What are Trump’s tariffs?

Global financial markets have seen a large sell-off following President Donald Trump’s announcement of new tariffs on major U.S. trading partners. Although the new tariffs officially took effect on Tuesday, Feb. 4, 2025, markets began selling off the prior weekend.

Stock market heat map: tradingview.com

The Trump tariffs included a 25% levy on imports from Canada and Mexico and a 10% tariff on Chinese goods. Trump justified the tariffs on grounds such as national security. Some of the issues included illegal immigration, drug trafficking, and economic dependence on foreign supply chains.

We have big deficits, as you know, with all three of them. And in one case they’re sending massive amounts of fentanyl, killing hundreds of thousands of people a year with the fentanyl, and in the other two cases, they’re making it possible for this poison to get in.

U.S. President Donald Trump remarks on tariffs on Mexico, China, and Canada: YouTube

Canada and Mexico announced plans to retaliate against the tariffs, sparking a trade war with the United States. However, on Monday, Feb. 3, 2025, Mexico reached a temporary agreement with the U.S., postponing its tariffs by a month.

Canada would soon follow, reaching an agreement for a 30-day pause on the tariffs. President Trump has also threatened tariffs on the E.U. China has also expressed that it is open to discussing curtailment of its tariffs.

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Analysts expect the tariffs to have several negative impacts:

• Potential contraction in global trade
• Higher inflation as companies pass increased costs to consumers
• Possible job losses and supply chain disruptions
• Strengthening of the U.S. dollar and gold prices

How did the Trump tariffs affect crypto?

Cryptocurrency market cap: tradingview.com

Following the announcement of Trump’s tariffs, cryptocurrency markets dumped alongside equities. The total cryptocurrency market capitalization contracted by approximately 8% in just one day, falling to about $3.2 trillion.

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There are concerns that the tariffs could escalate inflation, diminish consumer spending power, and hinder economic growth, affecting high-risk assets like cryptocurrencies.

What are tariffs?

A tariff is a tax imposed by a government on imports or exports. A nation may levy tariffs on other countries for strategic reasons, such as bargaining or managing the balance of trade — e.g., trade deficits.

In the temporary deal between Mexico and the U.S., Mexico will supply 10,000 troops along the U.S. and Mexico border to prevent illegal border crossings and drug trafficking.

A trade deficit occurs when one nation imports more goods than it exports to other countries or a particular country. In other words, a country can have a trade deficit between a particular country or a net trade deficit overall.

In the case of Trump’s tariffs, the U.S. imports more goods from Canada, Mexico, and China than it exports. To put this into perspective:

1. Canadian exports to the U.S. were roughly 19% of Canadian GDP in 2023, while U.S. exports to Canada were about 17% of U.S. exports in 2022.
2. U.S. exports to Mexico account for about 15% of overall U.S. exports, while over 80% of Mexico’s exports go to the U.S.
3. In 2022, 7.5% of all U.S. exports went to China, and 16.5% of all U.S. imports came from China.

To put it simply, the U.S. has a consumer-based economy and imports a lot of goods from other countries. Exports to the U.S. are a large part of some nation’s gross domestic profit (GDP), and as a result, these countries actually depend on exports to the U.S. as a large part of their own economy’s revenue.

The impacts of tariffs and trade

Trade deficits are an important part of the tariff discussion, as they may have implications for equities and cryptocurrency markets.

1.When a country creates tariffs, it becomes more expensive for importers to bring goods into that country, resulting in inflation as the costs are passed on to consumers.

2.When a country ships or exports goods to another country, such as the U.S., importers are paid in USD, which creates a demand for dollars. This can create a strong dollar. A strong dollar may be good for dollar holders but not necessarily for assets (stocks, crypto, etc.) or manufacturers and employers in the U.S.

The whole world uses dollars. It’s the most salable money that exists and it’s the most salable currency. But the problem with that is that means the whole world needs dollars. So, how do they get dollars? And, historically the way that they get dollars is the U.S. runs a structural trade deficit. That’s how we pour dollars out into the world… That actually hurts domestic competitiveness in terms of lower margin industries like manufacturing.

Lyn Alden on the U.S. dollar’s strength: YouTube

3.If a country exports a majority of its goods to a single market, such as the U.S., then when tariffs are levied, this could significantly affect that country’s GDP and revenue (e.g., if 80% of Mexico’s goods exported to the U.S. is shut down overnight, this can have drastic effects on the Mexican economy).

Why did crypto plummet from Trump tariffs?

Tariffs are inflationary, but given that the U.S. has a large trade deficit and imports goods from many countries, importers will likely pay more to import goods.

This could lead to U.S. consumers buying less of those goods due to discretionary spending constraints. In turn, this could result in fewer imports and lower profits, or the market could pull out of the U.S. altogether.

Investors in these companies likely foresaw the aforementioned scenarios, got spooked, and started selling off their assets, impacting the markets. In summary, U.S. tariffs could raise foreign goods’ costs, cut imports, and lower corporate profits. This might prompt investors to sell off equities, seek safer choices, and de-risk their crypto portfolios.

However, this presents a dilemma — cryptocurrency markets are not inherently tied to trade deficits or physical imports/exports in the same way equities might be. So, why did the cryptocurrency market plummet?

Spillover effect

Although crypto decouples from equity markets at times, when a shock hits, even assets that logically shouldn’t correlate can be affected — with market psychology playing a big role.

The reality is that many institutional investors and funds hold both equities and crypto. When these investors need or decide to de-risk, they typically don’t do it selectively to only one asset in the portfolio — they pull back from all perceived risk assets.

Crypto, from the perspective of big institutions, is still viewed as a speculative or high-risk/high-volatility asset class. In a flight to safety, it’s not unusual for them to move out of crypto (and other risky asset classes) and into cash, treasuries, or other safe havens.

Another factor is dollar liquidity. If the dollar strengthens in times of global uncertainty (and it often does, as people flock to USD assets), investors who are long on crypto might be forced to liquidate some holdings to cover positions or to rebalance. That leads to downward pressure on crypto prices.

Did you know? The Dollar Milkshake Theory posits that the U.S. dollar will prevail against other currencies despite the global economic uncertainties. The theory indicates that the dollar’s dominance will keep increasing as it sucks the liquidity out of other currencies. Read our guide to learn more about how this eventuality may impact crypto prices long-term.

If large hedge funds or VCs face margin calls (in part because their equity holdings have lost value), they might sell crypto to raise quick cash.

It is important to mention that institutional investors’ operations are conducted privately and are not disclosed in real time, much of the reasoning is speculation based on prior events and publicly available information. The limited transparency around institutional strategies and holdings means that these interpretations may not fully represent actual market dynamics.

Long-term impact of Trump tariffs on crypto prices

It is difficult to determine how the Trump tariffs will impact crypto prices going forward. More accurately, multiple possibilities could occur with varying probabilities. Crypto often responds to changes in broad liquidity (interest rates, central bank balance sheet actions, etc.) rather than narrower trade issues like tariffs.

Scenario 1

If tariffs lead to fewer imports in the U.S., this could constrict global markets’ access to dollar liquidity. Less access to dollars could lead to either a stronger or weaker dollar. That all depends on how long it takes for the scenario to play out.

However, the immediate response to constrained dollar liquidity is a stronger dollar. The effects of dollar supply constraints would strengthen the dollar and likely suppress crypto prices in the near term.

Scenario 2

Investors could continue to de-risk, suppressing the crypto and equities markets. If this continues, coinciding with deteriorating economic conditions in the U.S. (inflation, GDP, etc.), we may see interest rate cuts from the U.S. Federal Reserve.

Interest rate cuts can be bullish for assets like crypto in the medium to long term (since lower rates or paused rates often boost liquidity). However, they can also coincide with deteriorating economic conditions. This could be negative for risk appetite. The net effect is not always straightforward.

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However, if economic conditions are fair, the Fed may opt to pause interest rates instead of cutting. The key factor here is that liquidity conditions matter more than the economic data itself. Sometimes, you can have a bad economy but good liquidity, which supports speculative assets like crypto.

Additionally, if the Federal Reserve pauses but other major central banks tighten or loosen monetary policy, capital flows could be influenced differently — complicating projections even more.

In essence, a likely scenario is (1) continued risk-off, followed by (2) further suppression of crypto and equities markets:

• (3a) If these events coincide with fair economic conditions, then the U.S. Federal Reserve could pause interest rates. This could lead to a possible rebound in the medium to long term for crypto prices.
• (3b) If this coincides with worsening economic conditions, this could further lead to de-risking or tightening liquidity constraints, suppressing crypto prices further in the near to medium term.
• (4) However, deteriorating economic conditions followed by suppressed markets could lead to interest rate cuts. This could be bullish for crypto prices in the medium to long term.

Scenario 3

Lastly, unforeseen events could occur that also affect crypto prices, such as:

• Geopolitical events
• Sudden banking crisis
• Major defaults
• Tariffs being repealed altogether

These could derail or accelerate any scenario, sparking a flight to safety (hurting crypto) or causing extreme policy responses (potentially supportive of crypto).

Buckle up: turbulence ahead

Trump’s tariffs against Mexico, Canada, and China shocked crypto and equities markets. Although crypto is not fundamentally tethered to physical goods, imports, or exports, as equities may be, markets responded regardless with a significant amount of value lost from the overall cryptocurrency market cap.

If relations between the nations continue to deteriorate, this could impact economic conditions, which in turn would influence investor sentiment or the strength of the dollar. These scenarios could have broad implications for cryptocurrency markets, depending on how they play out.

Disclaimer:

1. This article is reprinted from [Beincrypto]. All copyrights belong to the original author [Ryan Glenn]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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