Trump Tariffs & Retaliatory Moves Put These ETF Areas in Focus

A second round of tariffs imposed by President Donald Trump takes effect today, impacting three major trade partners: Canada, China, and Mexico.

Breakdown of Tariff Measures

• Canada and Mexico: A 25% tariff on imports from both nations following a 30-day pause.
• China: A second round of 10% duties on imports, bringing the total blanket tariff rate to 20%.

Economic Impact and Market Reaction

The latest tariffs represent an escalation of Trump’s trade policies, surpassing the economic impact of his first term if maintained. According to the Tax Foundation, tariffs from 2018-2019 cut U.S. GDP by 0.2%, with the new measures expected to surpass this loss, as quoted on Yahoo Finance.

Erica York, Vice President of Federal Tax Policy at the Tax Foundation, estimated that the latest tariffs amount to a $130 billion annual tax increase on Americans, potentially raising household costs by $1,000 annually, per the abovementioned source.

Retaliatory Measures by China

In response, China announced additional tariffs of up to 15% on major U.S. agricultural exports, including soybeans, pork, and beef. The Chinese Commerce Ministry stated the following measures:

• 15% tariffs on U.S. chicken, wheat, corn, and cotton.
• 10% tariffs on U.S. sorghum, seafood, dairy products, and fruits.

Additionally, Beijing expanded its "unreliable entity list," barring ten more U.S. firms from engaging in trade activities within China. Companies such as General Dynamics Land Systems and General Atomics Aeronautical Systems were also placed on China’s export control list, further escalating tensions.

Canada's Retaliatory Response

The U.S.-Canada trade relationship, valued at over $900 billion annually, is now under significant strain. Prime Minister Justin Trudeau declared that Canada would not let the U.S. tariffs go unanswered, announcing countermeasures:

• An initial 25% tariff on C$30 billion ($20.6 billion) worth of U.S. goods, effective immediately.
• A second round of 25% tariffs on C$125 billion worth of U.S. products, including automobiles and steel, in three weeks.

Economists warn that a prolonged trade war could shrink Canada’s GDP by nearly 3% over two years, reducing demand for Canadian exports and increasing consumer costs. Traders also increased bets that the Bank of Canada would cut interest rates by 25 basis points.

ETF Areas to Win/Lose

Against this backdrop, we highlight a few sectors and their related stocks and exchange-traded funds (ETFs) that could be under the spotlight amid the escalating trade tensions.

Technology

Bloomberg News reported in early February that regulators in China were considering introducing a formal investigation into Apple’s (AAPL) App Store fees and policies. Additionally, China initiated an antitrust investigation into Alphabet GOOGL.

China is a key production engine for tech gear, including for American companies like Apple that have their products assembled in the country. In 2023, China made up for 78% of U.S. smartphone imports and 79% of laptop and tablet imports, the Consumer Technology Association trade group reported, as quoted on apnews.com.

So, tech ETFs like Technology Select Sector SPDR ETF XLK and Communication Services Select Sector SPDR ETF XLC may face troubles.

Consumer

As tariff tensions are heating up, consumer stocks could be under pressure.  A sweeping new U.S. tariff on products made in China is expected to raise the prices American consumers pay for a wide array of products, from the ultra-cheap apparel sold on online shopping platforms to toys and electronic devices such as computers and cellphones.

Chinese exports of low-value packages jumped to $66 billion in 2023, up from $5.3 billion in 2018, according to report released last week by the Congressional Research Service, quoted on apnews.com. In the United States, Temu and Shein accounted for about 17% of the discount market for fast fashion, toys and other consumer goods.

The new tariffs will also hit third-party sellers on Amazon that import products from China, according to Squali, as quoted on apnews.com. There are high chances, retailers will try to pass on some burden of higher costs to consumers, thereby raising prices.

This is likely to bump up inflation levels in the U.S. economy. Higher inflation in turn will give a boost to bond yields. This, in turn, might push up consumers’ borrowing costs and hurt ETFs like iShares U.S. Consumer Services ETF IYC and SPDR S&P Retail ETF XRT .

Rare Earth Elements

China’s Commerce Ministry and Customs Administration revealed that the country is imposing export controls on rare earth elements like tungsten, tellurium, molybdenum and indium, which are crucial for the clean energy transition, with China controlling much of the global supply.

VanEck Rare Earth/Strategic Metals ETF REMX puts 26.87% of weight in China and 26.74% weight in the United States. The latest trade war puts focus on the REMX ETF.

Auto

U.S. auto companies earn about sizable revenues from China. According to the U.S. International Trade Commission, the U.S. imports between $15.4 billion and $17.5 billion worth of transportation goods from China annually, as quoted on CNBC. This includes approximately $9 billion to $10 billion in auto parts and accessories for vehicles, tractors, and other special-purpose vehicles. The ongoing clash increased will thus weigh on First Trust NASDAQ Global Auto Index Fund CARZ (read: Trump's Tariffs and Their Impact on Auto ETFs).

Moreover, the United States and Mexico share trade ties in the automotive industry. Hence, sectors with the largest Mexico exposure, autos and auto parts, were particularly vulnerable.

Steel

The new steel and aluminum duties may benefit the domestic steel and aluminum industries, boosting VanEck Steel ETF SLX. But then, they could weigh on broader economic sectors. Ryan Young, a senior economist at the Competitive Enterprise Institute, noted that Trump's previous metal tariffs created approximately 1,000 jobs in the steel and aluminum sectors but resulted in the loss of 75,000 jobs in steel- and aluminum-dependent industries, such as automotive manufacturing, construction, and beverages, as quoted on Yahoo Finance.

Invesco Building & Construction ETF PKB may lose over the long term due to higher steel prices as steel is a raw material in the construction industry (read: ETFs to Win/Lose as Trump Imposes 25% Tariffs on Steel and Aluminum).

Beverage

Beverages and spirits such as tequila, mezcal and beer accounted for a significant portion of U.S. imports, totaling almost $12 billion in trade. Corona beer maker Constellation Brands STZ could be at risks. The STZ stock has about 3.67% exposure to Invesco Food & Beverage ETF PBJ. Moreover, the food and beverage bottling industry may see high-cost pressure due to steel tariffs.

Aerospace

U.S. aerospace industry thrives on steel and aluminum imports to construct aircraft. About 80% of an aircraft is made of aluminum. Companies like Boeing Company (BA), Lockheed Martin (LMT) and Northrop Grumman (NOC) may come under pressure. Aerospace and defense ETFs like iShares U.S. Aerospace & Defense ETF ITA may also feel the pinch.

Soybean

The two largest exporters of soybeans, Brazil and the United States, are likely to make up about 85% of the total global import demand. And soybeans are key U.S. exports to China. Needless to say, Teucrium Soybean Fund (SOYB) may face the brunt of a retaliatory tariff.

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This article originally published on Zacks Investment Research (zacks.com).

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