Reciprocal Tariffs: Market & Economic Implications

Businesses and investors may face an economic environment of slower growth and higher inflation after a wave of new U.S. tariffs were announced for nearly every one of its trading partners. While Canada and Mexico welcomed a reprieve from the latest trade barrier, the impact on the global markets has been significant.

On April 2, President Trump hosted a Rose Garden ceremony to announce a 10% baseline tax on all imports from all countries and then increased that rate for dozens of countries currently running a trade surplus with the U.S. These new levies include 20% on the European Union and a 34% tariff on imports from China, which is on top of the previously announced 20% tax Trump announced on all Chinese imports earlier in the year.

For a deeper analysis of the market and economic implications of tariffs and how they could impact the near and long-term outlook, Michael Miranda, CFA, Head of Investments, BMO Private Wealth North America, hosted a panel that included Michael Gregory, Deputy Chief Economist, BMO Capital Markets, and Yung-Yu Ma, PH.D., Chief Investment Officer, BMO Wealth Management U.S.

Tariffs expected to stoke inflation, stall growth

Before the latest bout of tariffs started being introduced in February, U.S. imports faced an average tariff rate under 3%; today, that figure is poised to surpass 20%, explained Michael Gregory. “It’s a meaningful increase, which will have a huge hit on the economy,” he explained.

As a result, BMO downgraded its Q4/Q4 growth forecast for the U.S. to 0.6% in 2025, and raised core-PCE inflation – which is one of the indicators followed closely by the Federal Reserve – to 4%. “This is clearly a stagflationary impulse for the U.S. economy,” he said.

In the near term, high-frequency imports of things like perishable goods will start to see the impact of tariffs immediately, while duties imposed on imported vehicles will show up in the next CPI print, Gregory explained. The shifting inflation and growth outlook is now pressuring the Fed to blunt the impact, but Fed Chair Jerome Powell has already indicated that he’s prepared to take a wait-and-see approach.

Although Canada and Mexico were not the focus of the latest tariff announcement, previously introduced tariffs have already had an impact on their growth outlook. Inflationary pressures will not be as pronounced in Canada as they are in the U.S. as a result of the tariffs, because the Canadian economy in much more exposed to ebbing southbound exports. BMO now projects that the economy will shrink by -0.7%, down from a previous forecast for growth of 1.6%.

The market response

The extreme nature of the impact of the tariffs is also being felt in the stock market, explained Yung-Yu Ma. Based on the steep selloff, Ma estimates that the market has now priced in a 15% tariff across the board.

“The most extreme scenarios are not priced in at this point, but also what’s not priced in are the more positive scenarios,” he said. What the market is trying to determine now is how long the tariffs could remain at these levels.

Ma agreed with Gregory that he doesn’t see the Fed coming to the rescue, as inflation will likely rise in the near term. He noted that the Fed would likely want to see other indicators, like weakening of the labor market, although Ma doesn’t expect to see any meaningful signals on that front to materialize before the summer.

Although Ma acknowledged that investors might feel the weight of the tariffs and their sudden impact, he said a lot could change between now and the summer.

Recessionary fears

Ma and Gregory note that while the tariffs will hurt both countries, they will impact Canada and the U.S. differently.

“Our base case, even with the tariffs, is not for a recession in the U.S.,” said Gregory, although he’s not prepared to rule out the possibility entirely. As for Canada, he said the country’s federal and provincial governments are in pretty good financial shape. He expects these jurisdictions to put forward various fiscal responses to support the most affected industries.

As for the longer-term outlook, Gregory remains cautious. While he said there is a chance that, over time, the tariffs won’t be as onerous as they seem to be right now, the uncertainty caused by U.S. trade policy decisions could have a lasting impact. “As long as you have that uncertainty, even if you get a rollback in tariffs, that uncertainty does affect businesses in terms of how they’re thinking about investing in the future,” he said.

Ma is also taking a wait-and-see approach. “It’s hard to get past the immediate headlines, but there’s so much uncertainty, so much in play,” he said. Some of the key points he’s watching for are whether the White House gets significant resistance from Republican members of Congress, the potential impact of legal challenges on the way in which the tariffs were imposed, and how quickly and significantly bilateral deals with countries can be struck to reduce tariffs.

“We do think a fair amount is priced in now, but there’s still acute uncertainty on a day-to-day basis,” he said.

Event replay: Reciprocal Tariffs: Market & Economic Implications