Mark down March 3, 2025. That was the day Wall Street finally realized that US President Donald Trump was serious about tariffs. On Monday, the S&P 500 fell nearly 2 percent as Trump confirmed what we at the Atlantic Council predicted in February—that the tariffs on Canada and Mexico were not mere threats, but actually likely to be implemented. The stock markets continued to fall on Tuesday as investors processed the news.
Now the United States begins a trade war with its three largest trading partners, and the costs could start piling up.
Monday’s reaction—the worst trading day since Trump was elected—was Wall Street quickly trying to make up for lost time since the election. This is only the beginning. Markets could remain shaky if deteriorating consumer sentiment translates into less spending and price hikes on everything from gas to cell phones come into effect in the coming weeks.
Why did many on Wall Street seemingly miss the signs that Trump was going to pull the trigger on tariffs? Because they were stuck in a mindset based on the previous Trump administration. In his first term, Trump often used the threat of tariffs to negotiate—see the China Phase One deal, for example—and implemented tariffs on a wide range of products. But in Trump’s second term, the president and his senior trade adviser Peter Navarro are approaching changes to trade on an even more sweeping scale and accelerated timeline.
Trump is now wielding tariffs in three distinct ways. Here’s how to think about them.
First, there’s “tariff as a negotiating tactic.” This is the kind of deal Wall Street thought Trump was trying to get with his threats against Mexico and Canada, mirroring what happened frequently in his first term. Those deals will still happen. China, for example, is a leading candidate for a renewed trade deal, despite Monday’s announcement.
The second form is “tariff as tariff.” Trump and his team are approaching tariffs with the traditional view that a tariff can generate domestic manufacturing by raising costs on importers and therefore incentivizing production in the United States. The challenge with this plan is that for many products (such as laptops), it would take a much higher tariff than even 25 percent to make it cheaper to produce them in the United States. While some companies are announcing efforts to move production back to the United States, it will take years to reorient associated supply chains. In the meantime, it is US consumers and companies that will end up paying higher prices—at a moment when inflation is proving a little more sticky than Trump, or the Federal Reserve, anticipated.
The other challenge is that Trump wants to use tariffs as a source of revenue. The Committee for a Responsible Federal Budget estimated in February that the Trump administration’s new tariffs could raise over one hundred billion dollars per year (and therefore possibly offset some of the cost of the coming extension of the Tax Cuts and Jobs Act). That still would only represent approximately 2 percent of total US revenue. And there’s a contradiction here. If the United States is collecting revenue on tariffs, that means the companies paying the tariffs aren’t actually reshoring. Instead, those companies are paying the higher cost for tariffed goods because doing so still makes the most sense for their businesses. The traditional use of tariffs can boost revenue or reshoring, but it’s very difficult to do both.
The third form of tariff is a new development in Trump’s second term. It is “tariff as punishment.” In Trump’s press conference on Monday, he specifically said several times that Canada and Mexico were going to be “punished.” What does tariff as punishment mean? It’s a form of sanction. Instead of financial sanctions, which Trump argued during the presidential campaign were causing countries to move away from the US dollar, expect the administration to use tariffs more as a tool of coercive economic statecraft. The benefit, from the Trump team’s view, is that unlike the on-and-off switch of sanctions, tariffs can be ratcheted up (5, 10, 15 percent) or ratcheted down. A recent example of this approach to tariffs came when Trump threatened a 150 percent tariff on any country from the BRICS grouping of emerging economies that was moving away from the dollar.
Trump’s second term is going to feature much more use of the latter two kinds of tariffs than his first term did. Trump told the public as much when he decided to leverage the International Emergency Economic Powers Act to give himself the authority to issue tariffs without any notice—an unprecedented use of the law. There will be negotiations, of course. It’s possible the new Canada and Mexico tariffs will only be temporary and become part of deal-making to renew the US-Mexico-Canada Agreement in 2026. But there will also be more tariffs for tariffs’ sake, more tariffs as punishment, and therefore more retaliation from other countries. It all adds up to the risk of a global trade war. In the coming weeks, deadlines are approaching for the next wave of steel and aluminum tariffs and a key report on reciprocal tariffs from the Office of the US Trade Representative and Commerce Department, which will provide the framework for possible actions against nearly every country in the world.
As of today, the United States has the highest effective tariff rate it has had at any time since 1943. Wall Street missed the early signs that Trump was serious about imposing tariffs. Now that investors have woken up, expect a bumpy ride ahead—in trade, in markets, and for the global economy.
Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund.
Sophia Busch and Charles Wheelock contributed to the data visualization in this article.
Further reading
Mon, Mar 3, 2025
Tariffs on Mexico could threaten Texas’s electricity reliability
New Atlanticist By David L. Goldwyn, Joseph Webster
Tariffs on transformers and other electrical components will make it considerably harder for the United States to achieve energy dominance and could prove costly for Texas.
Tue, Feb 4, 2025
Where do the Trump tariffs go from here?
Fast Thinking By
US tariffs on China went into effect today, while President Donald Trump paused levies on Mexico and Canada. Our experts explain who and what could be next.
Thu, Jan 30, 2025
Tariffs on Canada and Mexico could hurt Trump’s quest for US energy dominance
New Atlanticist By David L. Goldwyn, Joseph Webster
A trade war against Canada and Mexico could affect US energy prices and have significant geopolitical ramifications.
Image: Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 24, 2025. REUTERS/Brendan McDermid.