A Global Trade War Has Begun

While we can hope that World War III is not on the horizon,
the world is far from calm. Tensions between countries are escalating, and the
United States’ protectionist policies are a major driving force behind this.

This week, the U.S. officially imposed a 25% tariff on all
imports from Mexico and a 25% tariff on most goods from Canada. Although some
energy resources are exempted, the overall impact will still be significant.

On top of that, an additional 10% tariff has been imposed
on all imports from China. Beijing retaliated by filing a complaint with the
WTO and introducing 10-15% tariffs on US agricultural exports as of March 10.

As tensions rise, investors have been pulling back from
riskier assets. The S&P
500 fell 1.8%, while the Nasdaq dropped 2.6%. Overall, markets are
almost back to the levels seen before Trump won the presidency.

European stocks are also feeling pressure, especially after
Trump hinted that the European
Union could face tariffs, particularly on autos
and other goods, accusing the bloc of taking advantage of the United States.

So why are investors worried?

In the U.S., there is concern that these tariffs will drive
up prices, forcing the Federal Reserve to keep interest rates higher for
longer. This could hurt economic growth and ultimately push the economy into a
recession.

To make matters worse, the Atlanta Fed’s latest forecast
already suggests that the U.S. economy could contract at its fastest pace since
late COVID-19, with GDP expected to fall 2.8% in the first quarter of this
year.

The problem is that tackling this slowdown, especially with
rising inflation risks, won’t be easy. The Fed will likely need to keep
interest rates higher for longer to hit its 2% inflation target.

Still, markets are beginning to believe that the central
bank will not lower rates once or twice but possibly two or three times. Time
will tell, but for now, the rhetoric from Fed
members remains hawkish.

Elsewhere, it is estimated that a 10% tariff on European
products could reduce earnings per share for EU exporters by 1% to 2%, and for
giants such as Volkswagen and BMW, it could cut profits by 5% or more.

So will the U.S. market continue to fall?

Trump promised an “extraordinary” announcement today, but
it is unclear what it will be. If it includes more tariffs, market sentiment
could fall further. On the other hand, gold could rise due to global unrest.

This article was written by FL Contributors at www.forexlive.com.