After US President Donald Trump’s administration put additional tariffs on Canadian, Mexican and Chinese imports, wealth managers discuss the impact on markets, the economy and asset allocation.

The Trump administration has just signed executive orders to impose an extra 25 per cent tariff on most imports from Canada and Mexico, as well as an additional 10 per cent duty on all imports from China, citing a national emergency over the extraordinary threat posed by illegal aliens and drugs.

Duties levied on Canadian energy resources will face a lower 10 per cent tariff, although Mexican energy imports will face the full 25 per cent. President Donald Trump plans to hike tariffs on European Union goods, citing the deficit with the EU. He also plans to put tariffs on semiconductors, steel, copper, aluminum, and pharmaceuticals.

Retaliatory action
In response, Canada's government has announced a 25 per cent tariff on some US imports, starting with 30 billion Canadian dollars ($20 billion) worth of US goods on 4 February, to be followed by another CAD 125 billion added in 21 days’ time. Canada is also said to be considering several additional measures, including restrictions on critical mineral and energy exports. Mexico’s President Claudia Sheinbaum has ordered retaliatory measures, and China's foreign minister has vowed to take necessary countermeasures, though neither provided additional details. Trump later said he would hold separate calls with the leaders of Canada and Mexico on Monday.

The US dollar rallied while Asian stocks slumped on Monday morning Asian time. The S&P 500 futures were down 2.1 per cent and the STOXX Europe 600 futures slid 2.2 per cent. Traders also slashed their positions in a range of cryptos amid weakening risk sentiment, with ethereum falling as much as 26.5 per cent.

Mark Haefele, chief investment officer at UBS Global Wealth Management does not expect the 25 per cent tariffs on Canada and Mexico to be sustained for a prolonged period. “The Trump administration would not want to jeopardise US economic growth or risk higher inflation by leaving the tariffs in place for a sustained period, and significant stock market volatility could lead to a change in approach,” Haefele said in a note this week. Haefele believes that the tariffs against Canada and Mexico could be a tactic to accelerate a renegotiation of the United States-Mexico-Canada Agreement (USMCA), which is a free trade pact between the countries. The significant potential economic effect of the tariffs on Mexico and Canada may lead to concessions, even if their initial response has been to announce retaliation.

Swiss private bank Julius Baer also largely sees tariffs as a tool of negotiation tactics to reach other goals, namely tackling immigration and the opioid crisis. “We still believe that tariffs are ultimately only temporarily imposed until politically acceptable solutions are achieved. The case of the lower tariffs applied to energy trade with Canada shows that the US government keeps some grains of economic pragmatism,” Julius Baer said in a note this week. “Second, the trade tariffs’ impact should remain more deflationary outside than inflationary inside the US economy. A stronger US dollar also helps to buffer the trade tariff impact.” 

Mike Rode, senior investment director at American Century Investments also emphasised how Trump views tariffs as a negotiating tool – depending on what happens over the next few days there’s a chance they may not even be imposed. “The economic impact hinges on the longevity of these tariffs,” Rode said.

Haefele thinks that Trump's comments on Friday, which suggested that the tariffs were purely economic, linking them to the US’s bilateral trade deficits, are more concerning. “Deficits cannot easily be negotiated in the same way as non-trade issues like migration and drug control." Haefele believes that the US effective tariff rate in China will eventually rise to 30 per cent, from the current 11 per cent, even if Trump’s recent more diplomatic tone with China suggests that the White House may believe it has something to gain from the more gradual approach.

Asset allocation
Haefele thinks that investors should prepare for near-term market volatility and focus on diversification and hedging strategies, including capital preservation strategies where appropriate. Haefele expects the S&P 500 to rise by year-end. If tariffs on Mexico and Canada are not sustained, He believes that US economic growth will continue to support equity markets and that AI will remain a powerful tailwind. 

“In the weeks ahead, tariffs are likely to represent an overhang on markets and contribute to volatility, at least until investors gain greater clarity on the path and destination of US trade policy,” Haefele said. “In equities, capital preservation strategies can potentially help manage downside risks. As volatility and skew are low relative to current levels of uncertainty, mean reversion strategies can also be an effective way to harness higher volatility.” 

Haefele likes high grade and investment grade bonds, as they offer some insulation against uncertainty and can help diversify portfolios. Gold also remains an effective hedge against geopolitical and inflation risks, in his view. For investors willing and able to manage risks inherent in alternatives, Haefele thinks certain hedge fund strategies are well-positioned to offer attractive risk-adjusted returns and portfolio resilience during market volatility.

Although he will continue to monitor trade policy closely, his base case remains for the S&P 500 to rise to 6,600 by year-end. Tariffs on Canada and Mexico are unlikely to be sustained, US economic growth should represent a tailwind for stocks, and Haefele believes that AI presents a powerful structural tailwind for earnings and equity markets. He thinks that the recent development of DeepSeek, a lower-cost AI model, will ultimately lead to even broader proliferation of AI, enhancing growth and productivity.

Industrial and precious metals
“The reaction to Trump’s tariffs on China, Canada, and Mexico was negative across the board in the metal markets, primarily reflecting a risk-off stance in financial markets overall,” Norbert Rücker, head of economics and next generation research at Julius Baer, said. “The fundamental impact on metals demand is less clear-cut than it seems at first sight and very much depends on the question of how long the tariffs will remain in place, considering that they are not about trade per se but other goals instead.” Beyond any fundamental impact, Rücker sees them as an overhang for market sentiment and therefore has decided to downgrade his view on copper to neutral. At the same time, he keeps his views on aluminium and iron ore unchanged.

In early Monday morning trading, Rücker highlighted that the reaction was negative across the board with precious and industrial metal prices down between 0.6 per cent for gold and 2 per cent for copper. 

He said the US imports a significant amount of gold and silver doré from Canada and Mexico for domestic refining, which has now become more expensive. Some of this material might be rerouted to Europe. Within the industrial metal markets, aluminium sticks out. The US relies heavily on Canadian aluminium, making up around two-thirds of its total imports, with some corporations integrating the value chain across the border to reap the benefits of both locations. 

“More broadly, the impact of the tariffs on the industrial metals will be focused on imports of semi-finished and metals-intensive consumer products from China and Mexico, such as electronic and household goods. While China’s relevance has shrunk during the past few years due to the ongoing trade tensions and previously imposed tariffs, that of Mexico has grown as it expanded its footprint in the United States,” Rücker said. That said, in many cases, the products that were made in Mexico originated in China-backed factories. 

“Generally speaking, the fundamental impact on metals demand depends on the question of how long the tariffs will remain in place, which again relates to the point that they have been imposed to reach other targets, e.g. related to immigration and the opioid crisis,” Rücker continued.

Meanwhile, Rode emphasised how the impacts are far from clear given the level of uncertainty around the duration of the tariffs and the level of retaliation. “The clearest at risk would be companies with manufacturing facilities in Mexico and Canada,” Rode said.

“From a macro level, tariffs will lead to diminished cost advantages by producing in Mexico and Canada which, in theory, will lead to acceleration of reshoring of supply chains back to the USA which is Trump’s ultimate goal,” Rode continued. “In uncertain times, lean into high quality, sustainable dividends, and downside protection.”