Global markets brace for fallout from Trump tariffs

On Monday morning, markets in Japan and South Korea opened more than 2% lower. Overnight trading on Wall Street pointed to a sharp slide for US stocks when the markets open in New York on Monday.

Markets around the world braced for volatile trading Monday as investors began to assess the potential fallout from President Donald Trump's announcement of tariffs on Mexico, Canada and China.

On Monday morning, markets in Japan and South Korea opened more than 2 per cent lower. Overnight trading on Wall Street pointed to a sharp slide for US stocks when the markets open in New York on Monday. The peso and Canadian dollar both declined as the US dollar strengthened.

As investors begin to assess the potential fallout from what could be the start of a disruptive trade war, Japan and South Korea are seen as two countries likely to be particularly affected. Companies are exposed to the tariffs because they have made sizable investments in North America under agreements meant to facilitate trade.

Some of the biggest share-price declines in Asia on Monday were among Japanese auto manufacturers, which have poured billions into supply chains in Canada and Mexico that could be hit by new taxes. Toyota Motor fell nearly 5 per cent in early trading Monday, while Honda Motor and Nissan Motor slumped more than 7 per cent.

On Saturday, Trump followed through on his promise to impose tariffs of 25 per cent on Canadian and Mexican goods, except for Canadian energy products, which will be levied at 10 per cent. Trump also imposed a further 10 per cent tax on goods from China.

In the United States, the prospect of retaliation sparking a full-scale tariff war has heightened fears among investors and economists that the inflationary pressure that dogged the economy after the pandemic could swiftly return.

Shortly after Trump's weekend announcement, leaders in Canada and Mexico said they would respond by levying retaliatory tariffs on US goods.

The initial reaction from China, which as a big exporter could be damaged more than the United States in a global trade war, was cautious: The Ministry of Commerce said it would challenge the tariffs at the World Trade Organization. Markets in China were closed on Monday for the Lunar New Year holiday.

Worries about a reigniting of inflation helped nudge the two-year Treasury yield, which is sensitive to changes in interest rate expectations, slightly higher.

"Rising trade policy uncertainty will heighten financial market volatility and strain the private sector, despite the administration's pro-business rhetoric," said Gregory Daco, chief economist for the consulting firm EY-Parthenon.