It’s the opening alarm bell. Markets are sagging in response to US President Donald Trump’s decision—after a one-month delay—to impose 25 percent tariffs on Canada and Mexico, and increase tariffs on Chinese goods from 10 percent to 20 percent. As of today, the United States now has its highest effective tariff rate since 1943. To make sense of the market moves and Trump’s thinking on tariffs, we turned to the head of our GeoEconomics Center for insight.

• Josh Lipsky (@joshualipsky): Senior director of the Atlantic Council’s GeoEconomics Center and former adviser to the International Monetary Fund

Seeing red

• Monday was “the day Wall Street finally realized that Trump was serious about tariffs,” Josh tells us. The S&P 500 fell nearly 2 percent on Monday as Trump declared that the tariffs would indeed go into effect at midnight, and declined another 1 percent on Tuesday as Mexico, Canada, and China promised retaliatory measures.
• The markets are “quickly trying to make up for lost time since the election,” Josh adds, pricing in the impacts on consumers from a multifront trade war that is only now becoming real.
• And “this is only the beginning,” Josh notes. “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.”

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Three ways to tariff

• Josh has noticed three distinct ways that Trump is wielding tariffs in his second term. The first is “tariff as a negotiating tactic.” That’s what many on Wall Street thought the tariffs that came into effect today were, extrapolating from how tariff threats typically played out during Trump’s first term (for example, with the China Phase One deal). Josh expects this use of tariffs to continue, noting that China remains “a leading candidate for a renewed trade deal, despite Monday’s announcement” and the new tariffs against Canada and Mexico may prove “temporary and become part of deal-making to renew the US-Mexico-Canada Agreement in 2026.”
• The second form is “tariff as tariff,” meaning a way to either raise revenue or protect and promote US manufacturing. But it will take a much higher tariff than even 25 percent to make many products (such as laptops) cheaper to produce in the United States, Josh tells us, and years for companies to relocate production from overseas. “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 stickier than Trump, or the Federal Reserve, anticipated.”
• The third and most novel is “tariff as punishment.” Trump, Josh says, sees tariffs as a “tool of coercive economic statecraft” and an alternative to financial sanctions, which Trump worries are causing countries to move away from the US dollar. During a press conference on Monday, Trump specifically stated that countries will be “punished by tariffs” for the damage he believes they’ve inflicted on the US economy. “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 down,” explains Josh.

Street smarts

• Josh says we should expect much more “tariff as tariff” and “tariff as punishment” during Trump’s second term, and “therefore more retaliation from other countries” and greater “risk of a global trade war.”
• Next up are deadlines for a new tranche of steel and aluminum tariffs, and a report from cabinet departments to the White House about Trump’s plan for “reciprocal tariffs,” which Josh notes “will provide the framework for possible actions against nearly every country in the world.”
• With Wall Street waking up to these realities, Josh adds, “expect a bumpy ride ahead—in trade, in markets, and for the global economy.”

New Atlanticist

Mar 4, 2025

Wall Street is finally waking up to Trump’s tariff policy

By Josh Lipsky

Financial markets are beginning to react after the United States implemented tariffs on its three largest trading partners on Monday.

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Image: A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 24, 2025. REUTERS/Brendan McDermid/File Photo