Given the rapid succession of announcements related to trade policy in the past week, significant uncertainty surrounds what specific tariffs may be implemented in the near term, how soon and how long any such tariffs may be in place, and the direction, degree, and scope of additional levies that may be announced. The events of this week alone confirm that President Trump intends to use tariffs as a negotiating tool to address other policy priorities beyond trade policy itself, but how they may be used remains to be seen.
We’ll be collaborating with our colleagues across Plante Moran to monitor developments and provide insights and perspectives to our clients. To that end, we’re sharing a piece that was released by the firm earlier this week that provides additional insights that you might find beneficial.
The current landscape
News related to tariffs has dominated headlines and contributed to increased market volatility in recent days. While tariffs were widely expected to be both high on the priority list and a key tool in the new administration’s agenda, recent executive orders imposing import tariffs on the three largest U.S. trade partners proved unsettling to the markets. However, last-minute extensions of the announced tariffs against Mexico and Canada temporarily alleviated investor concerns.
What happened?
On February 1, Trump announced a blanket 25% tariff on Mexican and Canadian imports, along with an additional 10% tariff on Chinese goods beyond existing levies. A more limited 10% tariff was outlined for Canadian energy products that account for nearly a quarter of Canada’s exports to the United States.
By February 3 — just hours before the policies were set to take effect — Trump announced separate agreements with both Mexico and Canada to delay their implementation for 30 days. In separate statements, Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum each committed to invest in border security and curb drug trafficking to address the Trump administration’s stated concerns, despite initial indications of retaliatory tariffs against imports from the U.S.
While Mexico and Canada were able to come to terms on an extension, the additional levies against China became effective on February 4. In turn, China responded with a series of measures, including new tariffs on certain U.S. imports, an antitrust investigation into Google, and limitations on Chinese exports of key metals used in multiple industries ranging from consumer goods to defense. China’s response was viewed as more muted than anticipated, indicating a potential willingness to come to the table to discuss the future of trade policy between the two nations.
What’s the potential impact?
The short answer is: it will depend. A number of significant unknowns remain at play that significantly complicate anyone’s ability to gauge the magnitude or impact of the situation. Will additional tariffs go into effect? How long would tariffs stay in place? How will our impacted trade partners respond? What additional policy concessions could be achieved via negotiations? Of course, the discussion is dominated by many big “ifs,” but if all the proposed tariffs are eventually implemented, the effective tariff rate on U.S. imports would exceed 10%, up from just above 2% currently. This would represent the highest U.S. tariff rate since 1946, and if they’re expanded further, that rate could be even higher. Ultimately, the current environment is exceptionally unpredictable, particularly when other potential crosscurrents that could either blunt or exacerbate the direct impact of proposed levies are factored in.
We summarize below some potential implications of tariffs for consideration, but caution that there’s rarely a simple causational relationship across these factors. The textbook notion of “ceteris paribus” or “all other things being equal” doesn’t apply in practice. The fact of the matter is that tariffs are just one of many factors that will influence the direction of growth, inflation, and policy as we look forward from here.
- Inflationary pressures: The imposition of tariffs would contribute to higher prices in the near term, although the degree of increase would be influenced by multiple variables. Their size, breadth of applicability, duration, and resulting changes in demand/consumption would all come into play. Any future expansion to increase tariffs on other trade partners (most notably the European Union) and/or a universal tariff in the coming months would exacerbate the risk. However, it’s important to keep in mind that new tariffs represent a one-time increase to prices. Thus, the near-term uptick in inflation could prove transitory. Longer term, the result of tariffs could be disinflationary, particularly if higher prices contribute to falling demand and slower economic growth — something the Fed will be closely monitoring.
- U.S. economic growth slows: As noted, planned tariffs could lead to weaker demand and create a new headwind to growth. However, they come at a time in which the economy otherwise appears to be on solid footing today. The economy grew at a healthy 2.3% annualized pace in Q4 2024 and fundamentals today remain largely constructive, providing a buffer against the downside effect of reduced demand caused by higher prices.
- Interest rates stay higher for longer: The combination of a strong economy and potential for upward pressure on already-sticky inflation presents challenges for monetary policymakers. The Fed formally paused its cutting cycle last month, holding its short-term policy rate steady at 4.25–4.5%. More notably, the two cuts previously projected for 2025 may now be in question. Longer-term rates have been relatively steady amid the recent news on tariffs; however, if inflation edges up in the coming months, we could see long-term rates move higher and the Fed stay on hold for longer.
- Ex-U.S. growth challenged: At face value, a 25% tariff on imports from Canada and Mexico would be quite negative for their economies since goods exports to the U.S. accounts for roughly 20% of each country’s GDP. The 10% tariff on imports from China will be less impactful, as their exports to the United States account for less than 3% of China’s GDP today. Ultimately, tariffs would likely lead to slower growth abroad, if not outright recession for certain countries whose economy is more highly dependent upon exports and/or otherwise levered to trade with the United States.
While the postponement of tariffs for Canada and Mexico provided some reprieve from these potential impacts, the sheer uncertainty that exists around trade policy will have its own implications for business investment and investor sentiment alike.
What should investors do?
The recent news flow regarding tariffs has been fluid. Needless to say, there’s tremendous uncertainty on what may be announced or implemented next, let alone how long any or all pieces may be in place. In our recent webinar, “2025 Market and Economic Outlook,” we addressed many of the unknowns on the horizon — particularly the uncertainty surrounding the impact of potential new policies. We leave you with the closing remarks from that webinar, which resonate even more today.
“The fact of the matter is as investors, [and] as analysts, we live in and deal with probabilities, not absolutes. What people believe will happen is often incorrect. And so, we have to take a step back and be objective about any number of these things.
We can’t say definitively what will happen next month, next year, over the next several years, which again is why we preach the importance of a few key tenets to the financial planning process.
- Diversification — If we knew exactly what was going to happen, we’d know exactly what asset class to invest in at any given point in time. Diversification helps to provide a degree of protection against a range of outcomes that may or may not be the baseline.
- Time horizon — What happens over the next month, or three months, or six months is going to matter much less than what happens over the coming decade or more for most investors.
- Most importantly, making sure that your asset allocation (your portfolio structure) is aligned with your long-term goals, objectives, return requirements, and tolerance for risk.
Those are the decisions above all else that will drive your success as an investor, not only over the coming year, but over the many years to come.”
As with any event that creates questions for investors, these recent developments may be a source of uncertainty for a period of time. The flow of news may dominate discussions in the near term but shouldn’t override the long-term underpinnings of your financial plan. Maintaining appropriate liquidity and portfolio diversification within the context of your investment time horizon, risk tolerance, and return objectives should remain paramount in determining your portfolio positioning.
We greatly appreciate the trust you have put in us. We’ll continue to closely monitor developments as the situation evolves and consider the potential implications for your portfolio. If you have questions, please reach out to your relationship manager.
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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
