Financial markets reacted with mixed signals as President Donald Trump hinted at imposing 25% tariffs on imports from Mexico and Canada starting February 1. The announcement, delivered during a signing ceremony in the Oval Office on Monday evening, marked a dramatic shift in U.S. trade policy and sent ripples through global markets.
The proposed tariffs could have significant ramifications for North America, with Mexico and Canada being two of the U.S.'s largest trading partners. According to federal trade data, the U.S. imported $475 billion worth of goods from Mexico and $418 billion from Canada last year, collectively representing nearly a third of all U.S. imports. Conversely, the U.S. exported $354 billion to Canada and $322 billion to Mexico during the same period.
The news sent the U.S. dollar soaring to a five-year high against the Canadian dollar, while the Mexican peso depreciated by 1%. Oil prices tumbled, with Brent crude falling to $79.10 per barrel and West Texas Intermediate dropping to $76.15 per barrel. Meanwhile, gold, often considered a safe haven, rose to a two-month high amid uncertainty over trade policies.
Trump's tariff proposal represents a departure from his earlier campaign promises of sweeping, across-the-board tariffs, including a 60% levy on Chinese imports. On Monday, the president signed an executive action directing federal agencies to investigate the causes of trade deficits and review existing trade agreements. "Americans benefit from and deserve an America First trade policy," the action stated, emphasizing the need to promote investment, enhance technological advantages, and prioritize domestic workers.
While markets braced for potential disruptions, analysts expressed skepticism about the feasibility and implications of Trump's tariffs. "The tariffs, if enacted, would create a self-inflicted wound on America's own economy," said Judge Glock, senior fellow at the Manhattan Institute. Clark Packard, a trade policy expert at the Cato Institute, warned that the tariffs could violate terms of the U.S.-Mexico-Canada Agreement (USMCA) and provoke retaliatory measures from Mexico and Canada.
The proposal also drew criticism from market-focused officials within Trump's economic team, who advocated for a softer approach. Treasury Secretary Scott Bessent and National Economic Council Director Kevin Hassett reportedly pushed for alternatives such as incremental tariffs or delays to allow for negotiations. However, trade advisers like Peter Navarro and Commerce Secretary Howard Lutnick argued for a more aggressive stance to signal Trump's intent to overhaul trade relationships.
Global markets exhibited cautious optimism amid the uncertainty. Japan's Nikkei index ended the day 0.3% higher, while China's Shenzhen market rose 0.5%. However, the UK's FTSE 100 saw only marginal gains, and European gas prices fluctuated following Trump's decision to lift a moratorium on export licenses.
"Once again, Trump appears to care little for who are perceived to be allies or foes, with Canadian and Mexican currencies hit hard," remarked Joshua Mahony, an analyst at Scope Markets. "The Chinese markets clearly felt more optimistic, with Trump's decision to reinstate TikTok followed up by a lack of any mention around tariffs on Chinese imports. For now, anyway."
Despite the market volatility, Trump remained resolute in his approach. In his inaugural address, he pledged to "overhaul our trade system to protect American workers and families." He announced plans to establish an "External Revenue Service" tasked with collecting tariff revenue. "It will be massive amounts of money pouring into our Treasury coming from foreign sources," he stated.
