Over the weekend, US President Donald Trump prepared to impose tariffs on imports from Canada, China and Mexico. With nearly half of all US trade coming from these three regions, the S&P 500 index was modestly down roughly 1.6% in the early hours of trading on Monday, but largely recovered by the end of the day. 

These tariffs mean a US company that imports goods from any of these countries will have to pay an additional tax on top of the original price. The purpose of imposing tariffs is to encourage companies to source alternative suppliers domestically, while also offering the government an additional source of income. But it could also result in the consumer having to cover these increased costs.

Then there’s the issue of a potential trade war as other nations start retaliating by introducing tariffs. This would likely disrupt North American supply chains, particularly cross-border industries such as automobiles and manufacturing.

On Monday, the White House reached an agreement with Canada and Mexico to delay imposing the tariffs by a month, although tariffs on Chinese goods were confirmed on Tuesday. China has already reciprocated, implementing tariffs on an array of goods and commodities from the US including energy supplies and vehicles.

Coming into 2025, the experts at Coutts bank behind our investment offering believed many of the driving factors behind America’s strong performance last year would continue. Their outlook on the US was for no recession, contained inflation (albeit above the US Federal Reserve’s 2% target), and strong corporate earnings resulting in positive market performance.

These recent events do not alter this base case.

The US economy showed remarkable resilience over the past couple of years when numerous factors suggested it was heading towards a recession. Should a trade war have a negative impact on the US economy, at least that economy is starting from a strong position – particularly compared to Trump’s first term. Therefore, economic activity is only likely to slow, not contract. 

Fahad Kamal, Chief Investment Officer at Coutts, says: “While tariffs may cause further periods of short-term market volatility, we maintain the view that US economic growth should remain positive. Drivers for this include consumers’ healthy balance sheets and continued positive real wage growth.

“Trade tensions will likely put upward pressure on inflation and downward pressure on economic growth. But economic fundamentals in the US are healthy and better able to withstand trade uncertainty than they otherwise would be.

“We will continue to analyse the impact this could have on supply chains. China, Canada and Mexico are some of the biggest suppliers to the US, and these tariffs will undoubtedly cause bottlenecks.”

Fahad adds, “We believe in focusing on the long term when investing, rather than making any sudden, reactive moves to an evolving situation. Trying to time when to invest in the market could result in missing out on positive gains.” 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.

Trump entered a trade war with China during his first term in office in 2017-2021 which impacted supply chains. However, a strengthening dollar absorbed much of the losses experienced by markets. And it’s worth noting that Trump’s tariffs back then did not stop markets from rising.

What differs this time around is Trump’s move to target allies too, and at a larger magnitude. The US trade deficit (the difference between exports and imports) with Canada and Mexico is less than half of China’s, but its neighbouring countries account for more total US imports. This could result in a greater economic impact, which is why imposing tariffs on these countries is so significant. 

There does lie the possibility that the scope and size of these tariffs could expand, particularly as Trump has threatened other allies, such as Europe, with tariffs.

With that said, there is also the chance of successful negotiations leading to de-escalation – something we’ve already seen this week with Canada and Mexico. 

A trade war instigated by the US was widely speculated ahead of Trump’s inauguration and the Coutts’ team has been managing your investments accordingly.

Their investment strategy takes a global approach and our funds are diversified across various regions and sectors to help navigate these risks. Additionally, outside of equities, we have an allocation to global government bonds for further diversification.

The team will continue to monitor the situation as it develops and are ready to take action should they deem it necessary.