2025 has so far been a volatile year for investors. From the initial trade war within North America, to President Trump’s “Liberation Day” announcement on April 2nd of widespread tariffs on most imports, to the recent escalation with China, policy changes from the White House have been swift and aggressive, posing a challenge to globally-integrated supply chains. Adding to the chaos is how flippantly previously-announced policies have changed, with markets yo-yoing on each update from the White House.
With how unstable and fast-developing the situation has proven, it’s difficult to distill the full scope of these tariffs or how trade relations will ultimately shake out. Still, for those with anxieties about the markets, this post will strive to put things into perspective.
So, what exactly happened?
Since taking office, Trump has been lambasting the US’ trade deficit with key trading partners, whereby the US imports more than it exports, with the President likening the imbalance to a “subsidy.” To tackle this issue, the White House ordered a report due for April 1st
that would detail the US’ current trade relations, with the administration highlighting April 2nd as the day the government would enact “reciprocal” tariffs to counter what it deemed to be unfair trade practices. While markets were pricing in a flat 10% tariff with the announcement, the actual tariffs proved more aggressive than expected, with some countries facing a levy as high as 50%. The tariffs appear to be primarily based on each country’s trade balance against the US; the larger the gap between what a country sells to and buys from the US, the higher the tariff. Even still, some countries with trade deficits against the US (namely Australia) were even themselves hit with the levy.
Markets dropped meaningfully as investors braced for the worst only to rebound on April 9th as the White House announced a pause on its high country-specific tariff rates for 90 days, opting for a flat 10% rate while the government negotiated new trade deals. While the update gave comfort to investors that the President seems willing to negotiate, it was coupled with an escalation of Chinese tariffs that, after back-and-forth hikes, ended with an 125% Chinese tariff on US imports, and a 145% US tariff on Chinese imports.
Thankfully, Canada and Mexico (the US’ two largest trade partners) have avoided most of last week’s drama. The countries still face previously announced sector-specific tariffs on auto parts, steel, and aluminum, and previous duties on Canadian softwood lumber have now doubled from 14.4% to 34.45%, however trade carried out under the USMCA agreement (roughly 40% of Canadian exports) will continue tariff-free for now.
While the intent of these tariffs appears to be to improve the US’ negotiating position, it is clear that they will hurt the economies of all parties involved should they remain in effect. With the April 2nd tariffs forecasted to bring the US’ effective tariff rate from ~2% to 22.5%, the Budget Lab at Yale estimated that prices in the US would rise 2.3% in 2025, translating into an average annual household cost of $3,800. Real GDP could also be nearly a full percentage point lower in 2025, in part due to retaliation. While the US economy is less-reliant on trade than many of its trade partners (exports represent ~11% of GDP), stocks are more sensitive to the rates, with foreign sales making up 41% of the S&P 500’s revenue.
Countries like Canada, who’s exports represent a larger share of their GDP, are forecasted to see a heavier hit to their economy, with the Conference Board of Canada anticipating a 1.3% drop in real GDP, driven primarily by the auto sector, which could see a 57.4% decline in motor vehicles and parts exports.
These scenarios assume that tariffs remain in place, however we face a number of possible outcomes. In the worst-case scenario, the trade war escalates and the US commits to its new protectionist policy, a move that would permanently disrupt global supply chains. A more optimistic outcome would see the US open to negotiate new, low/no-tariff agreements with its trade partners before the tariffs come back into effect. Some are further hoping for a Hail Mary from Congress, which may look to intervene in the face of upcoming midterms. In the mean time, most countries have delayed plans to retaliate following the pause, with China and Canada being some of the only countries to retaliate with tariffs of their own.
It’s important to acknowledge that we cannot predict how America’s trade tiff will ultimately play out over the next year, let alone the next week – policies have proven prone to last minute adjustments, changes and delays. Because of this, we have no interest in speculating if (ideally, when) the trade war will simmer. Markets also tend to be forward looking; selling based on dips in prices has historically proven a losing strategy, with the strongest market rebounds commonly following periods of sharp declines. We therefore look to manage our risk by reviewing the financial health of the companies we invest in, assessing exposure to these acute headwinds, and ensuring the return/risk trade-off of the positions we hold remains attractive. We remain confident that client portfolios comprise of quality securities, attractively growing businesses with strong competitive positions. With our long-term focus, the fundamental growth of these companies will ultimately prevail.
With investments in both Canada and the US, we remain vigilant in our monitoring of the markets; should you have any questions or concerns, do not hesitate to get in contact with us.