Stock markets fall after US tariffs spark trade war fears

Stock market falls across the US, Europe and the UK deepened as concerns grow that President Donald Trump's tariffs on Canada, Mexico and China will "disrupt global trade".

Trump has followed through on a threat to impose 25% tariffs on imports into the US from Canada and Mexico, and a 20% levy against goods arriving from China.

Leading stock indexes in the US were trading sharply lower on Tuesday, marking a second day of declines, while markets in the UK, Germany and France also tumbled.

Olof Gill, trade spokesperson for the European Union (EU), said: "These tariffs threaten deeply integrated supply chains, investment flows and economic stability across the Atlantic."

Canada and China have already announced retaliatory import taxes on US goods following Trump's tariffs coming into force. Mexico's President Claudia Sheinbaum said the country would announce a response on Sunday that would include "tariff and non-tariff measures".

Trump has also threatened to impose 25% tariffs on the EU, recently claiming that the bloc was "formed to screw the United States". Europe has pledged to hit back, but no tariffs have been implemented yet.

After the US confirmed on Monday that the tariffs against its neighbouring nations and China would go ahead, the country's three main stock indexes dropped.

Sharp falls continued on Tuesday while in London, the FTSE 100 index of the UK's biggest publicly-listed companies plunged.

Chancellor Rachel Reeves said she did not want to see tariffs increase.

"I don't think it serves anyone well," she said. "And it's absolutely the case that even if tariffs aren't applied to the UK, we will be affected by slowing global trade, by a slower [economic] growth and by higher inflation than otherwise would be the case."

Trump is hoping that imposing tariffs on the goods that the US buys will force foreign companies to invest in America, boost tax revenues and grow the economy.

He has argued the tariffs, which are a tax paid by the business importing the product, will boost US manufacturing and protect jobs as foreign companies switch to production in America.

But tariffs also tend to trigger retaliation from targeted countries, disadvantaging domestic businesses looking to export goods, meaning the measures can ultimately hold back trade.

Analysts have warned that tariffs could lead to economic recessions in Mexico and Canada, push up prices for US households and could also have a knock-on effect on consumers across the world, including in the UK.

If inflation rises, it could affect the pace at which interest rates are cut.

Companies could choose to absorb the cost of the extra tax. Chipotle's chief executive Scott Boatright told NBC that the restaurant chain would take that route - for now.

But many businesses are expected to pass on the cost to consumers by raising prices.

A number of US retailers have already warned that prices will rise. Target's boss Brian Cornell warned consumers were likely to see increases over the next couple of days for foods such as avocados, bananas and strawberries.

Mexican avocados make up nearly 90% of the US market each year.

Meanwhile, a BestBuy executive warned that prices could soon head higher.

"The giant wildcard obviously is how the consumers are going to react to the price increases in light of a lot of price increases potentially throughout the year," said Matt Bilunas, chief financial officer of BestBuy.

Ford chief executive Jim Farley warned last month the business "could handle two weeks of tariffs".

He told Bloomberg: "We could see billions of billions of dollars of pressure on the industry, lost jobs, lots of impacts to communities."

Trump has decided to impose the tariffs on Canada, Mexico and China in response to what he claims is the unacceptable flow of illegal drugs and illegal immigrants into the US.

But in remarks on Tuesday, Canadian Prime Minister Justin Trudeau called those justifications "completely bogus" and warned that Canada's retaliatory measures would hurt.

He said Canada would first hit $30bn worth of products, and target the remaining $125bn over 21 days.

Any fresh duties Canada imposes will be in place "until the US trade action is withdrawn", he said.

"Canadians are reasonable and we are polite, but we will not back down from a fight, not when our country and the well being of every one in it is at stake," he said.

Addressing Trump directly, he added: "Donald, you're a very smart guy. But this is a very dumb thing to do."

China has also swiftly announced its own counter measures, which include 10-15% tariffs on some US agricultural goods, including wheat, corn, beef and soybeans. China is the US's biggest buyer of these goods.

"If the United States... persists in waging a tariff war, a trade war, or any other kind of war, the Chinese side will fight them to the bitter end," foreign ministry spokesman Lin Jian said.

Before the US tariffs on Mexican imports came into force, President Claudia Sheinbaum said her country had contingency plans.

"In this situation, we need composure, serenity, and patience. We have Plan A, Plan B, Plan C, and even Plan D," she said.

Following the latest trade escalation, the Dow Jones, the S&P 500 and Nasdaq were all down 1.4% in early US trading on Tuesday.

London's FTSE 100 was down 1.1% and in Germany, the Dax was 3.5% lower while France's Cac was off 2.3%.

Souring relations between the US and Ukraine over the war with Russia is also weighing on stock markets. Overnight, the US froze military aid to Ukraine.

Goods worth some $2bn cross the borders of the US, Canada and Mexico each day and their economies are deeply integrated.

Analysis from TD Economics has suggested cars could go up in price by about $3,000.

That is because parts cross the US, Canadian and Mexican borders multiple times before a vehicle is assembled.

Speaking to CNBC, US Commerce Secretary Howard Lutnick shrugged off concerns about pain for US households from Trump's trade actions.

"There may well be short-term price movements but in the long term it's going to be completely different. This is going to be the greatest America," he said.