It’s generally good practice not to worry too much about a single day’s movement in the markets. Nevertheless, the news that the administration is proceeding straightaway with 25 percent tariffs on imports from Canada and Mexico was not well received by investors, who have, more ominously, been feeling a touch morose for a little while now.
The S&P 500 retreated on Monday, extending February’s rout and turning red for the year after President Donald Trump’s confirmation of forthcoming tariffs ratcheted up economic concerns.
The S&P 500 fell 2.1%, bringing its year-to-date performance to a loss of nearly 1%. The Dow Jones Industrial Average dropped 789 points, or 1.8%. The Nasdaq Composite slid 3%, weighed down by Nvidia’s decline of more than 9%.
All three indexes traded higher earlier in the session, with the Dow at one point up nearly 200 points. Stocks took a notable leg down in afternoon trading following Trump’s reiteration that 25% levies on imports from Mexico and Canada would go into effect on Tuesday, dashing investors’ hopes of a last-minute deal to avert the full tariffs on the two U.S. allies.
“No room left for Mexico or for Canada,” Trump said alongside Commerce Secretary Howard Lutnick from the White House. “Reciprocal tariffs start on April 2 . . . but very importantly, tomorrow, tariffs, 25% on Canada and 25% on Mexico, . . . will start.”
The economic logic behind these tariffs being imposed on our two closest neighbors is, uh, questionable, and the geopolitical consequences are not likely to be that great either. The chances of Mark Carney, green zealot and Davos man par excellence, winning the next Canadian election just went up another notch.
Gary Peters, a Democratic senator for Michigan, writing yesterday in the Wall Street Journal:
Mr. Trump’s proposed 25% tariff on Canada would stack costs on U.S. automakers at each crossing. If that’s combined with the 25% steel tariff the president wants, consumer prices for some American-made vehicles could rise by as much as $10,000.
I agree with the president that tariffs can be effective—if they are focused on our adversaries. Last year I helped get the Biden administration to raise tariffs on Chinese electric vehicles from 25% to 100%. I also support the additional 10% tariff on Chinese imports that Mr. Trump announced last month. But compounding tariffs on allies integral to current U.S. manufacturing—like those he has proposed on Canada—would undermine the competitiveness of our plants and suppliers overnight.
Senator Peters is correct about tariffs on China, a hostile, mercantilist state, and he is right about tariffs on Canada, a historically friendly nation that this administration seems set on doing its utmost to antagonize. He is also right to draw attention to the way that U.S. automakers’ production is integrated across the U.S./Canada border. Something similar could be said about the U.S./Mexico border, too.
The WSJ had editorialized about this in February:
Ford Motor CEO Jim Farley warned this month that Mr. Trump’s threatened tariffs would “blow a hole” in the U.S. auto industry, and that’s more than self-interest talking. American auto plants rely on parts made in Canada and Mexico, some of which include U.S. content. A new analysis by the Anderson Economic Group examines the potential tariff damage.
Start with auto prices. The study estimates that a 25% tariff on the U.S. neighbors would increase the cost of a full-size SUV assembled in North America by $9,000 and a pickup truck by $8,000. The cost of an electric-vehicle cross-over would increase by $12,200. Canada is the biggest supplier to the U.S. of nickel, a key critical mineral in lithium-ion batteries.
Such higher prices owe partly to the compounding effects of tariffs on auto parts that sometimes cross the border multiple times. Mexico exports some $136 billion of vehicles and parts to such auto-manufacturing states as Michigan ($53.8 billion), Texas ($26.9 billion), Tennessee ($8.1 billion), Ohio ($2.4 billion), South Carolina ($2.2 billion) and Alabama ($1.8 billion). Canada exports $50.4 billion in vehicles and parts, with large amounts going to Michigan ($22.1 billion) and Texas ($14.8 billion).
It’s worth adding that this blow has landed on an auto sector that has been dangerously weakened by another ill-judged adventure in industrial policy (but I repeat myself), the creeping electric vehicle mandates introduced by certain states and, of course, the Biden administration.
Doubtless the big government, “worker-friendly” Right can explain how this will all work out splendidly in the end.