​What US President Trump's tariff plans mean for markets and the global economy

The scope of Trump's proposed tariffs

US President Donald Trump has announced plans for significant new tariffs targeting key trading partners, signalling a return to protectionist trade policies.

In early February 2025, President Trump announced a series of tariffs targeting imports from Mexico, Canada, and China, set to take effect on 4 March. These measures include a 25% tariff on all imports from Mexico and Canada, with a 10% tariff specifically on Canadian energy products, and an increase from 10% to 20% on existing tariffs for Chinese goods. The stated objectives are to curb illegal immigration, combat drug trafficking, and address trade imbalances.

Trading platform users have already seen market reactions, with increased volatility in affected indices such as the Russell 2000, US Tech 100 and US 500 trading in negative territory year-to-date and the US dollar appreciating.

​US indices year-to-date performance chart

​These measures represent a substantial escalation in trade policy compared to his first administration, when tariffs were more targeted.

Economic consequences on US consumers

The imposition of these tariffs, were they to be implemented, is expected to lead to higher prices for a wide range of consumer goods. Imports from Mexico and Canada constitute a significant portion of the US market for products such as fruits, vegetables, automobiles, and energy.

The Tax Foundation estimates that the average tariff rate on all US imports would triple from approximately 2.5% to over 7%, marking a more than 50-year high. This increase could cost US consumers between $120 billion to $225 billion annually, exacerbating inflationary pressures. The same holds true for the US's trading partners.

Potential market implications

Economists warn that these tariffs could disrupt established supply chains and trade relationships across North America. The Peterson Institute for International Economics projects that a sustained 25% tariff could reduce Mexico's exports by about 12%, leading to a 4% decline in its gross domestic product for 2025.

Canada, heavily reliant on trade with the US, faces potential economic contraction and job losses, particularly in its automotive and mineral processing sectors. In the US, increased production costs and retaliatory tariffs from trade partners may hinder economic growth and competitiveness.

​Influence on interest rates and inflation concerns

The Federal Reserve (Fed) is closely monitoring the situation, as the tariffs introduce additional inflationary pressures while potentially dampening economic growth—a combination that complicates monetary policy decisions. The prospect of "stagflation," characterised by stagnant growth and rising inflation, may prompt the Fed to reconsider its interest rate strategy. Some analysts suggest that the central bank might delay rate cuts or even consider rate hikes to combat inflation, despite the risk of further slowing economic activity.

Effects on the stock indices, sectors, the US dollar and interest rates

Online trading participants should monitor US stock indices, sectors heavily reliant on international trade, like technology and manufacturing, automotive, and consumer goods, which are already seeing significant impacts on their year-to-date performances.

The US 500 experienced a 2.5% decline for the week, erasing gains accumulated earlier in the year and the US Tech 100 dropped by over 7.5% from last week's 22,222 record high.

The increased cost of imported materials and potential retaliatory measures from trade partners introduce uncertainty, leading investors to reassess risk and growth prospects. Additionally, disappointing economic data and earnings reports have amplified market volatility.

Bond markets have also reacted, with some analysts suggesting tariffs could potentially contribute to inflationary pressures.

In the short-term, US and European yields have fallen, though, as investors worry about the impact tariffs while have on economic growth. Concerns about US economic fragility have grown, with soft data and Treasury Secretary Scott Bessent warning of underlying weaknesses, prompting traders to anticipate two Fed rate cuts this year, the first by July.

The tariffs are contributing to a complex environment for the US dollar. On one hand, trade restrictions can lead to a stronger dollar as import demand decreases. This is the case at the moment as the US dollar basket has risen by over a percentage point from its 10-week low this week.

On the other hand, concerns about economic slowdown and potential shifts in Fed policy could exert downward pressure on the currency.

Investors are closely watching for signs of inflation divergence between the US and other economies, such as the eurozone, which could influence currency valuations and capital flows.

International response and trade relationships

​Major trading partners have indicated they may implement retaliatory measures if these tariffs are enacted.

The European Union has suggested it would consider proportional responses targeting American exports.

China has reiterated its position against trade wars while preparing contingency plans and imposing retaliatory tariffs. In response to President Trump's announcement on 27 February 2025, of an additional 10% tariff on Chinese imports, the Chinese government has expressed strong opposition and pledged to implement countermeasures to protect its economic interests.

Earlier in February, the US imposed a 10% tariff on all Chinese imports, citing concerns over China's role in the fentanyl crisis. In response, China implemented tariffs of up to 15% on certain US goods and initiated regulatory measures against American companies, including an antitrust investigation into Alphabet.

These developments raise concerns about a potential cycle of escalating trade barriers affecting global commerce.