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Trade tensions: Navigating market risks

Quick takes on capital markets

March 7, 2025 | 2 min read

Escalating trade tensions are injecting fresh volatility into markets. The U.S. trade deficit, which remains sizable with key partners like China, Mexico, and Europe, underscores the stakes in ongoing trade disputes. However, while tariffs could increase costs and disrupt supply chains, history suggests that markets adapt over time. A well-diversified portfolio remains the best defense against short-term uncertainty. Investors should avoid overreacting to short-term swings and instead focus on economic resilience, corporate earnings strength, and broader market trends.

U.S. trade balance by country
Rolling 12 months, visible trade, free alongside basis

U.S. trade balance by country Rolling 12 months, visible trade, free alongside basis in graph form
Source: Clearnomics, Census Bureau, Principal Asset Management. Data as of December 31, 2024.

Financial markets are once again caught in the escalating trade tension crosshairs as new tariffs take effect, are postponed and are adjusted, seemingly on the fly. This week, President Trump imposed duties on imports from Canada, Mexico, and China—signaling a hardening stance to his trade policy. Investors are left weighing the implications for global supply chains, corporate profitability, and economic stability.

A prolonged U.S. trade war will create headwinds for growth and likely further unnerve markets. Since tariffs function as taxes on imports, they often push prices higher for both companies and consumers and will be an added strain on an already precarious inflationary environment. Amplifying investor concerns is the U.S.'s sizable trade deficit, which leaves the country particularly vulnerable to trade-related disruptions. If trading partners decide to retaliate, expect uncertainty to deepen, increasing pressure on businesses navigating global supply chains.

Despite short-term risks and the recent equity market selloff, it's important to put these events into perspective. While markets tend to respond swiftly, the economic effects of tariffs typically emerge gradually. History shows that diversified portfolios benefit from staying invested through cycles, particularly when strong corporate earnings, resilient labor markets, and stable credit conditions support a constructive long-term outlook. While trade headlines persist, disciplined investing remains the best strategy for navigating the uncertainty ahead.

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