As of yesterday, the U.S. has imposed 25% on Canadian and Mexican products, and an addiction 10% tariffs on Chinese products. The main ideas behind this presidential action seem to be: (1) to decrease the trade deficits the U.S. has with its main trade partners, (2) protect U.S. manufacturing and (3) decrease the amount of drugs and immigration that come through U.S. borders. Canada has already announced a 25% retaliatory tariff on U.S. products and Mexico is preparing a similar measure. This trade war comes at a time where none of the countries involved can afford a spike in prices and a slowdown in its economy. And that’s what tariffs have historically done. In the chart below, you can see the impact of these tariffs on the GDP of the 4 countries involved. For the U.S. and China, the first order effect of those tariffs is expected to be -40bps on GDP and Canada and Mexico may suffer between 1% and 2% respectively on their GDPs. This is an aggressive move by the Trump administration that may have unintended consequences on the domestic front, and will tense international relations with the rest of the world. Currency markets will be the canary in the coal mine.
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