US President Donald Trump has been dominating the headlines since his return to the White House, and we’ve had several questions from clients about the potential impact of the trade tariffs being championed by his administration.

What is a tariff?

A tariff is a tax imposed by a government on imported goods. By making foreign products more expensive, tariffs aim to protect domestic industries and generate tax revenues.

The reality can often be a little more complicated, with companies sometimes absorbing tariffs rather than putting up prices. In addition, in a world where US companies often import components from countries like China, products made by US companies could also increase in price. However, in essence the Trump administration hopes tariffs on imports from China will work as shown in the graphic below.

Which countries are affected?

On February 1st, Trump announced sweeping tariffs on the United States’ three largest trading partners: Canada, Mexico and China.

⬩ China is the subject of an additional 10% tariff on top of existing levies and this took effect on February 4th. Beijing has responded with its own tariffs on US goods.

⬩ Canada and Mexico were initially slated for 25% tariffs.

⬩ However, in a political twist, both countries have avoided these tariffs – for now. On February 3rd, Mexican President Claudia Sheinbaum announced that, after a call with Trump, the US had agreed to postpone tariffs on Mexican goods for one month.

⬩ Soon after this, Trump and Canadian Prime Minister Justin Trudeau announced on social media they too had reached a temporary agreement that meant tariffs on Canadian goods would be postponed for at least 30 days.

⬩ Trump has also announced plans for a 25% tariff on all steel and aluminium imported into the US. Canada, China and Mexico are the largest exporters of steel and aluminium products to the US.

The key question: do tariffs materially increase the risk of a US recession?

Tariffs have many knock-on effects, but ultimately, this is the only question that truly matters for stock markets.

⬩ Since 1928, the S&P 500 has declined by 10% or more in a calendar year on 12 occasions.

⬩ Nine of these declines were caused by a US recession (1930–1931, 1937, 1957, 1973–1974, 2001–2002, 2008).

⬩ Two were linked to World War II (1940–1941).

⬩ The most recent decline in 2022 was caused by the US Federal Reserve’s aggressive monetary policy and fears of an impending recession.

Why a recession still seems unlikely

A prolonged, multi-front trade war could lead to a US recession and stock market losses, but it’s far too early to sound the alarm.

⬩ US economic growth remains solid: GDP grew at an annual rate of 2.3% in Q4 2024.

⬩ Labour markets are resilient: US unemployment stood at 4% in January 2025.

⬩ Oil prices remain stable: At $71–$72 per barrel, prices are largely unchanged this year. Even if tariffs eventually hit Canadian crude, history suggests a US recession typically requires oil prices to double in a year (e.g. 1973, 1990). That scenario looks unlikely for now.

Key takeaway: While tariffs could create headwinds, the US economy still shows strength. It’s too soon to assume they will tip the country into recession.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.