Experts advise diversification and risk management strategies as global trade uncertainty escalates with US tariffs.

With President Donald Trump’s recent announcement of significant tariffs on goods from major trading partners such as Mexico, Canada, and China, global markets are once again in turmoil. The 25 per cent tariffs on imports from Mexico and Canada, and the 10 per cent tax on Chinese goods, have rattled markets, sparking fears of a potential escalation in the ongoing trade war.

The tariffs, effective as of 12:01 am Eastern Time on February 4, come as a response to Trump’s accusations that these nations have failed to curb the flow of illegal migrants and drugs into the United States. While the tariffs target vital sectors, such as energy, automotive, and manufacturing, the ripple effect of these new barriers extends beyond simple trade disruptions.

The collective trade relationship between the US and these three countries accounted for a substantial portion of global imports in 2024, with Canada being the largest recipient of US exports. In 2023, goods worth US$322 billion were exchanged with Canada, followed by Mexico with US$309 billion and China with US$131 billion. With tariffs now in place, the economic consequences for both the US and its partners are expected to be significant, as retaliatory measures could disrupt over US$2.1 trillion in annual trade.

The economic repercussions of these new tariffs are wide-reaching. For example, parts of the US economy, such as the auto industry, are highly dependent on imports from Mexico and Canada, with motor vehicles and parts amounting to billions in imports annually. Likewise, energy supplies, particularly from Canada, are integral to US industries, and tariffs on these imports could significantly impact prices and supply chains.

The increased cost of everyday goods, including food, housing, and petrol, could also burden US consumers. According to the Tax Foundation, an estimated average of US$830 per household in 2025 could be added due to these tariffs, along with a 0.4 per cent dip in US economic output. Additionally, the Federal Reserve’s stance on interest rates may be affected, with fewer cuts anticipated due to inflationary pressures.

Trump’s tariff strategy, which started during his first term, mirrors his broader economic policy of protectionism. The uncertainty surrounding these policies, coupled with potential retaliatory actions, could lead to greater volatility in global stock markets. However, it’s important to recognise that while the 2018 trade war led to significant market declines, multiple factors contributed to the volatility, including a record-long bull market, interest rate hikes, and tightening monetary policy. Presently, we find ourselves in the early stages of a new bull market, coupled with more accommodative monetary policy.

For investors navigating this uncertain terrain, the key is to maintain composure and manage risks effectively. Portfolio diversification remains a crucial strategy, as does dollar-cost averaging, which can mitigate the impact of market volatility. Staying invested in the long term is advisable, as short-term dips caused by tariff escalations may present buying opportunities.

While Trump’s unpredictability means surprises are always a possibility—such as the reversal of tariffs, which would provide a boost to markets—his pro-business stance and tax policies suggest a generally favourable outlook for US equities. Any changes in trade policies, such as a ceasefire or tariff reductions, could lead to a rally in the markets, as seen in 2018 after a sharp sell-off.

In conclusion, the current economic climate requires investors to adopt a measured approach, staying calm while diversifying risk across assets. The outlook for the medium term remains positive, with potential opportunities in both equities and bonds, particularly during any sharp pullbacks in the market.