The markets’ tariff indigestion

The Trump administration’s proposal of 25% tariffs on imports from Mexico and Canada sent immediate shockwaves through markets, highlighting the broader economic and financial implications of disrupting the delicate web of just-in-time supply chains across North America and the world. If these tariffs are enacted, here’s what sectors are likely to get hit hardest—and how it might affect the overall appeal of U.S. equities. 

Equities tied to global trade have already been hit by the news. Markets abhor uncertainty, and the risk of a sudden, sweeping policy change disrupts long-term decision-making. While the administration justifies the tariffs by citing concerns over drug trafficking and immigration, the market’s negative response reflects fears of higher costs, strained supply chains, and retaliation by foreign governments. 

Mexico has already signaled the possibility of countermeasures, raising the possibility of a tit-for-tat trade war. Such escalation could magnify economic disruptions, particularly for sectors like agriculture and energy, where trade integration between the US, Mexico, and Canada runs deep. 

Among the worst hit by the recent sell-off were U.S. auto manufacturers—deeply reliant on Mexican supply chains—whose shares fell sharply as investors priced in higher production costs and potential loss of competitiveness. Currency markets also reacted swiftly, with the Mexican peso and Canadian dollar depreciated against the US dollar. These moves underscored concerns about weakened export competitiveness and economic stability for two of the U.S.’ largest trading partners. Canada buys more U.S. exports than China, Japan, and the UK combined. 

Many policies proposed by the incoming administration, including these tariffs, are seen as disproportionately benefitting the American economy at the expense of trading partners. With Europe grappling with stagnation and Asia seeing mixed growth signals, the U.S. remains a relative bright spot, attracting investment interest despite the risks. 

However, Trump’s high-tariff approach, if implemented, risks isolating key allies and partners, fueling economic uncertainty both outside the U.S. and within it. Over time, the compounded effects of retaliation, higher costs, and eroded confidence could temper the U.S. economy’s perceived exceptionalism.

Despite these concerns, U.S. equities are still on a strong footing compared to their global peers. The American economy has shown remarkable resilience, bolstered by robust consumer spending, low unemployment, and healthy corporate earnings. Investors, while cautious of potential volatility, may find domestic opportunities in more defensive sectors and global opportunities in markets with a lower beta to global trade. 

Arjun Kaushik contributed to this article. Sources: Bloomberg, New York Times.