New tariffs have significantly impacted global economies and trade relationships in 2025. This analysis examines how tariffs impacted performance in Q1 and assesses ongoing trade negotiations during the 90-day delay that began in Q2.
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The Tariff Impact in Q1
The first quarter of 2025 shows mixed economic responses to tariff announcements across global markets. While some regions show resilience, others are seeing early signs of economic slowdown as businesses and consumers adjust to the changing trade landscape.
GDP in the First Quarter
Recent GDP data releases highlight contrasting tariff impact patterns between the United States and European economies:
- US GDP contracted largely as firms increased imports ahead of new tariffs taking effect in April.
- Eurozone GDP grew 0.4% quarterly (1.4% annualized), double expectations and the previous quarter’s result.
- Germany and France returned to growth after contracting in Q4 2024.
- Ireland posted 13.4% annualized growth, driven largely by pharmaceutical exports.
Notably, the eurozone’s stronger-than-expected performance appears to have been driven by domestic factors rather than an export boom. Press releases from major European economies showed:
- France reported net trade as a 0.4% drag on growth.
- Italy noted negative contributions from net exports.
- Spain showed only a minimal 0.2% positive contribution from net trade.
- Germany highlighted household consumption and capital formation as primary growth drivers.
This suggests Europe’s economy may maintain resilience in Q2 despite ongoing tariff threats, as its growth isn’t overly dependent on U.S. exports that could face tariff barriers.
Earnings in the First Quarter
The tariff impact on corporate earnings reveals a stark contrast between U.S. and non-U.S. companies:
- U.S. Companies: The number of companies in the S&P 500 index with earnings outlooks downgraded has reached levels comparable to major crises such as the Global Financial Crisis and the COVID-19 pandemic. This reflects serious concerns about the tariff impact on supply chains, input costs, and market access.
- Non-U.S. Companies: Earnings outlook remains within normal historical ranges, showing significantly fewer downward revisions compared to their American counterparts.
This difference may stem from the different nature of the tariff impact: For US companies, tariffs are a supply-side shock, disrupting supply chains and driving up costs, which cannot be resolved quickly. For international companies, they are a demand-side shock, which can be offset by domestic stimulus or market diversification strategies.
This fundamental difference in tariff impact may explain why non-U.S. equities have outperformed U.S. stocks throughout early 2025.
The Status of Tariff Negotiations and the Tariff Impact Across Countries
As we head into Q2, the direction of global markets will largely depend on how trade negotiations progress during the 90-day delay that began on April 9. Historical data suggests caution: from 1985 to 2017, a US trade deal took an average of 18 months to sign and 45 months to fully implement.
Japan
Japan faces significant tariff impact concerns despite its previously strong trade relationship with the United States:
- President Trump said on April 2 that he was willing to “tariff negotiations if other countries offer something phenomenal”—a similar phrase to when he described the US-Japan trade deal in 2019.
- The previous deal took about 13 months to negotiate (September 2018 – October 2019), though it was done quickly thanks to the friendly relationship between Prime Minister Abe and Mr. Trump.
- Now, tensions are higher, as shown by Finance Minister Kato’s statement that Japan’s $1.1 trillion in US Treasury holdings could be “on the table.”
With this backdrop, the likelihood of a comprehensive deal being completed within 90 days is very low, extending the period of tariff impact uncertainty for Japanese exporters and investors.
Canada and Mexico
The United States-Mexico-Canada Agreement (USMCA) provides some tariff protection, but both countries face pressure for renegotiation:
- Mexico’s President Sheinbaum announced ongoing work between the treasury, finance, economy, and commerce secretaries to “improve trade balance and advance outstanding issues.”
- As the United States’ largest trading partner, Mexico’s exports come largely from U.S. companies operating there, making tariff negotiations more about U.S. business than Mexican government policy.
- Canada’s newly elected Prime Minister, Carney faces a strained relationship with President Trump, with White House comments about making “Canada America’s cherished 51st state” complicating diplomatic efforts.
- The previous NAFTA renegotiation into USMCA took 13 months of negotiation (August 2017-September 2018) plus another 21 months until implementation (July 2020).
The complicated political dynamics and historical timeframes suggest prolonged uncertainty regarding the tariff impact on North American trade relations.
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Europe
European-U.S. trade negotiations appear at an impasse, creating significant tariff impact concerns:
- European Commission President von der Leyen has made a “zero-for-zero” offer to eliminate tariffs on cars and industrial goods if the US does the same.
- President Trump countered by demanding Europe “buy and commit to buy a like amount of energy,” despite limited US LNG transport infrastructure.
- EU governments are reluctant to make concessions without a clear commitment that the US will remove the tariffs it has announced.
- Full tariffs on EU exports and EU retaliation on US goods could begin after July 9, when the delay expires.
The EU has begun exploring improved trade relations with China as a potential buffer against tariff impact, reminiscent of China’s strategy during Trump’s first term, when it reduced most-favored-nation tariffs for non-U.S. trading partners while maintaining higher duties on American goods.
China
Despite having been at the centre of previous trade conflicts, China has so far been less vocal in tariff negotiations:
- China’s Ministry of Commerce has stated it’s “evaluating” potential trade talks with the White House, falling short of demonstrating eagerness to de-escalate tensions.
- Both sides have exempted some goods from tariffs, a move that appears to be more about domestic pressure than diplomatic progress.
- China shows no significant domestic pressure to address U.S. tariffs. The April 25 Politburo meeting did not announce major fiscal or monetary stimulus.
- Chinese officials maintain they are “fully confident” in reaching their 5% GDP growth target for 2025 despite the potential tariff impact.
Historical precedent from Trump’s first term suggests a potentially lengthy resolution timeline. The previous U.S.-China trade conflict featured:
- Tariff threats during the 2016 campaign.
- Initial 25% tariffs on $34 billion of goods implemented July 6, 2018.
- Escalation until a 90-day truce at the December 2018 G20 meeting.
- Further escalation after the truce expired.
- Phase One trade deal agreement on December 13, 2019 (signed January 15, 2020).
This 12-month negotiation period suggests current discussions could extend well beyond the current 90-day pause, prolonging the tariff impact on global supply chains and financial markets.
It makes sense to prepare for a prolonged period of uncertainty as businesses navigate a volatile trade environment. While framework agreements may emerge during Q2, comprehensive deals resolving tariff impact concerns will likely require significantly more time. This could potentially extend the July 9th deadline and maintain pressure on corporate decision-making and market stability throughout 2025.
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