U.S. equities and yields, the U.S. dollar, and oil are lower while gold and the VIX are higher to begin the day following President Donald Trump’s decision to move forward with his tariff plan. After a month’s delay, new U.S. tariffs on Canada, Mexico, and China went into effect overnight, applying a 25% tariff on goods coming in from Mexico; a 25% tariff on Canadian goods (aside from energy products which will be taxed at 10%); and an increased 20% tariff on goods from China. In aggregate, the U.S. actions are expected to impact approximately $1.5 trillion in imports and result in an average tariff rate for Americans higher than anything experienced since the 1940s.

The new tariffs are likely to increase prices for U.S. consumers on a range of goods, most notably on cars and trucks, oil and petroleum products including gasoline, cell phones, computers, toys and sporting goods, and apparel. Initial reaction to the tariff announcements centered on the impact to the North American economy at large, as 47% of vegetables and almost 40% of fruits consumed by Americans, while approximately half of all car parts and assembled vehicles, make their way to the U.S. via our USMCA trading partners.

Admittedly, tariffs are likely to be much more damaging to Mexico and Canada than they are for the U.S. With 16% and 14% of Mexican and Canadian GDP, respectively, directly dependent on U.S. exports, any extended period of tariffs of this magnitude is likely to depress economic growth and the value of these currencies meaningfully. Response from Canada was swift, as Prime Minister Justin Trudeau announced a 25% tariff on the equivalent of $107 billion of U.S. goods over the course of the next four weeks. (Impacted goods include American beer, wine, and appliances.) Mexican President Claudia Sheinbaum has also announced plans to effect “tariff and non-tariff measures” by Sunday – a replay of her thoughtful and cautious approach to February’s tariff announcement, while also calling for the U.S. to do its part in curbing fentanyl demand.

As for China, the announcement in early February called for a 10% tariff on all imports, but as we intimated in our note at the time, we believe the China story is likely to evolve and now has, with the tariff rate increased to 20%. President Trump has already closed a loophole that exempted packages valued at under $800 from tariffs, which has an outsized impact on apparel which accounts for 30% of all apparel imported into the U.S. In addition, there are a number of anticipated actions in the coming week that will further test the U.S.- China relationship, with steel and aluminum tariffs in effect as of March 12th while early April might bring a 25% tariff on semiconductors, automobiles, and pharmaceuticals as well as a report on the progress (or lack thereof) of the Phase 1 trade deal negotiated in President Trump’s first term.

China retaliated by placing a 15% tariff on imports of chicken, wheat, corn and cotton from the U.S., as well as 10% tariffs on imports of U.S. sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables, and dairy products. It also added 15 companies to its export control list and is likely to continue to look for offsets to U.S. action over the coming months.

Our view is that there may be an attempt to negotiate the tariff terms between the U.S. and Canada/Mexico over the coming days, but more color may come in tonight’s address to Congress, as Trump might take the opportunity to lay out specific demands or give a nod towards softening the approach in certain industries, such as granting an exemption or applying a lower tariff rate on autos. He may also use this platform to outline further tariffs planned for European Union or other U.S. trading partners that have tariffs in excess of those levied by the U.S. As for China, as mentioned above, negotiations may come as we move through 2025, but today’s actions are likely only an opening salvo.

Given that most of what was announced today was a known risk, one could question the magnitude global market response. Part of what has changed since the initial announcement is sentiment. While companies and consumers were riding a wave of optimism during the month of January, anticipating deregulation and a strong U.S. economic foundation could deliver another year of positive outcomes, economic data has softened, and confidence has wavered along with it. Consumers were already expecting higher prices over the next year – on top of already sticky inflation – and small business surveys registered a significant increase in uncertainty.

Anticipation of an uptick in jobless claims and the unemployment rate on the heels of DOGE’s efforts to streamline the U.S. federal government point to some potential volatility coming out of February’s non-farm payrolls print on Friday and threatens to disrupt the narrative of a resilient consumer comfortable with their job prospects. There is also continued geopolitical upheaval as the Trump Administration cut aid to Ukraine following a tense meeting with last week with Ukrainian President Volodymyr Zelenskiy.

The implication of these events in aggregate is a firm shift from inflation worries to growth concerns. While tariffs on Chinese goods were anticipated, the scope of the actions against Canada and Mexico was expected to narrow – particularly after the reprieve granted in early February. Further tariffs loom on the horizon and U.S. companies appear cautious in terms of outlining plans for capital expenditure and hiring given the near-term uncertainty – despite their longer-term constructiveness.

The Atlanta Fed’s GDP Now estimate has fallen to -2.8% for the first quarter of 2025, and expectations for Fed rate cuts are now at three for the year, meaningfully higher than just a few weeks ago. Admittedly, there are a number of factors that are weighing on this quarter’s GDP print, and the impact of tariffs is likely to be muted for this quarter based on the timing. But the shift in sentiment and activity has been noticeable and parsing out the effects of seasonality and some of the pull forward that occurred in the fourth quarter of 2024 is a challenge.

Despite the potential for broad economic disruption, we are not as of now anticipating a significant hit to U.S. growth or a persistent increase in inflation; we expect that there will be discussions with Canada and Mexico in the near term given the potential impact to their economies of a protracted trade war. We also believe that the foundation for U.S. growth remains intact, buoyed by an improving environment for business investment and a deregulatory impulse. As such, we remain constructive and committed to our current broad allocations of at target in equities and overweight in investment grade fixed income, encouraging clients to take advantage of the recent decline in equities to reposition portfolios accordingly, particularly as it relates to positions that have appreciated meaningfully over the prior two calendar years.