Macroeconomics

America’s Trade Wars Escalate

04 March 2025 • 4 mins read

A man reads Mexican newspapers with the news of the increase in tariffs by US President Donald Trump on the Mexican government, in Mexico City on 4 March 2025. AFP.

Overnight, President Trump ordered 25% tariffs on Canada’s and Mexico’s exports to start today and another 10% on China’s after last month’s 10% rise.
Financial markets weakened sharply with the S&P down 1.76% while 10Y Treasury yields fell from 4.20% to 4.13% as investors fear Trump’s tariff hikes and foreign retaliation will cause US growth to falter.
US tariff threats already may be hitting activity. February’s manufacturing ISM index fell from 50.9 to 50.3. We expect US growth to slow from 2.8% in 2024 to 2.2% in 2025 and China’s from 5.0% to 4.2%.
The Federal Reserve is unlikely to cut interest rates, however, if tariffs lift inflation. Investors should thus prepare for more volatility until a truce is called in America’s trade wars with the rest of the world.

Overnight, the White House said President Trump signed an order to set 25% tariffs on Canada and Mexico’s exports starting today and a another 10% on China’s exports after last month’s 10% rise, lifting further tariffs to 20%.

Source: Bank of Singapore, Bloomberg

Financial markets weakened sharply with the S&P down 1.76% while 10Y Treasury yields fell from 4.20% to 4.13% as investors fear Trump’s tariff hikes and foreign retaliation will cause US growth to falter.

US tariff threats may already be hitting activity while boosting inflation. The chart shows February’s manufacturing ISM index fell from 50.9 to 50.3 as US firms said tariffs had created uncertainty. New orders fell sharply from 55.1 to 48.6 while prices paid jumped from 54.9 to 62.4.

Source: Bank of Singapore, Bloomberg

Stagflation risks challenge our view that a likely soft landing for the US economy this year coupled with deregulation and tax cuts should favour US markets.

Our forecasts for 2025 already anticipate growth falling from increased trade tensions. We expect US GDP growth to slow from a strong 2.8% in 2024 to a solid 2.2% in 2025 and for China’s growth to fall from 5.0% last year to 4.2% this year. As the second chart shows, China’s exports to the US were USD525 billion in 2024. A 20% US tariff applied for a full year may shave up to 1% point off China’s GDP growth.

Provided officials respond with more stimulus - fiscal in China, monetary in the US - then the impact of increased trade tariffs may be manageable, however. This week China’s annual National People’s Congress is set to increase this year’s budget deficit target from 3.0% to 4.0% of GDP reinforcing our view to favour Chinese equities in addition to US equities. But the Federal Reserve is unlikely to cut interest rates from 4.25-4.50% if tariffs put upward pressure on inflation again this year.

Investors should thus prepare for more volatility until the full impact of America’s trade wars on US and foreign growth becomes clear. The risk of retaliation by Canada, Mexico and China will test equity markets while stagflation presents both upside and downside risks to US Treasury yields. Only when a truce starts between the US and its trading partners to stop raising tariffs further will growth fears subside, allowing risk assets and Treasury yields to recover.

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Author:

Mansoor Mohi-uddin

Bank of Singapore