Trump tariffs: market reaction and what it means for your money

Tariffs against China came into effect this morning, but those against Mexico and Canada have been postponed. Is Europe next – and what does it all mean for your money?

Summary

  • US tariffs against China kicked in at 00:01 EST this morning, imposing a levy of 10% on Chinese imports.
  • China has responded with retaliatory tariffs against the US, including 10% on crude oil and 15% on coal and liquified natural gas (LNG).
  • US president Donald Trump had previously threatened 25% tariffs on Canada and Mexico, also due to kick in on 4 February.
  • These were postponed after Trump agreed to last-minute deals with Mexican president Claudia Sheinbaum and Canadian prime minister Justin Trudeau.
  • It is possible that Trump will set his sights on Europe next as he looks to reduce the US trade deficit and boost tax revenues.
  • Trump recently told the BBC that tariffs on the EU will “definitely happen”, but indicated that a deal could potentially be “worked out” with the UK.
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Thank you for following our live blog again today. That concludes our coverage for this evening.

We will be reporting live on other news topics this week, including the upcoming interest rate decision from the Bank of England. Our reporting there will begin tomorrow ahead of the announcement on Thursday.

Alternatively, for all things tech-focused, check out our live blog on the Magnificent Seven's earnings. Up tonight is Alphabet, which will be reporting its fourth-quarter results shortly after US markets close.

Will Trump and Xi Jinping strike a deal?

A White House advisor previously indicated that Trump and Chinese president Xi Jinping would speak today, however the latest report from the Wall Street Journal refutes this. If the two leaders do speak, it is possible that they will come to some kind of compromise.

"If not, China is likely to devalue its currency to offset the impact of tariffs, as it did in the first trade war," said George Brown and David Rees, both economists at Schroders. "The authorities will be mindful of the risk that a weaker currency exacerbates already-weak domestic sentiment. But the rapid imposition of tariffs also increases the probability of a larger fiscal stimulus to support domestic growth."

Tariffs could add to existing pain for Chinese economy

The Chinese economy has run into some challenges in recent years, including a property market crisis and slowing growth. Tariffs from the US government now add another headwind to the mix.

Despite this, Kai Wang, market strategist at Morningstar, says the immediate consequences should be limited to specific sectors. These include home appliances, home furnishings, lithium batteries and EVs – all of which have "sizeable exposure to US revenue".

Shein and Temu could be hit as Trump closes tax loophole

In the executive order which imposes 10% tariffs on Chinese imports, Trump has included a footnote which closes a tax loophole known as “de minimis” rules.

Historically, this rule has allowed companies to avoid paying duties if their goods are valued at less than $800 and shipped directly to American consumers.

It has allowed Chinese companies like Shein and Temu to sell clothes and products at incredibly low prices.

Analysts have suggested that closing this loophole could benefit Amazon, with consumers buying low-cost items from the US giant instead.

Tariff threats: a headache for Diageo

Drinks company Diageo – the owner of brands like Guinness, Smirnoff and Johnnie Walker – announced its interim results today (4 February). The company’s shares are in the red after it ditched its medium-term growth guidance (5-7% organic net sales growth), blaming the current geopolitical environment.

The US is Diageo’s largest market, and chief financial officer Nik Jhangiani told analysts on the earnings call that around 45% of the company's net sales in the region come from products made in either Canada or Mexico. This includes the company’s tequila portfolio, as well as Canadian whiskey. With this in mind, Trump’s tariffs are a real concern.

Adam Vettese, market analyst at investment platform eToro, said: “Despite revenue coming in slightly ahead of forecast, the spectre of tariffs looming is a far bigger priority with the company particularly exposed.

“Bosses will be hoping for some kind of US-Mexico accord given they imported $1.6 billion worth of tequila into the states last year. The fact the firm has withdrawn any medium-term forecasts based on the potential impact of tariffs really demonstrates the gravity of the situation.

“Diageo has said they will take measures to try and mitigate the impact of tariffs, but realistically there’s a limit to what cost-cutting and inventory management can do when faced with such a mammoth additional expense.”

What do tariffs mean for the dollar?

The US dollar strengthened after Trump’s tariffs were announced over the weekend. It has since fallen back slightly after measures against Mexico and Canada were put on pause.

Tariffs usually strengthen a country’s home currency because they make it more expensive to buy and import foreign goods (which are priced in foreign currencies). This means fewer foreign goods are bought which, in turn, means less foreign currency is needed.

Ultimately, the dollar could strengthen even further if Trump’s tariffs result in higher inflation. Why? Because a resurgence in inflation could force the Federal Reserve to keep interest rates higher for longer. Generally speaking, a currency strengthens when interest rates go up and weakens when they go down.

European markets still jittery

European markets fell this morning as investors remain nervous about tariffs.

In the UK, the FTSE 100 was down 0.7%.

“With markets on a tariff tightrope, volatility looks set to stick around,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.

Investors are still weighing up when and how Trump might set his sights on Europe – and what exactly he is trying to achieve. As yesterday’s developments show, the situation can change quickly.

“For those willing to ride the waves, there may be chances to cash in on overreactions, especially if Trump’s tariff bark proves worse than his bite,” Britzman added.

The headlines overnight

Good morning and welcome back to our live blog on Trump’s tariffs. These are the headlines since we signed off yesterday evening:

  • Tariffs on Canada have been postponed after last-minute talks between Trump and Trudeau.
  • In exchange, Trudeau has agreed to reinforce the US-Canadian border in a deal that has echoes of the agreement between Trump and Mexican president Claudia Sheinbaum.
  • 10% tariffs against China have not been postponed and came into effect at 00:01 EST this morning.
  • Beijing has announced retaliatory tariffs on US products, including a 10% tariff on crude oil, farm equipment and some vehicles, and a 15% tariff on coal and liquified natural gas (LNG).

That concludes our live coverage for today. Thank you for joining us. We will be back tomorrow with further updates and analysis.

Can the US bull market continue?

A lot has happened over the past seven days. This time last week, US equity markets were rattled by the DeepSeek news and today it is tariffs that are causing disruption.

Indeed, even before the events of the past week, the word “bubble” was being used more and more extensively as investors questioned whether US equity valuations had gotten out of hand. The US tech sector in particular has flown in recent years. Whether it is on the brink of an Icarus moment is up for debate.

Despite this, Tom Stevenson, investment director at Fidelity International, warns against panic, encouraging investors to “view the threat to markets in context”.

He adds: “January closed out on Friday on a high, global shares rose by 3.4% during the month, with the S&P 500 up 2.8% and the equal-weighted version of the same index up 3.5%. Much of this strength can be attributed to another solid earnings season, with 80% of the companies reporting so far beating expectations.”

Case study: how a Chevrolet Silverado is made

Chevrolet, owned by General Motors, is one of the most popular US car brands. Its bestselling model last year was the Chevrolet Silverado.

Looking at how this car is made can help bring the potential impact of tariffs to life.

As Caleb Miller, associate news editor at Car and Driver points out, a portion of the company’s trucks come from General Motors’ factory in Silao in Mexico, while others are built in Oshawa in Ontario.

This is just one example at one company – scale it up and you start to get a picture of just how disruptive tariffs could be for businesses.

Ford and Stellantis – two other American car giants – also have factories across the border in Mexico and Canada.

Car makers take a hit

Car makers have been some of the worst-impacted stocks in today's tariff-related sell-off.

Toyota and Nissan both fell by more than 5% during trading hours on Monday, while Honda fell by more than 7%.

European markets are still open but BMW is down more than 3% at the time of writing, and Volkswagen nearer 5%.

The US still has several hours to go until markets close, but General Motors is almost 2% lower at the time of writing, Ford is down more than 1%, and Stellantis is down more than 4%.

Trump pauses tariffs on Mexico for one month

US tariffs on Mexico have been paused for one month following a conversation between Trump and Mexican president Claudia Sheinbaum.

Sheinbaum wrote on social media site X: “We had a good conversation with president Trump… we reached a series of agreements”.

Mexico has agreed to reinforce its northern border with 10,000 National Guards to reduce drug trafficking. In return, Sheinbaum has sought commitment from the United States that it will prevent the trafficking of high-powered weapons to Mexico.

How much revenue will tariffs raise for the US government?

On social media, Trump has previously said that revenue from tariffs could be used to pay off US debt and “make America wealthy again”. However, it is US consumers who will end up footing at least part of the bill in the form of more expensive goods.

“Revenues from the tariffs could reach almost $250bn per year, or 0.8% of GDP. That could be a significant hit to the US economy if those revenues are used to reduce the federal budget deficit rather than recycling them into the economy by cutting taxes or boosting federal spending,” said Paul Ashworth, chief North American economist at Capital Economics.

He adds that US exporters will also lose out thanks to a stronger dollar. They could also be hit by retaliatory measures from other countries.

US equity markets fall

The S&P 500, the Dow Jones Industrial Average and the Nasdaq are all in the red this morning.

At the time of writing, around 30 minutes after market open:

  • S&P 500: -1.77%
  • Dow Jones: -1.38%
  • Nasdaq: -2.24%

“Trump’s launch of tariffs in 2018 did raise revenues for America but US corporate profits took a hit that year and America’s S&P 500 index fell by a fifth, so markets have understandably taken fright this time around,” said Russ Mould, investment director at AJ Bell.

China to challenge tariffs at World Trade Organisation

China’s Ministry of Commerce has said it will take “corresponding countermeasures” against the US after Trump announced a 10% tariff on Chinese imports. It has not yet given any specifics.

China has also threatened to take a complaint to the World Trade Organisation (WTO), although experts say there is little the WTO will be able to do.

First and foremost, the US has previously ignored WTO rulings under the Biden administration. Furthermore, the body within the WTO that is responsible for resolving disputes is currently short on judges, as the US has been blocking new appointments for the past two years. This means the judges can no longer achieve a quorum.

Retaliatory tariffs: Canada bites back

“Canada will not stand by as the United States imposes unjustified and unreasonable tariffs on Canadian goods,” the Canadian government said. “In response, we are moving forward with 25% tariffs on $155 billion worth of imported US products.”

Some items (covering $30 billion of US imports) will be impacted from 4 February, including certain foods, beverages, cosmetics and more.

Other items (covering the remaining $125 billion) will be hit at a later date, including things like passenger vehicles, steel and aluminium.

Markets were not prepared for Trump's aggression

Trump has surprised markets over the weekend with both his speed and aggression.

George Saravelos, global head of FX research at Deutsche Bank, says: “By our estimates, the market was roughly pricing the equivalent of a 5% universal tariff being enacted in coming months, equivalent to a 30bps ‘hump’ in the US inflation curve.

“The announcements this weekend are roughly three times larger with reasonable passthrough assumptions, i.e., we would expect a 1% US headline inflation impact if tariffs are sustained.

“These tariffs are also roughly five times as large as the cumulative sum of trade actions taken under the first Trump administration measured in terms of average tariff increases.”

Saravelos thinks the market needs to “structurally and significantly reprice the trade war risk premium”.

What do tariffs mean for inflation?

Just as prices were coming under control, Trump’s tariffs could fan the embers of inflation on a global scale.

Firstly, US consumers will need to pay more for imports from impacted countries.

US businesses will feel the effects too, if they have imported goods or materials anywhere in their supply chain.

If costs increase, businesses could be forced to raise their prices in an attempt to protect their margins – another hit for consumers.

Furthermore, the countries that Trump has targeted are already starting to respond with retaliatory tariffs of their own, and so the problem spreads.

The effects won’t be confined to the US, Canada, Mexico and China either. Global economies operate in a tangled web of interdependence. If goods in the US suddenly become more expensive to produce because of tariffs, any other country that imports those goods will have to pay a premium too.

Carve-out for Canadian energy

Trump’s tariffs include a special carve-out for Canadian energy imports, which will be hit with a lower 10% tariff (as opposed to 25%).

According to the BBC, 61% of oil imported into the US between January and November last year came from Canada.

Canadian prime minister Justin Trudeau has previously said that Canadian energy “powers American manufacturing, businesses and homes.”

Speaking in recent weeks before Trump's tariffs were imposed, Trudeau added: “The alternative for [the US] would be more resources from Russia, China or Venezuela. Canada is a safe, secure and reliable partner in an uncertain world.”

Over the weekend, Trudeau announced 25% retaliatory tariffs against the US in response to the latest developments.

Canada and Mexico: is a recession on the cards?

“Since exports to the US account for around 20% of their GDP, today’s tariffs could plunge both the Canadian and Mexican economies into recession later this year,” said consultancy Capital Economics.

The effect of Trump's tariffs will be felt in the US too, though, with consumers now facing the prospect of higher prices. Capital Economics expects US inflation to rise further and faster than previously anticipated, exceeding 3% later this year.

European tariffs: “the writing is on the wall”

Although no tariffs have been directed at Europe so far, the “writing is on the wall”, according to Michael Field, chief market strategist at Morningstar. “That Donald Trump has no qualms about imposing them on his nearest neighbours, means that Europe too should be bracing for impact,” he added.

Trump recently told the BBC that the European Union has “taken advantage” of the US and is “way out of line” for not importing more US goods. In 2023 (the most recent year we have annual figures for), the US-EU trade deficit was $208.2 billion.

“They don’t take our cars, they don’t take our farm products, they take almost nothing. And we take everything from them,” Trump said.

Markets tumble as trade war heats up

Stock markets tumbled in Asia on Monday in response to the latest news from Washington. In Taiwan, the Taiex index shed 3.53%. In Japan, the Nikkei 225 closed 2.66% lower. Meanwhile, in South Korea, the Kospi fell 2.52%.

European markets have also tumbled so far this morning, as investors process the fact that the EU could be next on Trump’s hit list. The Stoxx Europe 600 is down more than 1% at the time of writing.

Meanwhile in the UK, the FTSE 100 is down more than 1% so far. Trump has indicated that a deal could be “worked out” with the UK to exclude it from tariffs, but even if this is the case, a global trade war would spell bad news for domestic markets and the economy.

This is not a drill

On 1 February, US president Donald Trump announced 25% tariffs on Canada and Mexico and a 10% tariff on China, due to kick in from 4 February. The trade wars have begun.

Trump made extensive tariff threats while on the campaign trail in the lead-up to the US election but, until recently, experts had been warming up to the idea that these were little more than a bargaining chip. The latest moves suggest otherwise.

Here’s everything you need to know – from what’s been announced to how markets have responded.