Our Take on Tariff Tuesday

Editors’ Note: MarketMinder prefers no politician nor any party. We assess developments for their potential economic and market effects only.

After a 30-day reprieve, 25% tariffs on Mexico and Canada took effect Tuesday, and another 10 percentage point increase against China is slated to arrive in six days. All have announced or planned retaliatory measures. Stocks fell on the news, and headlines warn of pain ahead. Uncertainty is high, and market volatility adds to nerves. At times like this, we think it is important to take a deep breath, assess the situation objectively and remember how markets work. This is how to face the real challenge: avoiding investment errors that could work against your long-term goals.

Make no mistake, we don’t think tariffs are good. In our view, they are bad policy. Not because of who implemented them (we are always agnostic on politics, parties and personalities), but because anything adding costs and friction to global trade risks interfering with everyday commerce, creates winners and losers and reduces economic efficiency. This is partly why tariff talk spooks markets. The fear also has deep roots in the Tariff Act of 1930’s role (alongside global retaliation) in contributing to the early 1930s’ deep recession.

At the same time, markets don’t move one-to-one with economic events. There isn’t some scale telling us how certain policies will intrinsically, automatically affect stocks. Setting aside markets’ initial gut reaction to policies, longer-term movement always depends on how reality goes compared to initial impressions and expectations.

Hence, the effect depends not only on whether a given policy has negative consequences, but on whether the zeitgeist is underestimating or overestimating the damage. If tariffs were to take effect at a time when everyone was cheering and focusing only on the potential winners their architects claim they will create, then there would be a high risk of negative surprise for stocks. But if they take effect amid deep, widespread fears of Great Depression 2.0, then there is positive surprise potential. In that scenario, tariffs’ amounting to modest friction and cost increases would qualify as a better-than-expected outcome. In our view, stocks don’t need good—just not as bad as feared.

In our view, this happier scenario is the likeliest outcome now. Exhibits 1 and 2 show the tariffs implemented or scheduled thus far and the retaliatory measures—and how all of them scale.

Exhibit 1: New US Tariffs

Source: White House, FactSet and US Bureau of Economic Analysis (BEA), as of 3/4/2025. China includes both rounds of 10 percentage point increases. H/T: Fisher Investments Research Analyst Tom Kirby

Exhibit 2: New Retaliatory Tariffs

Source: FactSet, US BEA, Reuters and The Wall Street Journal, as of 3/4/2025. H/T: Fisher Investments Research Analyst Tom Kirby

Now, a word about the scaling above. First, you will notice that both are scaled against US GDP. We did this to intentionally overstate the effect on America’s economy. But, to be clear, it is logically inconsistent to argue America will bear the full cost of tariffs on Canadian, Mexican and Chinese goods as well as the full cost of retaliation from the same three. This is incredibly unlikely in the real world; tariffs’ costs are likely to be shared across both trade partners. Some firms will eat the cost of goods shipped. Others will pass them on. Some will dodge them. The tables are meant to help scale the unlikely maximal effect—a worst-case scenario for this round of actions.

President Donald Trump has proposed other tariffs, of course, including an EU levy, “reciprocal tariffs” on countries with perceived imbalances and pharmaceutical goods. These aren’t in the above analysis, however, because at this point they are just talk, without specifics or numbers to crunch and scale. Same goes for the mooted retaliation from various trade partners. Canadian province Ontario announced a 25% export tax on electricity provided to about 1.5 million US homes but directed power providers to cease exporting electricity to the US entirely if a national deal isn’t reached by April 2. That amounts to a temporary cost increase, potentially followed by a power supply chain rejiggering, whose costs and effects will be difficult to calculate. It may also be unnecessary. Everyone is talking tough right now, but that is pretty standard. World leaders have done their homework and know Trump uses tariffs as leverage in foreign policy talks and are playing the cards they have. A deal seems to be the goal on all sides. No one involved seems to want these costs and headaches to be permanent.

Which brings us to the potential for positive surprise. All the tariff coverage we have read in recent days implies tariffs, once enacted, won’t go away. That they are permanent bad policy. But Trump has said multiple times that the tariffs enacted thus far are about achieving concrete aims, namely stopping the flow of migrants and fentanyl. In Europe, freer EU market access, where tariffs and non-tariff regulatory barriers hamper world trade, seems to be the goal. In 2018 and 2019, the first Trump administration announced a lot of tariffs. Some never took effect, with deals reached before implementation. Some were enacted only temporarily, biting the dust once a deal happened. And some stayed, like the levies on China, but clearly didn’t dent commerce or spike inflation. Trade re-routed through third countries and life went on.

So perversely, we are encouraged by headlines’ tone and reactions to these tariffs. Great Depression references, which we saw several of, ignore the minute worst-case scale demonstrated in Exhibits 1 and 2. The market’s volatility, which wiped out all the S&P 500’s post-election gains, is highly unpleasant, and we aren’t downplaying its effects. But it also demonstrates a sentiment reset, suggesting the high hopes that lifted stocks in the late autumn and early winter have faded. This rebuilds the bull market’s proverbial wall of worry, increasing positive surprise potential.

When expectations are this dour, stocks don’t need perfection or anything close to it. They don’t even necessarily need good. The US and global economies’ grinding out ok results as overseas producers and their US clients negotiate new terms and trade routes would probably suffice.

None of this is to say volatility will reverse immediately. High fear and uncertainty may roil markets a while longer. As we write, US and global stocks haven’t yet reached -10%, which would put them in correction territory (usually a sentiment-fueled drop of -10% to -20%). Perhaps they get there. Markets can swing hard on fear in the short term, and it is always impossible to predict when they will shift from that reaction to their primary job: weighing the longer-term fundamental landscape. But eventually that shift should happen, and with tariff costs so tiny, stocks should start reflecting that the actual hit to corporate earnings and overall economic activity should be much smaller than feared.