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Trump’s Tariffs Rock Markets as Canada, Mexico, and China Prepare Retaliation

By:
James Hyerczyk
Updated: Feb 3, 2025, 11:15 GMT+00:00

Key Points:

  • Trump imposes 25% tariffs on Canada, Mexico, and China, triggering market volatility and fears of an all-out trade war.
  • Canada retaliates with 25% tariffs on $105B in U.S. goods, targeting autos, agriculture, and consumer products.
  • The U.S. removes the $800 de minimis exemption, impacting e-commerce giants like Amazon and China-based retailers like Temu.
  • Currency markets react sharply as the USD surges 1.5% against CAD and EUR, while JPY strengthens as a safe-haven asset.
  • Equities brace for steep losses, with auto stocks, Tesla, and consumer goods firms likely to face the hardest hit.
Trump Tariffs

Trump’s Tariff Shock Triggers Market Turmoil as Retaliation Looms

Markets were caught off guard as U.S. President Donald Trump followed through on his tariff threats against Canada, Mexico, and China. After years of mixed signals on trade policy, investors had largely dismissed the latest warnings. But with steep tariffs now set to take effect, global markets must quickly adjust to the economic fallout and potential countermeasures. The question now is whether this escalates into a full-scale trade war or if a resolution can be reached before lasting damage is done.

Tariffs Hit Canada, Mexico, and China Hard

Trump’s decision imposes a 25% tariff on most Canadian imports, with energy products facing a lower 10% rate. Mexico is hit with 25% tariffs on all exports to the U.S. Meanwhile, China faces an additional 10% duty on all imports, with the removal of the $800 “de minimis” exemption—a major blow to e-commerce retailers like Temu and Amazon that rely on Chinese-sourced goods.

The White House cited national security concerns, blaming Mexico and Canada for failing to curb illegal immigration and drug trafficking. China, meanwhile, was targeted for its role in fentanyl exports. The sudden implementation of these tariffs caught markets off balance, triggering immediate reactions across currencies, equities, and commodities.

Retaliation Is Already in Motion

The response from U.S. trading partners has been swift. Canada announced 25% tariffs on $105 billion in U.S. goods, initially targeting alcohol, coffee, clothing, and household appliances before expanding to autos, agriculture, and aerospace. Mexico has pledged countermeasures, though specifics remain unclear.

China condemned the move as a violation of international trade rules, vowing to retaliate and filing a complaint with the WTO. While Beijing has yet to outline specifics, past disputes suggest it could target U.S. agricultural exports, technology components, or impose new restrictions on American businesses operating in China.

Trump also confirmed over the weekend that he will “absolutely” impose tariffs on the European Union, setting the stage for another trade confrontation. The EU has warned it will respond “firmly” if targeted.

Markets React as Risk-Off Sentiment Takes Hold

Markets have responded with significant volatility.

  • Currencies: The U.S. dollar surged 1.5% against the Canadian dollar and euro, while the Mexican peso is expected to weaken sharply at market open. The Japanese yen strengthened, reflecting a flight to safety. The Chinese yuan will be closely watched, with Beijing defending key levels.
  • Equities: Global stock markets are set to gap lower as risk sentiment deteriorates. Automakers such as GM and Ford, which produce up to 40% of vehicles in Canada and Mexico, could see sharp declines. Tesla faces heightened risk in China and Europe, where anti-U.S. sentiment is growing.
  • Treasuries: The reaction is uncertain. Some expect yields to rise on inflation concerns, while others see U.S. bonds as a safe haven, supporting prices.
  • Crypto: Bitcoin fell more than 4% over the weekend, as traders sought liquidity in traditional safe-haven assets.

Key Risks: Trade War or Temporary Disruption?

The central question for traders is whether this standoff escalates further or if a diplomatic resolution emerges. With Canada and China already retaliating and Mexico preparing its response, the risk of a prolonged trade war is rising. An even broader conflict looms if Trump moves forward with EU tariffs.

Key areas to watch:

  • Any signals from Washington or U.S. trade partners that indicate a potential compromise.
  • Supply chain disruptions, particularly in automotive, technology, and consumer goods sectors.
  • Inflationary pressures from rising import costs and potential Fed intervention.

If tariffs remain in place, markets could face a stagflation scenario—slower growth combined with rising prices. Short-term volatility is likely to persist, with risk-off sentiment dominating early trading. Traders should stay alert for further retaliation or de-escalation signals that could shift market direction.

More Information in our Economic Calendar.

About the Author

James Hyerczyk is a U.S. based seasoned technical analyst and educator with over 40 years of experience in market analysis and trading, specializing in chart patterns and price movement. He is the author of two books on technical analysis and has a background in both futures and stock markets.

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