Global Markets Shattered by Trump's Aggressive Tariff Blitz | Image Source: Images.pexels.com
TOKYO, February 2, 2025 – The global financial landscape has become a confusion following US President Donald Trump’s announcement of radical tariffs on Canada, Mexico and China. As of February 4, the United States will impose 25% customs duties on Canadian and Mexican goods and 10% on Chinese imports. These measures, aimed at combating illegal immigration and drug trafficking, triggered immediate reprisals on the part of the affected nations, raising fears about a total world trade war.
According to Reuters, the Canadian dollar and Mexico’s weight collapsed with several years of losses, while the Chinese yuan reached a low record in offshore trade. The euro has also fallen to its lowest level since 2022, and even traditional safe havens such as the Swiss franc have not been forgiven, moving to levels that have not been seen since May last year. As global markets move away from the shock, economists warn that the effects of the waves can lead economies to recession and increase inflationary pressures around the world.
What caused the last commercial war?
President Trump’s tariffs stem from his administration’s aggressive attitude to illegal immigration and drug trafficking. The new measures have been described in three executive decrees and are expected to come into force at 12:01 EST in February. 4. According to Capital Economics, these rates are expected to accelerate US inflation “faster and wider” than expected.
While trade tensions between the United States and China have faded for years, this sudden escalation involving Canada and Mexico has blinded global markets. “The surprise for the markets is that Canada and Mexico recuse immediately, while others like China and the EU probably follow the example,” said Tony Sycamore, IG Market Analyst. This rapid reaction has fuelled fears of a sharp contraction in world trade.
How do the countries concerned react?
Canada and Mexico did not waste time announcing reprisals. Canada imposed US import duties of 25 percent. In addition, the Government of Canada has committed $155 billion to key sectors to exert maximum economic pressure. Meanwhile, China promised to challenge US tariffs within the World Trade Organization, highlighting a long legal and diplomatic battle.
“A persistent tariff of this magnitude is a recession for Canada,” said Frances Donald, Chief Economist of Royal Bank of Canada. “If our analysis is sustained, we believe these rates could eliminate Canadian growth for three years. TD Economics echoed this sentiment, predicting that sustained tariffs could officially lead the Canadian economy to recession within six months.
What is the impact on global curves?
Exchange markets responded quickly to tariff announcements. The United States dollar increased from 0.7 per cent to 7,2552 yuan in offshore trade, reaching a short record of 7,3765 yuan. It also increased by 2.3% to 21.15 Mexican pesos and 1.4% to $1,4755 CAD, levels not observed since 2003. The euro sank to 2.3% at $1,0125 before recovering slightly to $1,0259, while the Swiss franc weakened to its lowest level since May.
“CAO is likely to weaken further compared to the USD,” said Shaun Osborne, head of Coin Stratiega at Scotiabank. It predicted that the Canadian dollar could lose 5 to 6 per cent in the coming weeks, which could raise the USD/CAD exchange rate to 1.50-1.55, the equivalent of 66.6-64.5 cents.
What are the broader economic consequences?
Economists sound alarms about the potential of a global economic crisis. According to BMO Capital Markets, Canada may fall into a recession later this year, pushing the Bank of Canada to cut its policy rate from 3% to 1.5% by October. “Tariffs on this scale pose serious risks of rising unemployment,” said Frances Donald, noting that Canadian GDP could decrease to 6 percentage points if tariffs persisted.
The United States is not immune to these effects. Paul Ashworth of Capital Economics cautioned that tariffs could lead to an increase in inflation in the United States, exacerbating the economic pressures already perceived due to high interest rates and slow growth. “The announced rates could reduce real GDP growth from about 2 percentage points to about zero in 2025,” said Douglas Porter, BMO’s chief financial market economist.
How do financial markets respond?
Global stock markets are experiencing greater volatility. US stock futures opened 2 per cent on Sunday night, while the P/TSX composite index and the Dow Jones industrial index closed the two lowest on Friday in anticipation of tariffs. The cryptomoneda markets were not saved, since Bitcoin fell below $100,000, marking its lowest level in almost three weeks.
“The bets are higher than ever, and Trump” all in “the approach shows that he bets a lot,” said Stephen Innes, Managing Partner of SPI Asset Management. “If it is a calculated bet or a high risk error, the fall could reconfigure the business dynamics across the continent and beyond. »
What are the long-term risks?
The longer the tariffs, the greater the risk of lasting economic damage. “If these rates increase for several months, Canada’s recessive risks increase rapidly,” said Frances Donald. The manufacturing sector, which accounts for 9% of Canada’s GDP and 70% of its trade with the United States, is particularly vulnerable. Industries that depend on cross-border supply chains, such as automobiles and energy, face the prospect of multiple tariff cycles on the same products.
“Many companies will increase their production at the border to avoid tariffs,” said Douglas Porter. This change could lead to permanent changes in supply chains and investment patterns, which would undermine long-term economic growth.
For the U.S., tariffs could decrease by increasing costs for U.S. consumers and businesses. “It’s when you look at the types of goods that it could have an impact, it’s from the car to the lawyer,” said Mark Malek, Chief Investment Officer of Financial Siebert. “The most immediate effect would be to increase the cost of goods, which could lead to a recession in the U.S. economy. »
As tensions escalate, the world notes closely whether diplomatic efforts can deactivate the situation before it becomes a world trade war of all kinds.
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