Following US president-elect Donald Trump's vow to issue executive orders on the first day of his presidency imposing new punitive tariffs on imports from Mexico, Canada, and China, Mark Haefele, chief investment officer at UBS Global Wealth Management, discusses the possible impact.

Mark Haefele at UBS Global Wealth Management highlighted that the Canadian dollar fell 0.5 per cent against the US dollar near a four-year low last Tuesday, while the Mexican peso traded close to its weakest level in the past two years. These events followed US president-elect Donald Trump saying that he would target Canada and Mexico with a 25 per cent tariff, and China with a 10 per cent tariff above any additional tariffs, until the three countries addressed complaints over illegal migration and drug trafficking. The Chinese renminbi weakened to 7.26 against the US dollar, while Chinese equities fell. 

The tariffs, as described, would target the US’s largest trade partners in order of rank: Mexico, Canada, and then China, according to September trade statistics.

While details are still thin at this stage, Haefele sees several takeaways for global investors. The use of tariffs to target areas that are not directly linked to trade confirms a transactional orientation from the Trump administration. In Hafaele's view, this is aimed at gaining leverage and achieving outcomes rather than conforming to prior processes or norms. The president-elect’s choice of Scott Bessent as Treasury secretary has been seen in the market as an anchor of stability and responsibility in the Trump cabinet. However, this does not suggest that Bessent won’t champion Trump’s tariff strategy. Bessent recently said tariffs could help getting allies to spend more on their own defence, opening foreign markets to US exports, securing cooperation on ending illegal immigration, and interdicting fentanyl trafficking, or deterring military aggression.

In May 2019, Trump also briefly threatened Mexico with an escalating 5 per cent tariff rate over border and migration issues, before ultimately dropping the approach.

The timing and narrow focus of the latest threat suggest scope for negotiation. The current USMCA free trade agreement between the US, Canada, and Mexico is not technically up for review until 2026, but this latest tariff threat effectively marks the start of negotiations, Haefele continued. Its national security framing offers legal cover, and both Mexico and Canada have already signalled plans to negotiate.

Stepping back, all three countries remain heavily reliant on each other economically; hefty taxes on key US imports such as crude oil or softwood lumber risk exacerbating US consumer inflation. Haefele believes that lasting tariffs would likely take longer to craft, if they were meant to endure legal challenges. The narrow focus on drugs and migration suggests that the Trump administration wants a path to resolution on these matters outside structural trade-oriented disputes in both North America and with China.

Tariff threats may trigger near-term market volatility, but the fundamental backdrop remains supportive, Haefele added. Since Trump’s electoral win, markets have primarily focused on the incoming administration’s pro-growth policies.

“Our base case for the year ahead is for still-solid US growth supported by deregu­lation and improved business confidence, which can more than offset the impact of selective tariffs. This early proposal from President-elect Trump may prompt investors to consider risk outcomes for trade, including the potential for large, blanket tariffs imposed on imports from multiple countries. While we are monitoring tariff risks closely, and see them as a likely source of market volatility, we maintain our positive view on US equities,” Haefele said.

Within the US, the technology, utilities, and financial sectors are among those he sees as attractive. Haefele takes the fairly muted reaction to China stocks last Tuesday as a reflection of the market’s focus on the core tariff threat – the 60 per cent headline figure – and recommends a defensive position within China equities. US dollar strength may continue in the short term, with tariffs, tax cuts, and deregulation potentially supporting the currency.

Haefele, believing that the dollar is currently overvalued, suggests that investors use near-term strength to decrease exposure. He advocates adding portfolio hedges such as gold, and favours diversification into alternative and other less correlated assets.