This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The US market sold off heavily on Monday morning after President Donald Trump announced sweeping tariffs over the weekend to take effect Tuesday. The broader benchmark S&P 500 was down over 1.7%, as of 9:55 a.m. ET. Meanwhile, the Dow Jones Industrial Average fell over 600 points and the Nasdaq Composite also fell 2%.
However, stocks had recouped a majority of the losses by midmorning, after Mexican President Claudia Sheinbaum announced an agreement with the U.S., leading to a delay in implementation of tariffs on her country. Trump also had a call with Canadian Prime Minister Justin Trudeau in the afternoon during which he agreed to pause tariffs for at least 30 days.
Despite the overall market's partial rebound, the Nasdaq Composite still ended the day 1.2% lower and shares of Nvidia (NASDAQ: NVDA) fell 2.84%. Shares of Tesla (NASDAQ: TSLA) were down 5.17%, while shares of Taiwan Semiconductor Manufacturing finished the session 5.73% lower.
A drug war escalating into a trade war?
The Trump administration initially announced 25% tariffs on all imports on goods from Mexico and most imports from Canada. Additionally, Trump imposed 10% tariffs on Chinese imports and Canadian energy products. The tariffs were set to take effect on Tuesday.
The administration positioned the tariffs as a way to gain leverage over Canada and Mexico to further clamp down on illegal immigration and drugs flowing into the U.S. On Truth Social, Trump said:
Canada doesn't even allow U.S. Banks to open or do business there. What's that all about? Many such things, but it's also a DRUG WAR, and hundreds of thousands of people have died in the U.S. from drugs pouring through the Borders of Mexico and Canada.
He also acknowledged that Americans may feel some pain but said it would worth it.
Tariffs are a tax on foreign imports. They often make U.S. goods and services more competitive but can lead to higher consumer prices because of less competition and the fact that foreign countries can often produce goods and services at a lower cost. Trump also hinted that the European Union may be his next tariff target.
While Trump positioned the tariffs as a bargaining chip, officials from Canada and Mexico initially said they would respond with tariffs of their own, setting the scene for a trade war. Trudeau said Canada would impose 25% tariffs on $106 billion of U.S. goods ranging from American alcohol to household goods. China had yet to say it was retaliating, as of this writing. In 2024, over 40% of total U.S. imports came from Mexico, Canada, and China, according to NBC.
The proposed tariffs do not necessarily directly impact the major artificial intelligence (AI) players like Nvidia but they do send a message that the Trump administration could be more serious about tariffs than many believed when he took office. Following the emergence of DeepSeek, a Chinese AI chatbot reportedly made at a fraction of the cost of OpenAI's ChatGPT, media reports circulated suggesting Trump may ramp up export restrictions on chips sold to China. The new tariff announcements may exacerbate those fears.
Bernstein analyst Stacy Rasgon, in a research note Monday morning, wrote that the tariffs could indirectly impact the major chip players by impacting the costs of data processing equipment like computers and servers from China. The U.S. purchased $39 billion of this equipment from China and $28 billion from Mexico in 2023.
Tesla manufactures its vehicles in the U.S., but a portion of car parts used to manufacture the vehicles are made in Canada and Mexico. Meanwhile, Taiwan Semiconductor serves a critical role in the actual manufacturing of Nvidia's chips, so tariffs could lead to much higher costs for Nvidia and also likely threaten the loss of a big customer for the world's largest chip company, even though they've spoken about moving their factories elsewhere.
Trump can be unpredictable
As many know, Trump can be unpredictable. But he may not want to wade too deep into tariffs, because many U.S. companies could see their earnings diminished if they stay in place too long. There's also the risk of reigniting inflation, which may force the Federal Reserve to consider rate hikes down the line. Trump seems likely to use the tariffs as a bargaining chip.
This is likely not the last we've heard of tariffs, which means more volatility may come in the future. Trading on a short-term horizon is difficult, so I wouldn't recommend making too many moves amid the chaos. However, I still think many of the high-flying stocks like Nvidia and Tesla are trading at elevated valuations, making them more susceptible to sell-offs.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
