade deal was reached, easing volatility and driving a financial market recovery.

• If a full-scale trade war erupts, U.S. markets and the U.S. dollar (USD) could outperform, while smaller, open economies might struggle.

4. Regional Considerations and APAC Resilience

• Domestic economic factors will play a key role in shaping Asia-Pacific (APAC) economies' responses to trade disruptions.

• India and Japan, with strong domestic demand, are better positioned to cushion the effects of weaker international trade.

• China’s economic outlook will largely depend on the scale and effectiveness of policy stimulus measures rolled out this year.

• These internal dynamics could help offset some of the negative impacts of reduced trade activity.

5. Currency and Emerging Markets (EM) Outlook

• In the near term, the USD is expected to remain strong due to continued trade uncertainty.

• A robust USD could challenge capital flows into emerging markets, as liquidity tightens and investors seek stability in U.S. assets.

Conclusion

While the temporary halt in tariffs on Mexico and Canada has provided relief to markets, the overarching uncertainty surrounding trade policy remains a significant concern. Businesses and investors should prepare for potential shifts in supply chains, currency fluctuations, and continued market volatility. Domestic factors in key APAC economies, such as India, Japan, and China, will be crucial in determining their resilience. In the meantime, the strong USD may create headwinds for emerging market investments, requiring a cautious approach in capital allocation strategies.