Trump tariffs: markets brace for falls as Mexico and Canada hit back

Investors are bracing for stock market falls after Canada and Mexico hit back against trade tariffs imposed by Donald Trump this weekend.

Trading on the brokerage IG’s weekend markets indicated shares were likely to fall on Monday after the US president signed an order on Saturday to bring in sweeping tariffs this week, a move that could prompt a trade war with some of the country’s largest trading partners.

Technology stocks are expected to be hit, and the US’s Nasdaq index is on track to fall by 1.4% at the start of trading on Monday, according to IG. The official futures market opens on Sunday evening.

The Dow Jones index of 30 large US companies looked likely to fall by 0.8%, while the UK’s FTSE 100, which ended last week at a record high, was on track for a 0.7% drop.

The IG analyst Tony Sycamore said: “The surprise for markets today isn’t so much Trump’s tariff announcements – largely as flagged. It’s that Canada and Mexico retaliated immediately and that others, ie China and the EU, may follow their lead, resulting in a sharp contraction in global trade.”

Canadian and Mexican exports to the US will face a 25% tariff starting on Tuesday, and there will be a 10% levy on energy resources from Canada.

Trump said the move was in response to a “major threat” from illegal immigration and drugs, and demanded both countries staunch the flow of fentanyl and illegal immigrants.

Imports from China will face a 10% tariff on top of existing US charges.

Trump also told reporters he would “absolutely” put tariffs on goods from the European Union, claiming the EU had treated the US “terribly”.

Economists fear that the trade war could push Canada and Mexico into recession.

Deutsche Bank’s top currency strategist, George Saravelos, said if Trump’s tariffs went ahead, they would be the “largest shock” in global trade policy since the end of the Bretton Woods system of fixed exchange rates half a century ago.

“We see immediate recessionary consequences for some of the economies involved and broad-based negative read-across to the world economy,” Saravelos added.

Paul Ashworth, the chief North America economist at Capital Economics, warned that Trump’s decision to impose tariffs on Canada, Mexico and China was “just the first strike in what could become a very destructive global trade war”.

“Imports from the European Union will be hit within the next month or two and a universal tariff is coming in April. Since exports to the US account for around 20% of their GDP, today’s tariffs could plunge both the Canadian and Mexican economies into recession later this year,” Ashworth added.

Canada was swift to respond. The prime minister, Justin Trudeau, announced a tit-for-tat 25% tariff phased in across C$155bn (£86bn) worth of American products.

Mexico’s president, Claudia Sheinbaum, ordered her economy minister to implement tariff and non-tariff measures in response, while China’s commerce ministry pledged to file a “lawsuit” against the US at the World Trade Organization.

Trump’s tariffs include a retaliation clause to ratchet them up if Mexico, Canada or China try to impose their own tariffs in response.

Analysts and energy traders have predicted that US motor fuel prices are likely to rise because of tariffs on Canadian and Mexican oil.

Chris Weston, the head of research at the brokerage Pepperstone, predicted Trump’s announcement would lead to “some derisking” in the markets, and higher volatility on foreign exchanges.

“With Trump placing an additional 25% tariffs on Mexican and Canadian imports and adding 10% to the current tariff rate on Chinese imports (with limited carve-outs), one can say that this outcome comes close to representing the most hardlined approach of all the possible scenarios we had considered,” Weston wrote.

“Talk of recession risk in Canada will surely increase and [it] should also raise the prospect that the Mexican central bank will cut the overnight rate by 50bp when Banxico meet on Thursday.”

Bitcoin, the world’s largest cryptocurrency, dropped to a two-week low below $97,000 on Sunday.

South Korea’s acting president, Choi Sang-mok, ordered government agencies to closely monitor any impact from the new tariffs on domestic firms and the South Korean economy.

Trump denied that the tariffs, which are paid when goods enter the US, would push up prices. “Tariffs don’t cause inflation,” he said. “They cause success.”

But economists expect the cost to be passed on to US consumers.

The Harvard economics professor Lawrence Summers, a former US secretary of the treasury, said the tariffs against Canada and Mexico were “inexplicable and dangerous”.

“Much of what we export involves imported inputs. Cars move back and forth across the border between five and 10 times during assembly. This makes the whole of North America much less competitive, relative to Europe and Japan,” Summers posted on X.

Klaas Knot, a member of the European Central Bank’s governing council, predicted Trump’s tariffs would lead to higher inflation and interest rates in the US that are likely to weaken the euro.

Knot, who is also the Netherlands’ central bank president, told the Dutch television programme Buitenhof that trade wars harm all sides.

“Europe will not want to be pushed around. We are also a powerful trade bloc with 400 million consumers,” Knot said.