As Trump's tariffs take effect, what might it mean for US investors?

February has arrived and less than one month after he was inaugurated, President Trump is going ahead with heavy tariffs on some of America’s major trade partners.

It means imports of goods worth billions of dollars from Canada and Mexico will be subject to 25% tariffs, with a 10% rate for Canadian energy, while Chinese imports will face an additional 10% tax on top of existing tariffs. And there could be more to come.

Already Canada’s administration has announced new tariffs on many US goods including beer, wine, bourbon, fruits, clothing, and household appliances. They will come into effect Tuesday and non-tariff measures could follow. Mexico will announce its plans today.

Investors have been seeking havens in fear of an escalating trade war, with gold reaching a new record high of $2,800 last week and global markets are expected to be volatile early this week as more details of tariffs help to shape a potential wider trade war that could eventually spill over into most major economies.  

Carl Ludwigson, managing director at Bel Air Investment Advisors, a $12 billion AUM firm based in Los Angeles, says that the near-term impact on markets driven by concern about inflation (in the bonds market for example) is likely to be followed by a longer-term impact on the economy.

“While tariffs may cause short-term inflationary pressures, they represent a direct tax on consumers and businesses. This could stall the Federal Reserve's current trajectory of rate cuts, which has already shifted from four cuts to just two for 2025 due to policy uncertainties,” he said. "The Federal Reserve’s policy direction has been influenced already, as reflected in its revised dot plot projections in December. Should the administration's trade and labor policies prove aggressive, the Fed may pause further rate cuts, impacting bond markets and equity valuations."

Higher prices and interest rates may mean weakened consumer demand and subdued growth, but does Ludwigson believe a greater downturn could be on the cards?

“While the long and variable lags of monetary policy leave some room for potential recession, the majority of strategists are more sanguine coming into this year than they were last year,” he noted. “If tariffs and labor policy keep the Fed on hold and the new administration pursues aggressive fiscal discipline, then we might see economic growth take a hit this year. Our base case is for trend growth as a more business friendly regulatory environment may offset potential changes to trade and immigration.”

Consumers are bracing for potential pain with a recent survey of 2,500 Americans by three US universities finding that 40% of respondents are likely to stockpile goods and more than one third would create emergency savings to mitigate higher prices.