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US President Donald Trump on Thursday threatened a 35% tariff on imports from Canada starting 1 August, up from 25% previously, warning in a letter that rates “will be modified, upward or downward, depending on our relationship with your country.” Separately, Trump told NBC News “all of the remaining countries are going to pay, whether it’s 20 percent or 15 percent,” floating a new blanket tariff baseline level.

Details at this stage remain thin, but an unnamed White House source cited by the Wall Street Journal suggests the 35% tariff on Canada will not apply to goods compliant with the US-Mexico-Canada Agreement (USMCA), with the caveat that this could change. The Wall Street Journal also reports Canadian negotiators are “increasingly resigned” to an eventual end-deal that includes some form of new tariffs.

This latest move comes on the heels of similar actions targeting numerous other trading partners, reinforcing our expectations for more disruptive tariff headlines and developments into US-imposed negotiating deadlines. We make several observations from this latest episode:

The actual impact on US-Canada trade might be fairly limited. The 35% headline figure on Canadian imports sounds high, and indeed would be destructive if applied to all trade given the deep integration of the two countries' supply chains and economies. However, the impact depends heavily on whether the USMCA exemption holds, as is the case with the current 25% rate. Most Canada-US trade is USMCA-compliant and currently duty-free, so the real economic costs could be quite small relative to overall trade. Sector-specific tariffs, such as the proposed 50% levy on copper, remain a separate threat, and we think they could prove more durable than others to legal challenges.

Trump’s confidence is high, fueling aggressive tariff moves. With US equities at record highs, little evidence of economic fallout in US inflation or labor data, and his fiscal package having won approval from lawmakers, Trump appears emboldened to escalate trade actions. Reflecting this confidence, Trump linked his renewed trade levies to rising equities, telling reporters “the tariffs have been very well received… the stock market hit a new high today.” The bond market impact has also been relatively contained in recent weeks, with 10-year US Treasury yields hovering near 4.34% and this week’s USD 22bn Treasury auction of 30-year bonds fairly well received. However, this could change as we get closer to actual enactment of these threats and executive orders. A sharp sell-off in either stocks or bonds may be the catalyst needed to prompt a pause or reversal in tariff escalation.

Renewed tariff threats also reflect the difficulty of striking new deals. Trump’s push for “90 deals in 90 days” has fallen short, with only a Vietnam framework and a small UK deal reached so far. This is unsurprising, as trade negotiations are inherently complex and time-consuming, requiring careful technical work and consensus-building over a period of months if not years. Many trading partners remain cautious on striking a deal now, with looming sector-specific tariffs and ever-shifting US demands undercutting the prospects for a durable agreement. We think Trump's latest tariff threats reflect a strategy of creating headline risk to reassert leverage and accelerate stalled negotiations. Although this has its limits and its own costs, we do expect more country-specific deals and frameworks in the coming weeks.

So, while negative trade headlines and tariff threats may multiply in the coming weeks, we think US trade policy will move toward greater stability in the second half of the year. Our base case is that the effective US tariff rate will land near 15% by year-end, slowing the US economy over the next six months but not causing a recession. Many of the most heavily weighted US equities in the S&P 500 are fairly insulated from tariff risk, in our view, and we think the index can climb to 6,500 by June next year despite periodic volatility. We recommend phasing into equities for underallocated investors to manage near-term market swings, or using structured strategies for more defensive positioning.