President Trump announced a 34% reciprocal tariff on Chinese goods last week, which led to China’s retaliatory 34% counter-tariff. Effective April 8, a new cumulative 50% tariff, alongside existing tariffs, may push total import taxes above 100%.
Tariffs are customs duties aimed at supporting local businesses by making imported goods less competitively priced. They differ from taxes, as tariffs are paid at import, while taxes are settled upon purchase.
Debate Over Tariffs
The use of tariffs remains a debated topic, with some viewing them as protective measures and others warning they could escalate trade tensions and increase prices. In 2024, Mexico, China, and Canada comprised 42% of US imports, with Mexico leading at $466.6 billion in exports.
With the escalation of tariffs on Chinese imports to a cumulative potential of more than 100%, and China’s swift 34% countermeasure, we’re seeing a textbook trade standoff. These levies, aimed at shielding domestic production, have immediate consequences for cost structures across the supply chain. They also introduce layers of complexity for any participants exposed to international pricing pressures.
It’s worth noting that tariffs serve to inflate the landed cost of imports. For businesses relying heavily on overseas goods, this alters production costs, likely triggering a pass-through to retail prices. Particularly in areas like consumer electronics, machinery, and industrial components—where China remains deeply embedded as a supplier—volatility in input costs should not be underestimated.
This is not merely a political manoeuvre; traders must now incorporate tariff risk into pricing frameworks and volatility assessments. For example, increased duties affect the terms of trade and shift forecasted inflationary pressures, thereby influencing interest rate outlooks. We’re already seeing how Treasury yields are reacting in anticipation. Some may be tempted to read this as a short-term impulse—but the sequencing of tariffs and the potential for retaliatory spirals require a more layered approach.
For derivatives traders—especially those involved in commodities, currencies or fixed income—timing matters. The April 8 tariff-taking-effect date creates a near-term window for dislocations. Models that previously relied on stable cross-border cost dynamics will need adjustments. Particularly for those with books exposed to Chinese manufacturing outputs, hedging strategies should reflect immediate and medium-term pricing pressures.
Mexico’s Role in Trade
Moreover, López Obrador’s economic ties with the US, with Mexico now surpassing China in export volume, could shift the focus of trade diversification. If Mexico becomes the preferred trade partner, watch for realignment in rates and currency instruments tied to North American trade corridors. This isn’t just about country-level trade volumes—it’s about supply-chain rerouting in real time.
Freeland has remained notably silent on Canada’s response path, though the structural role of Canadian exports sets up exposures in sectors like automotive and raw materials. Derivative pricing in these sectors may begin decoupling from historic volatility norms. The lack of public positioning may be deliberate, but it creates a vacuum markets may interpret as uncertainty.
From our perspective, volatility premiums may expand, particularly on USD/CNH and MXN pairs, as the market adjusts to expectations of prolonged friction. Likewise, industrial inputs—particularly metals tied to Chinese production—may begin to trade at a premium due to perceived scarcity or delayed fulfilment.
What’s notable is not just the eye-catching percentage rates, but how the cadence of tariff announcements alters behaviour across markets. These are not one-off shocks; they’re shaping trend formation through sentiment and expectation rebalancing. We need to monitor not only the regulatory updates but also the market’s reaction to tariff clarity or confusion.
In the short run, skewness in options markets may become more pronounced as hedgers reposition. Unhedged positions built on baseline assumptions of global trade stability now present outsized risk profiles. So reviewing exposure thresholds is not just ideal, but increasingly necessary. We may see rising open interest in longer-dated contracts, indicating the market is already plotting beyond immediate volatility.
For now, price action in sectors most reliant on Chinese parts can serve as a forward indicator for broader inflation dynamics. The knock-on effect may show up not just in CPI prints, but in central bank tone shifts—an area we must begin to reweight in our forward-looking scenarios.
