In October 2015, before Trump’s 1st term, the now-exiting Canadian PM Justin Trudeau told NYT that Canada is the “first post-national state”. Moreover, Trudeau remarked that “there is no core identity, no mainstream in Canada”, suggesting there is no such thing as Canada, or Canadian, in the first place.
At the beginning of President Trump’s 2nd term, this notion is heading for a big test. Jokingly or not, Trump already hinted that Canada could become “cherished 51st state”, as he announced 25% tariffs on imports from Canada and Mexico and 10% from China. In return, Trudeau warned of retaliatory measures on Saturday, calling for national unity.
Given that trading relations between the US and Canada, alongside Mexico, are completely lopsided in US’ favor, such measures are exceedingly likely to be short-lived.
China is in another category, however, having only 15% of its total exports to the US as of 2023. Moreover, the US Chamber of Commerce projected that the US would have to invest over $1.5 trillion, over the next decade, to decouple from China in semiconductor, aviation and healthcare sectors.
In the meantime, China has been transitioning from cheap goods manufacturing to high-tech growth. Simultaneously, China still holds $768.6 billion in U.S. Treasury securities, as the 2nd largest foreign debt-holder behind Japan.
In other words, President Trump’s focus on tariffs, as a way to revitalize domestic industry and bring in revenue, is likely to cause disruptions. The question is, what kind of disruptions can investors expect and how to prepare for them accordingly?
Stock Market Response to Potential Trade Wars
Despite having only 4.2% of the world’s population, the US holds unparalleled stock market weight. At $62.2 trillion as of January 1st, the total market cap of publicly traded companies in the US comprises 73.94% weight of the global equity market.
In other words, the US dominance and leverage is unmatched, despite retaliatory threats against announced tariffs. It is also notable that the Eurozone is firmly within the US sphere, as demonstrated by the total lack of European response following the Nord Stream pipeline bombing.
This is why the market’s reaction on potential Trade Wars 2.0 has largely been muted. Over the last week up until Monday, Europe’s Stoxx Europe 600 (SXXP) index is up 0.15%, while Germany’s DAX went down 0.13%. Hong Kong’s Hang Seng flatlined at 0.13% while Japan’s Nikkei 225 was the outlier but only at a 1.45% drop.
This mild market reaction is in line with Trade Wars 1.0 during Trump’s 1st term. In terms of tariffs affecting companies with international earnings vs domestic earnings, there was no discernable difference last time, according to Charles Schwab (NYSE:SCHW) data.
This time around, with greatly weakened Europe and UK (following the Ukraine war pushed by the US State Department) and Canada, the US is even more likely to power through any retaliatory measures. As a fan of stocks going up, President Trump seems to be aware of this.
Retaliation Impact on US Industries
On Tuesday, Trudeau’s CAD$30 billion worth of tariffs against US imports should take effect, equal to Trump’s announced 25%. In total, the Canadian PM retaliated with around CAD$155 billion worth of tariffs on US goods.
Oddly enough, despite the US enacting tariffs as a whole nation (of the United States), Canada is targeting so-called “red states”. Already, such an unorthodox maneuver elicited additional response from some governors of those red states.
Of those Republican red states, North (ND) and South Dakota (SD), as well as Ohio (OH), appear to be the most susceptible to Canadian tariff backlash.
As a whole, however, the most affected US markets would be fuel exporters and automakers. Namely, Canada accounts for $22 billion worth of crude and refined petroleum exports from the US. Mexico takes in $36 billion worth of refined petroleum and $8 billion in petroleum gas.
Canada makes up $16 billion in imported US cars. China has a much larger import weight in the auto sector, at $37 billion as well as $41 billion weight in vaccines and other medical supply imports.
Overall, based on Trade Wars 1.0 impact, investors should rely on utility stocks and real estate sector to guard their portfolios against push-and-pull trade wars. Likewise, except for China and Russia, the world’s global IT sector is effectively under US control.
Despite China’s DeepSeek advancement, ASML (AS:ASML) CEO considers such optimizations as bullish for the long term growth of the semiconductor sector.
The Bottom Line
The renewed tariff wars should not be a major concern for investors. Canada, the EU and the UK are all in much worse economic conditions since Trump’s first term in office. Mexico is even in a worse negotiating state as the US can impose tax on $63.3 billion worth of remittances (in 2023), which accounted for 7.5% of global remittances.
Having increased 50% from 2019, Mexico’s reliance on remittances rose to 4.2% of its GDP in 2023. Of course, the US accounts for 96% of Mexico’s remittance flows. Moreover, with the removal of regulatory burdens against gas & oil, the lowered energy prices should offset any increases in the cost of living.
This is why the newly appointed Treasury Secretary Scott Bessent, a Wall Street insider, doesn’t believe any inflation increase is on the table. During Trump’s 1st term, tariff measures also failed to cause inflation rate jumps.
Coupled with major spending cuts, which were not on the table during Trump’s previous admin, the US has greater stamina than ever to impose tariffs without much negative or long-lasting impact.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.