By: Mike Houston, Chief Executive Officer, LLYC US, and Zack Mukewa, Managing Director & Head of Capital Markets
The latest wave of tariffs—25% on most imports from Mexico and Canada and 10% on Chinese goods—has officially escalated a global trade war years in the making. As the initial shock subsides, one fact remains: markets may be unpredictable, but they present opportunities for those who know how to navigate them. This comprehensive analysis explores the fallout, risks to key economies, and how investors can position themselves to seize opportunities in the midst of uncertainty.
Uneven Playing Field: Mexico and Canada Face Greater Risks
The economic stakes in this trade war are unevenly distributed, with Mexico and Canada potentially facing significantly greater risks than the United States. Exports to the U.S. make up 78% of Mexico’s and 77% of Canada’s total exports, while U.S. exports to these two countries represent just 16% and 17% of its overall export base.
This disparity is even more striking when viewed through the lens of GDP:
- U.S. exports to Mexico and Canada contribute less than 2.5% of its GDP.
- For Mexico and Canada, exports to the U.S. constitute 20%–30% of GDP.
This imbalance leaves Mexico and Canada far more exposed to economic disruptions stemming from reduced trade volumes, higher tariff-related costs, and declining export competitiveness. Companies in key sectors such as automotive, manufacturing, and agriculture are likely to feel the pressure first, leading to ripple effects across their broader economies.
Policy Responses: Negotiation or Retaliation?
Given the extent of their exposure, Mexico and Canada are expected to push for negotiations, relief measures, or retaliatory tariffs. Both governments face the difficult task of balancing domestic pressures from industries that rely heavily on U.S. markets with the broader need to maintain diplomatic stability. Investors should monitor potential policy shifts, particularly in industries where supply chains are highly integrated across North America.
The X-Factor: China’s Response and Consumer Fallout
China’s reaction to the new 10% tariff represents a critical wildcard in this trade war. Unlike Mexico and Canada, China is less reliant on U.S. trade as a share of its overall GDP. However, its deeply intertwined supply chains—especially in manufacturing, electronics, and technology—make it vulnerable in more complex and indirect ways.
American consumers will likely be among the first to feel the impact, particularly through higher prices on consumer electronics, household goods, and clothing. Products like smartphones, laptops, and appliances, many of which depend on Chinese components, are expected to see price increases in the coming months.
For U.S. businesses, the impact could be even more significant. The tech sector, already facing disruptions from DeepSeek AI and U.S. investigations into Chinese semiconductor purchases, may encounter further challenges as tariff-related costs squeeze margins and disrupt supply chains.
China’s response may not be limited to direct tariff retaliation. Non-tariff measures, such as regulatory crackdowns on U.S. firms operating in China, restrictions on rare earth exports, and delays in customs processing, are possible tactics. Additionally, China may strengthen its economic partnerships with other nations, particularly through initiatives like the Belt and Road program, to counterbalance the loss of U.S. trade.
Broader Implications: A Slowdown in U.S. Economic Growth
While the immediate impact of the trade war may be most pronounced in Mexico, Canada, and China, the U.S. economy is not immune to the long-term effects. If the current tariff regime persists, the U.S. could experience an annual output decline of up to 2% through 2026. Companies will face increased costs, margin compression, and reduced global competitiveness, particularly in industries dependent on global supply chains.
Limited Relief from Energy Markets
Energy prices, which have historically acted as a buffer during economic downturns, are unlikely to offer much relief this time. For oil prices to meaningfully offset the inflationary impact of tariffs, they would need to drop by 80%—an improbable scenario given the current market dynamic. Instead, persistently high energy costs may exacerbate inflationary pressures, leading to further consumer spending declines.
The Role of Interest Rates
Adding to the economic strain is the Federal Reserve’s commitment to maintaining elevated interest rates through at least Q3 2025. After reducing the federal funds rate by 100 basis points over the past three meetings, to a range of 4.25% to 4.50%, it looks like a plateau has been reached. Higher borrowing costs will impact corporate investment, housing, and consumer spending, further dampening economic growth. For investors, this environment underscores the importance of evaluating fixed-income exposure and potential refinancing risks in their portfolios as they move to keep average duration in portfolios near benchmark levels or below.
Global Risk: BRICS Tariffs and Potential U.S. Isolation
President Trump’s proposed 100% tariffs on BRICS nations could mark a turning point in the global economic order. With over 30 countries considering joining the bloc, the potential for the U.S. to become economically isolated is a growing concern. Emerging markets, which are expected to drive much of the world’s future growth, could become less accessible to U.S. firms, affecting industries ranging from agriculture to technology.
By 2025, the average U.S. tariff rate is projected to reach 22%, a more than fivefold increase compared to the historical average of the past three decades. This protectionist stance may shield certain domestic industries in the short term but risks undermining long-term growth by reducing export competitiveness and increasing production costs.
Opportunities Amid Volatility: The Case for Strategic Trading
While the long-term economic outlook may be uncertain, short-term market volatility presents opportunities for tactical investors. With a stronger U.S. dollar, elevated interest rates, and shifting global trade dynamics, active trading strategies will be essential to capitalizing on price movements.
Investment Community Considerations
Prolonged trade tensions create uncertainty, which often leads to reduced investor confidence and increased market volatility. Equity markets generally dislike uncertainty, and prolonged trade disputes can trigger risk-off behavior, leading to market corrections or bear markets.
- Increased Input Costs and Margin Pressure: Companies that rely on imported goods for their supply chains will face higher input costs due to tariffs. This is particularly relevant for industries like manufacturing, technology, and retail. Higher costs can compress profit margins, leading to lower earnings and potentially reduced stock prices.
- Reduced Global Competitiveness: Firms exporting goods may struggle to remain competitive in international markets due to retaliatory tariffs from other countries. This can reduce sales, hurt revenue growth, and dampen stock performance, particularly for multinational corporations.
- Shift to Defensive Sectors: Investors may rotate out of cyclical sectors (like industrials and consumer discretionary) and into defensive sectors (such as utilities, healthcare, and consumer staples) that are less exposed to global trade dynamics. This shift can lead to relative outperformance in these sectors during periods of tariff-induced volatility.
- Currency Fluctuations and Market Volatility: Tariffs can strengthen or weaken the U.S. dollar, depending on how they affect trade balances and investor confidence. A stronger dollar can hurt companies with significant international revenues, while increased market volatility may lead to broader sell-offs in equities.
- Potential for Long-Term Structural Changes: Persistent tariffs may lead companies to restructure their supply chains, relocate manufacturing, or even reconsider market expansions. These shifts can have long-term implications for company valuations and investor strategies.
Adaptability Is Essential
In a trade war of this magnitude, success will depend on flexibility, discipline, and the ability to react swiftly to market changes. While the long-term concerns surrounding growth, inflation, and geopolitical tensions remain valid, short-term volatility provides opportunities for investors willing to stay adaptable and disciplined. By focusing on transparency, strategic communication, and consistent engagement, a solid communications program transforms uncertainty into an opportunity to strengthen investor relationships and demonstrate the company’s resilience and growth potential.
Want to know how we’re navigating this turbulent market? Let LLYC guide you forward. Because while you can’t control the market, you can control how you respond to it.