After Wall Street’s stock indexes tumbled on Monday after President Donald Trump imposed steep tariffs on Mexico, Canada, and China, a swift move has been made to delay the tariffs on Mexico and Canada by a month, to ease the market concerns about a full-scale trade war unleashing its potential impact on the global economy.
When Trump announced new tariffs — 25% on imports from Mexico and Canada and 10% on Chinese goods — over the weekend, he acknowledged that the measures could cause “short-term” economic pain. Goldman Sachs warned that each 5% tariff increase could cut S&P 500 earnings by 1-2%, with the latest tariffs alone reducing forecasts by up to 3%. Meanwhile, the Cboe Volatility Index, also known as “fear gauge” hit a one-week high.
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However, Mexico and Canada returned to the negotiating table enabling the Trump administration to ease the trade war fears amid huge market selloff. Mexican President Claudia Sheinbaum successfully persuaded Trump to delay new tariffs for a month, pledging to deploy 10,000 National Guard troops to its northern border to curb drug trafficking. Later in the day, Trump indicated that he had spoken with Canadian Prime Minister and delayed the enforcement of tariff hikes.
Since the delay in tariffs was delayed by a month, enough room has been left for China, which is the immediate target of higher tariffs, though Trump suggested that the European Union (EU) might be next.
China, however, dismissed the tariffs as an “American problem” and sought to challenge them at the World Trade Organization (WTO) but signaled its willingness to negotiate based on the 2020 trade pact which committed China to buying an extra $200 billion from the U.S. But now, a hawkish White House under Trump may further seek Chinese negotiators to strengthen efforts to end Russia-Ukraine War.
Coming to EU, the leaders preferred negotiation though reiterated retaliatory stance. The US is the EU’s largest trade and investment partner. As per the 2023 Eurostat data, the US recorded a trade deficit of $161.6 billion with the EU. easing the tension, “There are no winners in a trade war,” said EU foreign policy chief Kaja Kallas and, of course, reminded that a US-EU trade war would benefit China.
Joining the chorus, economists warn that Trump’s tariffs could drive up consumer prices in the U.S. and slow down global growth. The Chinese yuan, Canadian dollar, and Mexican peso all weakened against the U.S. dollar. With Canada and Mexico as top suppliers of U.S. crude, oil prices climbed over 1%, while gasoline futures surged nearly 3%.
Moreover, the tariffs affect nearly half of all U.S. imports, forcing domestic manufacturing to more than double the output to offset supply disruptions. Some experts warn that the tariffs could push Canada and Mexico into recession while triggering “stagflation” — a mix of high inflation, stagnant growth, and rising unemployment — in the U.S.
Echoes of Great Depression?
The current tariff war and retaliation brings back the worst fears of the Great Depression, which was an offshoot of Smoot-Hawley Tariff Act passed amid similar protectionist policies in 1930. Analysts draw comparisons to the 1930s, when the U.S. imposed sweeping tariffs that extended the conditions leading to the Great Depression.
The Smoot-Hawley Tariff Act of 1930 raised duties on over 20,000 imported goods to protect American industries but instead triggered retaliatory tariffs from other nations. The result was a 65% decline in global trade and a deepening of economic crisis.
During the 1928 presidential campaign, Herbert Hoover pledged to raise prices on agricultural imports, but pressure from other sectors led to broader tariff hikes. The Smoot-Hawley Tariff Act was passed in 1930, prompting stock prices to fall sharply.
By 1932, US exports had plunged from $7 billion to $2.5 billion, and farm exports fell by one-third. Foreign investors began withdrawing capital, destabilizing markets further. Soon, markets crashed and millions of investors suffered heavy losses. When imports became more expensive, mass layoffs were announced and millions of unemployed workers, unable to afford anything but domestic goods, emerged as the worst-hit section.
History also shows that Canada, then the U.S.’ largest trading partner, retaliated imposing additional duties on American goods, but lowered tariffs on imports from the other places in the British Empire. Eventually, between 1930 and 1932, several other countries adopted retaliatory tariffs, leading to the collapse of the U.S. trade with Europe, with imports and exports falling by two-third. And, the global economy suffered severe setback until President Franklin Roosevelt’s Reciprocal Trade Agreements Act of 1934 sought to reverse course, promoting trade liberalization.
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History is, thus, replete with the dangers of protectionism in a modern and highly inter-dependent world. “The Smoot-Hawley Act showed that aggressive trade barriers can backfire, worsening economic downturns rather than alleviating them,” said one historian. “As the world’s largest economy, the US must craft trade policies that balance domestic interests with global stability.”
The coming week is key to determine whether Trump’s tariffs serve as a negotiating tactic or push the world to the brink of an imminent economic showdown that triggered the 1930s Great Depression.