Markets still shaky as China retaliates to US tariffs; Mexico, Canada get reprieve

China’s swift retaliation with its own tariffs on prime US commodities from oil to agriculture, tech and energy has rattled markets.

US President Donald Trump speaks to the press after signing an executive order to create a US sovereign wealth fund, in the Oval Office of the White House on February 3, 2025, in Washington, DC. Picture: Jim Watson / AFP

Markets remained shaky as the US went ahead with tariffs on China after last minute talks failed, despite giving a reprieve to Mexico and Canada, and China immediately retaliated.

Immediately after a 10 per cent increase in tariffs on Chinese goods imposed by the US took effect, China revealed its own tariffs, export curbs and a probe of Google for alleged anti-trust breaches.

China imposed 10 per cent tariffs on US oil and agricultural machines and 15 per cent tariffs on US coal and LNG. It also put export controls on tungsten-related materials used in superalloys, as well as tellurium, used in solar panels and semiconductor chips.

The Aussie dollar extended its intraday fall to 0.9 per cent, hitting an intraday low of 0.6171.

The S&P/ASX 200 stock index erases all of its 0.8 per cent intraday gain, closing flat as 500 futures turn down 0.4 per cent after soaring 0.8 per cent after the US granted Mexico and Canada a one-month stay of execution on the 25 per cent tariffs that were also due to start on Tuesday.

Meanwhile, gold quickly resumed its safe-haven status, hitting a fresh record high of US$2,830.74.

Bitcoin more than fully recovered from Monday’s sharp fall, regaining the US100,000 mark.

Despite the reprieve on tariffs granted to Mexico and Canada, investors were left grappling with the prospect of ongoing uncertainty about the future of US trade policy.

“One thing we can say for sure - markets are going to remain subject to massive headline risk in coming hours, days and years,” said Ray Attrill, head of FX Research at NAB.

Mexico agreed to send 10,000 National Guard officers to the border to stem the flow of fentanyl and migration into the US. Canada made a number of concessions around fentanyl trafficking.

However, there were no concessions by Mexico or Canada on their trade surpluses with the US.

“Uncertainties regarding impact, retaliations, and possible reversals abound, but this weekend’s tariff announcement from the Trump administration sets in motion a sharp shift in the US’s position toward the global trading order,” said J.P. Morgan’s chief economist and global head of Economic Research, Bruce Kasman.

“A trade conflict with the US’s closest economic partners has begun and all indications are that these actions are a start to a widening conflict.”

With 42 per cent of US imports coming from Mexico, Canada and China, his planned tariffs will add roughly 7 per cent to average goods tariffs, taking them to around 10 per cent – much bigger than the 2018 tariff increases by the US and the most since 1946, according to AMP.

Trump has also ordered a review of unfair trade practices by 1 April, continues to talk of a general tariff on all goods which in the election he put at 10 or 20 per cent, has talked about a 50 or 60 per cent tariff on China and is vowing to impose tariffs on the EU “pretty soon”, semiconductors, steel, metal, oil and gas and pharmaceuticals.

His proposals could take the average US tariff to near 20 per cent or more, the highest since the 1930’s.

Relatively smaller rebounds in French and German stock markets on Monday came after higher than expected inflation data for the euro area as well as a warning from US President Donald Trump that US tariffs on EU goods “will definitely happen” citing a large trade deficit with the bloc.

But Dimensional Fund Advisors noted that US and Chinese stock markets outperformed the MSCI World ex USA index over the four years of Trump’s first administration.

“We conclude that markets are forward-looking, and the economic impact from initiatives such as tariffs is likely already reflected in current market prices,” said Dimensional CEO Bhanu Singh.

“When these expected developments come to pass, the effect on markets may be muted.”

But Australia faced indirect impacts that could result from a fall in global trade and less demand for raw materials, said AMP’s chief economist and head of investment strategy, Shane Oliver.

Australia’s US exports are just 4 per cent of Australia’s total exports, and may be spared from tariffs as Australia has a trade deficit with the US, but they could still be hit if Trump’s motivation is mainly to shift production back to the US and raise tax revenue.

“Our main US goods exports are beef, precious metals, pharmaceuticals, aluminium, aircraft parts and wine – some of which Trump is specifically talking about putting tariffs on,” Dr Oliver said.

“However, as an open economy with high trade exposure to China, our main vulnerability is to a fall in global trade flowing from a trade war sparked by Trump’s tariffs, particularly if it weighs on demand for Chinese exports.”

An OECD study found Australia could suffer a 1.2 per cent reduction in GDP as a result of an “extreme” 10 per cent reduction in global trade between major countries.

In a speech in December, RBA Deputy Governor Hauser, said the Australian dollar could act as a “shock absorber”, meaning the economic impact could be negligible over two years.

“Part of the reason for a potentially small impact on Australia also flows from the fact that Australian exports are dominated by mining, which is only a small share of manufactured end products that go to the US compared to exports from most other countries including Canada, Asia, Europe and Japan,” Dr Oliver said.

“Much will depend on how hard Trump goes, how other countries respond and how long the tariffs remain in place. US tariffs won’t add to Australian inflation unless Australia imposes tariffs on US products in retaliation or the Australian dollar plunges.

“In terms of the impact on RBA monetary policy, our assessment is that Trump’s trade war adds to the case for a rate cut because it’s more of a threat to growth than inflation.

“That said, the weak Australian dollar is one factor that will likely slow the pace of easing, likely seeing the RBA cut in February but hold in April to avoid pushing it down faster.”