Trade Wars Begin

Trade Wars Begin

President Donald Trump has announced the imposition of tariffs on imports from Canada and Mexico, effective from Tuesday, February 4, 2025 for Canada but delayed one month for Mexico. The tariffs will likely carry a much bigger impact on Canada and Mexico than on the US. Here’s a breakdown of what this means for the economy and capital markets.

Trade Dependency and Tariff Details

The U.S. Imports from Canada represent approximately 14% of U.S. total imports, which was valued at over $437 billion in 2022.? Imports from Mexico account for about 15% of U.S. total imports, with a value of roughly $455 billion in the same year. (Sources: The U.S. Census Bureau, as referenced in various web sources, particularly from the U.S. International Trade in Goods and Services report for 2022. The Observatory of Economic Complexity (OEC) for detailed trade statistics between countries.)

According to these same sources, Canada's exports to the U.S. make up more than 70% of its GDP, while Mexico's exports to the U.S. constitute around 80% of its total exports, contributing significantly to its GDP.

Thus, we think the hit to the U.S. GDP growth will be relatively mild compared to the hit on Canada and Mexico due to the U.S.'s broader base of trading partners. We have seen estimates indicating as much as a 5% GDP hit for Canada if these tariffs persist over a year, due to the high dependency on U.S. trade. Similarly, Mexico could see its GDP decrease by even more under similar conditions, given its even greater reliance on U.S. markets.

The tariffs are expected to generate significant revenue for the U.S. Treasury. Estimates from various sources suggest that tariffs on Canada and Mexico could raise about $1.3 trillion over ten years according to the Congressional Budget Office. However, this must be weighed against potential economic slowdowns, increased costs for U.S. consumers, and possible retaliatory measures from affected countries.

Market Reaction

We have already seen volatility in financial markets with declines in U.S. stock prices, a drop in the value of the Mexican peso and Canadian dollar, and an uptick in U.S. Treasury bond yields.

There's a risk of inflation due to higher costs for goods, which might pressure the Federal Reserve to adjust monetary policy. This could affect interest rates and, consequently, bond yields.

Equities in sectors heavily reliant on imports from Canada and Mexico or on exports to these countries might see profit margins squeezed or supply chain disruptions. Sectors like automotive, agriculture, and energy could be hit particularly hard, given the integrated supply chains with Canada and Mexico.

Investment Strategy Considerations

Considering these developments, ensuring your portfolio is diversified across different sectors and geographies is more crucial than ever to mitigate risks from trade policy changes. WealthPlan already manages broadly diversified investment portfolios, so we are relatively insulated from the increased volatility. We will closely monitor the situation, including any retaliatory actions from Canada and Mexico, which could further influence market conditions. Should the need arise, we will consider rebalancing your investments to adapt to the new economic landscape, possibly shifting towards sectors less exposed to these trade tensions. At this time, we do not see any need to making any such adjustments.

While there are risks, there might also be opportunities in sectors that could benefit from domestic production incentives or in companies that might gain from new trade alignments.

This trade tariff situation is extremely fluid and can change day to day. We will keep you updated as the situation evolves and are here to discuss how these changes might affect your financial goals. Please feel free to reach out if you have any questions or concerns.

DISCLOSURES

Advisory services offered through WealthPlan Group, a DBA for WealthPlan Investment Management, a subsidiary Registered Investment Advisor of WealthPlan Group, LLC.? WealthPlan Group, LLC is not a registered investment advisor, but is the holding company for WealthPlan Partners LLC and WealthPlan Investment Management, LLC.

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