With Donald Trump set to assume the U.S. presidency in less than two weeks, global markets are already feeling the pressure of his pledge to impose aggressive tariffs. The incoming administration has promised tariffs as high as 10% on imports from around the world, and a sweeping 60% levy on Chinese goods. In addition, Trump’s vow to slap a 25% import surcharge on products from Canada and Mexico is adding fuel to concerns about a potential trade war. These proposed duties, according to trade experts, could severely disrupt global trade flows, increase costs, and prompt retaliatory measures from affected countries.
Though the full scope of these tariffs remains uncertain, the impact on markets is already apparent. Here’s an overview of the regions and sectors most likely to be affected:
1. China: The Primary Target
China stands to be the most impacted by Trump’s trade policies, with analysts predicting that it will be the focal point of the U.S. trade wars. Goldman Sachs expects China to bear the brunt of the tariffs, forcing the nation’s stock markets and central bank to act as the yuan continues to slide. The Chinese currency has hit a 16-month low, with the dollar surpassing the critical 7.3 yuan level, a milestone that had been previously defended by Chinese authorities.
Barclays predicts the yuan could fall to 7.5 per dollar by the end of 2025, with a more pessimistic scenario driving the currency to 8.4 if the U.S. imposes its 60% tariff on Chinese goods. Even in the absence of tariffs, the yuan has been under pressure due to a weakening economy and low government bond yields, further widening the gap with U.S. Treasury yields. Analysts expect China to allow its currency to weaken gradually, helping exporters mitigate the effects of tariffs, but a sudden depreciation could spark capital outflows and erode investor confidence.
2. Eurozone Faces a Toxic Mix
The euro has already depreciated by more than 5% since Trump’s election, falling to its lowest levels in two years, hovering around $1.04. Some analysts, such as those at JPMorgan and Rabobank, believe the euro could drop to parity against the dollar this year as tariff uncertainty hangs over the markets.
The U.S. is the European Union’s largest trading partner, with two-way trade in goods and services valued at $1.7 trillion. With the European Central Bank expected to cut interest rates by 100 basis points this year to support an ailing economy, traders anticipate only a 40 basis point rate cut from the Federal Reserve, making the dollar an increasingly attractive option for investors. Additionally, a weaker Chinese economy poses further risks to Europe, compounding the pressure on the euro.
As ING currency strategist Francesco Pesole warns, the simultaneous imposition of tariffs on both China and the EU could create a “toxic mix” for the eurozone.
3. European Auto Sector in Turmoil
The European automobile sector has been particularly sensitive to tariff news. Recently, a report from The Washington Post suggesting that Trump’s aides were exploring import duties on critical goods led to a brief rally in auto stocks. However, the gains were short-lived after Trump denied the report, highlighting the market’s fragility.
European auto stocks have been struggling for some time, shedding about a quarter of their value since April 2024. Analysts, including Barclays’ Emmanuel Cau, identify the auto industry as one of the most exposed to trade risks, along with other sectors like consumer staples, luxury goods, and industrials. In fact, a Barclays index tracking the most tariff-sensitive European stocks has dropped between 20% and 25% relative to the broader market in the past six months.
With the eurozone economy still weak, European equities have underperformed, with the STOXX 600 rising only 6% in 2024 compared to a 23% gain for the S&P 500.
4. Canada’s Dollar Faces Further Decline
The Canadian dollar is already facing significant pressure, hovering near its weakest point in over four years after Trump threatened in November to impose a 25% tariff on Canadian and Mexican imports until both countries took action on drugs and migration. Goldman Sachs estimates that markets are only pricing in a 5% chance of such a tariff, but the uncertainty surrounding ongoing trade negotiations keeps risks high.
ING’s Pesole suggests that prolonged trade talks or the full escalation of a trade war could push the Canadian dollar further down, potentially reaching the 1.50 mark against the U.S. dollar. The political uncertainty in Canada, particularly following the resignation of Prime Minister Justin Trudeau, adds another layer of complexity to the economic outlook.
5. Mexican Peso Faces Continued Volatility
The Mexican peso was already under significant strain, having dropped 16% against the dollar in 2024, following Trump’s election. The peso’s performance during the year was the weakest since 2008, with a sharp depreciation exacerbated by both tariff threats from the U.S. and domestic political issues, including a controversial judicial reform.
The peso’s volatility was on display again when news of a potential tariff surge sent the currency up as much as 2% on Monday, only for gains to be quickly reversed after Trump denied the report. This volatility highlights the uncertainty facing Mexico as trade relations with its largest trading partner remain in flux.
As Donald Trump’s inauguration approaches, global markets remain on edge, bracing for the potential impact of his aggressive trade policies. The world’s major economies, from China to Europe to North America, are all vulnerable to the fallout of these looming tariff hikes. While the ultimate outcome remains uncertain, investors are already adjusting their positions, and the global economic landscape is likely to be reshaped in the coming months.
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