Trade War Begins, Stock Markets Crash

NEW YORK, TUESDAY - The stock markets in the United States and several other countries reacted negatively to the certainty of a trade war. The New York Stock Exchange turned red, and the markets in other countries also began to experience corrections.

In a statement on Monday evening (3/3/2025) Washington DC time or early Tuesday morning Western Indonesian Time, U.S. President Donald Trump confirmed that import tariffs would take effect this Tuesday. A 25 percent import duty will apply to Canada and Mexico. "They will be subject to tariffs," he said.

China will also be subject to an additional BMI increase from 10 percent to a total of 30 percent. It is not yet clear when the additional BMI for China will take effect.

Canada and Mexico are key trading partners bound by the North American Free Trade Agreement (NAFTA) with the U.S. The U.S. primarily serves as the market, while Canada and Mexico act as suppliers. With the implementation of BMI, the agreement is effectively nullified, potentially disrupting supply chains.

"If Trump imposes tariffs, we are ready. We are prepared with tariffs amounting to 155 billion dollars, and we are ready with the first phase, namely 30 billion dollars," said Canadian Foreign Minister Mélanie Joly.

Canada and Mexico have been negotiating with the US for the past month regarding BMI tariffs. Unfortunately, the negotiations have not reached a conclusion, resulting in the implementation of BMI tariffs.

Mexico and Canada have confirmed they will impose retaliatory tariffs on the US. As a result, a trade war is inevitable. The trade war causes prices of various goods to rise, raising concerns about a potential decline in consumption.

The decline, and ultimately the revenue, could also reduce the sales of various manufacturers and distributors. In the stock market, this revenue correction diminishes expectations for dividend values as well. As a result, stock prices are also corrected.

After Trump's announcement, not all major New York stock indexes immediately turned red. The Nasdaq was hit the hardest, dropping 2.64 percent as its index was cut by 497 points.

Meanwhile, the S&P 500 and Dow 30 had lower corrections. Each was 1.76 percent for the S&P 500 and 1.48 percent for the Dow 30. Although the percentage was lower, the Dow 30's point cut was more than the Nasdaq's 649 points.

Not only in the US, negative stock market reactions were also seen in Asia Pacific. The Nikkei index in Japan was corrected by 1.37 percent because it lost 509.88 points at the opening of trading on Tuesday. While the S&P Australia was corrected by 67.9 points.

The decline was also seen on the Mumbai stock exchange, India. The S&P Sensex Mumbai index was slightly corrected by 0.15 percent because it lost 115 points.

On the Shanghai Stock Exchange, China, the reaction to Trump's announcement was also negative, although not as severe at the opening of trading on Tuesday. The SSE Composite Index was slightly corrected by only 0.12 percent.

"Market players are worried about the future after Trump's announcement. What they should do is build their auto plants and other things in the U.S., then they won't get hit with tariffs," Trump said at the White House.

He said there was no room left to make a deal to avoid tariffs by curbing the flow of fentanyl into the U.S. The issue of fentanyl, a synthetic narcotic, was the basis for Trump's new BMI.

Trump said China has not done enough to ease the drug crisis in the US. According to the US Centers for Disease Control and Prevention, 72,776 people will die from synthetic opioids in 2023 in the US, mostly from fentanyl.

CEOs and economists say Trump's tariffs on Canada and Mexico cover more than $900 billion worth of annual U.S. imports, and are expected to hurt the North American economy.

Cornell University public policy professor Gustavo Flores-Macias said the impact on price increases could be seen within days.

"The automotive sector, in particular, is likely to experience significant negative consequences. Not only because of the disruption of supply chains that cross the three countries in the manufacturing process, but also because of the potential increase in vehicle prices, which could weaken demand," Flores-Macias said.

White House trade adviser Peter Navarro said the inflationary impact of any tariffs would be very small.

"So I don't see the president wavering on this, because he knows that to achieve a world where America is strong and prosperous, with rising real wages and more factory jobs. This is the path he has chosen," he was quoted as saying by CNBC business media, Monday (3/3/2025).

Mexican officials have not commented on Trump's latest remarks. Mexico and Canada previously managed to delay the imposition of Trump's tariffs, which were originally scheduled to take effect on February 1, 2025.

Mexico managed to get Trump's tariffs delayed after agreeing to send thousands of troops to its northern border with the US to step up anti-drug efforts.

We have plan B, C, D.

Before Trump's remarks, Senjn, Mexican President Claudia Sheinbaum said her government was remaining calm as it awaited Trump's decision. But Mexico would retaliate if the U.S. went ahead with its tariff threats.

"We have plans B, C, D," Sheinbaum said, without providing any details.

He added that coordination with the US on fentanyl trafficking had been excellent.

China is targeting U.S. agricultural exports as a retaliatory measure against new U.S. import tariffs, calling the tariff hikes akin to blackmail.

"China is studying and formulating relevant countermeasures in response to the US threat to impose an additional 10 percent tariff on Chinese products under the pretext of fentanyl," an anonymous source in China was quoted as saying by Chinese government-affiliated media outlet the Global Times on Monday.

According to the Global Times report, retaliatory measures will likely include tariffs and a range of non-tariff measures that will likely include US agricultural and food products.

China's Ministry of Commerce and the US Embassy in Beijing have not commented on the report.

China is the largest market for U.S. agricultural products. The sector has long been vulnerable to being targeted during Sino-U.S. trade tensions.

"Despite the decline in imports since 2018, any tariffs on key US agricultural products such as soybeans, meat and grains could have a significant impact on China-US trade and US exporters and farmers," said Genevieve Donnellon-May, a researcher at the Oxford Global Society.

According to Donellon-May, the US agricultural sector, with lessons learned from the first Trump administration, is already preparing for a second Trump administration and trade war 2.0.

Experts and observers say Beijing still hopes to negotiate a truce with the Trump administration, but with no sign of any trade talks, prospects for a rapprochement between the two economic giants are fading.

"A China-US trade war is not inevitable. But Trump's decision to impose tariffs now is a bad decision," said Wang Dong, executive director of the Institute for Global Cooperation and Understanding at Peking University.

Wang said Trump and his advisers may think that imposing tariffs now is to put pressure on China and send a signal. However, he said, this could backfire and China will definitely respond strongly.

China's Commerce Ministry said Friday it hoped to resume talks with the U.S. as soon as possible, warning that failure to do so could trigger retaliation.

Trump also said reciprocal tariffs would go into effect on April 2, 2025. These reciprocal tariffs would apply to countries that impose duties on US products.

Last week, Trump ordered the resumption of tariff investigations into countries that tax US digital services.

He also proposed a fee of up to $1.5 million each time a Chinese-built ship enters a U.S. port, and launched a new tariff investigation into Canadian copper and lumber imports.

This is in addition to his plan to set reciprocal US tariffs. Reciprocal tariffs are planned to be higher to match the tariffs imposed by other countries on US products.

These reciprocal tariffs could hit the European Union (EU) hard on value-added taxes imposed by EU countries.

Desmond Lachman, a senior fellow at the American Enterprise Institute, warned that Trump's higher tariffs could keep inflation high and could push the global economy into recession. (Reuters/AP/AFP)