On Saturday, the White House announced heavy tariffs are set to hit imports from Mexico, Canada, and China, and predictably, all three countries have promised to return fire. The executive orders specify 25% tariffs on all goods imported from Mexico, 25% on all goods imported from Canada (except for energy products where the tariff rate is 10%), and 10% on all goods imported from China. These moves will ripple through prices, supply chains, and financial markets in ways that no one can fully predict.

We have already seen Canadian Prime Minister, Justin Trudeau, announce 25% counter-tariffs on C$155 billion of U.S.-made goods starting with levies on C$30 billion worth of goods starting on Tuesday and ramping up to the full amount after 21 days. Mexican President Claudia Sheinbaum announced that she is readying both counter-tariffs and other measures in retaliation. Meanwhile, the Chinese Commerce Ministry also pledged to take countermeasures

Trade wars have a unique way of making everyone feel like they’re winning – until they aren’t. Politicians see them as leverage, businesses see them as a tax, and consumers feel them in their wallets. The reality is that tariffs, when applied at scale, distort incentives and introduce inefficiencies that take years to unwind.

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Numbers Help Tell the Story

- According to JP Morgan, the U.S. imported $1.36 trillion in goods from Canada, Mexico, and China last year. The tariffs announced would impose an average import tax of 19% on those goods. That’s real money flowing out of the economy.

- The immediate economic impact? If all of the price increases were passed to consumers, inflation could rise by over 1%, pushing the Fed to keep rates higher for longer.

- Retaliation matters, too. U.S. exports to these countries totaled $760 billion last year, and if demand weakens due to tariffs, corporate earnings in sectors like agriculture, autos, and technology could take a hit.

- Treasury yields are already climbing as we speak, with the 10-year yield pushing toward 4.5%, signaling expectations of prolonged inflation and potential Fed intervention.

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What This Means for Markets

Markets are trying to digest the impact, but the truth is, these things don’t play out in a straight line. Stocks, bonds, and currencies all react differently, but uncertainty is the common denominator. When businesses don’t know what their costs will be next quarter, they hesitate. That hesitation can slow hiring, delay investments, and shrink corporate profits – all of which matter to investors.

The biggest risk is not the tariffs themselves but the second-order effects – companies shifting production, reworking supply chains, and passing higher costs to consumers. The unintended consequences of economic policies tend to be more powerful than the intended ones. For investors, regardless of the early market reaction, the reality of a trade war suggests the need for broad diversification including allocations to real assets and international assets.

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Inflation, Interest Rates, and the Unseen Costs

Tariffs act like a tax, raising prices on imported goods. That means higher costs for businesses, which often get passed along to consumers. If inflation ticks up as a result, the Federal Reserve may hold off on rate cuts. That would make borrowing more expensive, slow down corporate investment, and impact everything from mortgages to stock valuations.

The U.S. government is also adding $1 trillion to the national debt every 100 days. If interest rates rise due to inflationary pressure, the cost of servicing that debt skyrockets. A 1% increase in Treasury yields adds roughly $300 billion a year in interest expenses. That’s real money, and it has long-term implications for economic growth.

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What Investors Should Do

Trade wars don’t follow a script. They start with tariffs but often end with something entirely different – currency devaluations, subsidies, or new trade alliances. The key for investors is to focus on what they can control.

Diversification matters more than ever. A portfolio too concentrated in one sector or geography is vulnerable to policy changes like this.

Real assets and international exposure can help. If U.S. equities face headwinds, alternative investments may provide a hedge.

Avoid reacting to every headline. The market will fluctuate wildly as negotiations evolve. The winners will be those who take a long-term view and stay disciplined.

Expect more volatility. We’re already seeing it. The VIX (a measure of expected market volatility) spiked more than 18% overnight at the time of this writing. Markets are pricing in turbulence.

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The Bottom Line

Tariffs, trade wars, and economic uncertainty are nothing new. Markets have navigated worse. What matters most is understanding that economic policy isn’t just about what gets announced – it’s about how businesses and consumers adapt. And adaptation happens slowly.

In the meantime, expect volatility, expect scary headlines, and expect a lot of noise. But remember: The economy doesn’t stop innovating because of a tariff. Companies don’t stop growing because of a trade dispute. And long-term investors don’t make decisions based on short-term panic.

Stay balanced. Stay diversified. And keep your eyes on the big picture as in the long run markets tend to reward resilience over reaction.

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