Markets shaken as U.S. tariffs against Canada, Mexico go into effect

Stocks tumbled in morning trading on Wall Street on Tuesday as a trade war between the U.S. and its key trading partners escalated, but uncertainty around the tariffs has somewhat shielded global markets from huge shocks, experts say.

The tariffs between the United States, China, Canada and Mexico have helped to extend a recent slump for U.S. stocks that was prompted by signs of weakness in the economy.

The S&P 500 fell 1.4 per cent, weighed down by nearly every sector except real estate and utilities, which are typically considered relatively safer investments.

Canada’s main stock index dropped nearly 400 points in early trading, and the Dow Jones industrial average, one of the biggest indicators of the health of the U.S. economy, shed 580 points, or 1.3 per cent, as of 10:04 a.m. ET. The Nasdaq composite fell 1.4 per cent.

Markets in Europe fell sharply, while stocks in Asia saw more modest declines.

The drops follow a steep sell-off Monday. Altogether, the decline has wiped out all of the markets’ gains since U.S. President Donald Trump’s election in November. Worries about tariffs raising consumer prices and reigniting inflation have been weighing on both the economy and Wall Street.

Imports from Canada and Mexico are now to be taxed at 25 per cent, with Canadian energy products subject to 10 per cent import duties. The 10 per cent tariff that Trump placed on Chinese imports in February was doubled to 20 per cent.

Retaliations were swift.

China responded to new U.S. tariffs by announcing it will impose additional tariffs of up to 15 per cent on imports of key U.S. farm products, including chicken, pork, soy and beef, and expanded controls on doing business with key U.S. companies.

Canada plans on slapping tariffs on more than $100 billion of American goods over the course of 21 days. Mexico also plans tariffs on goods imported from the U.S.

Market reaction initially muted

The uncertainty surrounding the trade war — with experts unclear on how long tariffs and counter-measures could last — is one of the reasons the initial market response has been somewhat muted, according to one expert.

“What we don’t know is duration and that’s key,” Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, stated in a note to clients. He added that Trump can be a volatile figure in terms of his decision-making, so it’s unclear how dedicated he is to maintaining the tariffs.

“If they do last, then the effects on the [North American] economy and markets will be much larger. That might not take long, given guidance from the auto sector that shift cancellations and plant closures could begin within roughly a week after arriving.”

Holt said the retaliatory measures put in place by Canada, Mexico and China have not been as extreme, at this stage, as what the U.S. has enacted, limiting some of the damage to markets. 

While Canada is matching the 25 per cent tariffs, the counter-measures target a smaller volume of U.S. imports. China’s tariffs on U.S. goods won’t go into effect until March 10, and Mexico will not be announcing which U.S. products its counter-measures will target until Sunday.

The “implied point” of these moves is to leave space to negotiate, Holt said, and minimize the shock to domestic economies.

Douglas Porter, chief economist at the Bank of Montreal, said in a note to clients that if the tariffs remain in place for a year, Canada would “face the risk of a moderate recession.”

“With little confidence given the lack of historical precedent, we estimate that the tariffs will reduce real GDP growth by roughly 1.5 ppts to around 0.5 per cent in 2025,” he wrote. 

Retailers, companies on alert

The tariffs are prompting warnings from retailers, including Target and Best Buy, as they report their latest financial results. Target slumped 4.9 per cent despite beating Wall Street’s earnings forecasts, reporting that there will be “meaningful pressure” on its profits to start the year because of tariffs and other costs.

Best Buy plunged 13.9 per cent after giving investors a weaker-than-expected earnings forecast and warning about tariff impacts.

WATCH | If tariffs continue, when will consumers feel the heat?:

How soon will tariffs make things more expensive?

U.S. President Donald Trump’s 25 per cent tariff on Canadian goods are expected to start on March 4. The National ’s Adrienne Arsenault asks journalists and a business professor to answer viewer questions about how the tariffs will impact prices, a possible recession and Canadian diplomacy.

At the consumer level in Canada, some impacts were immediate.

On Tuesday morning, the the website for the Liquor Control Board of Ontario, which sells liquor products to the public, displayed an error page indicating it was “temporarily unavailable while we remove U.S. products in response to U.S. tariffs on Canadian goods.”

The LCBO noted that its in-store service was unaffected.