Lexicon Financial Group Weekly Update — July 30, 2025

Aug 1

“High tariffs inevitably lead to retaliation by foreign country and the triggering of fierce trade wars. The result is more and more tariffs. Higher and higher trade barriers and less and less competition. So, soon, because of the prices made artificially high by tariffs, that subsidize inefficiencies and poor management, people stop buying. Then, the worst happens, markets shrink and collapse, businesses and industries shut down and millions of people lose their jobs.”

— President Ronald Reagan, 40th President of the United States

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

ISSUE 190

Looking Around

Tariffs continue to dominate the news cycle.

Japan and the European Union (E.U.), like the United Kingdom (U.K.), appear to have come to terms with higher tariffs on their exports and signed preliminary trade deals with the United States (U.S.). Vietnam has also accepted a similar trade deal.

Given all of this, it appears that the use of the U.S. economy as leverage to push countries to accept tariffs of 15 to 20 per cent to do business with the United States is the new normal. The resulting market reaction to the 15 per cent tariffs on Japan and the European Union suggests that the catastrophe many investors and analysts expected from President Trump’s earlier, more extreme tariffs may not materialize. What is also apparent is that the Trump administration has embarked on a vast economic experiment, with tariff levels not seen in the U.S. since the early 20th century. Trump and his supporters contend that higher tariffs will encourage many more companies to manufacture in the U.S., which will generate factory jobs while having minimal impact on U.S. businesses and consumers. And they may be right. However, continuing to insist that someone other than the U.S. consumer ultimately pays the tariffs is simply incorrect.

The result is that the tariffs are acting like a value-added tax.

Canadians are familiar with this type of tax. We pay it on almost every item we buy. It was initially launched as the GST, but is now called the Harmonized Sales Tax (HST) in most regions.

The only difference is that the U.S. is excluding U.S.-made goods from taxation, which, in theory, could spur economic investment in the U.S. economy by global companies who want access to the market. Make no mistake, the costs are being borne by consumers or businesses who decide to cut their profit margins and absorb the impact of higher costs.

But it is ceratinly good public relations for the U.S. administration. It can rightly claim that it has not raised taxes, but tariffs. It can then refund people some of their own money in much the same way politicians around the world have provided support that aligns with their priorities.

In recent weeks, automakers like General Motors and Volkswagen have reported hits of more than $1 billion from tariffs. According to Diane Swonk, the chief economist at KPMG, what’s lost in translation is even as these deals are being cut, the eventual tariff rate is likely to peak around 20 per cent, which is up a lot from below three per cent. People expected the economic effect of tariffs to be instantaneous but Ms. Swonk argues that because the rollout of tariffs has been stop and start, it is taking time for the impact to work through supply chains. Economic research suggests that it takes six to 18 months for the full effects of tariffs to show up and history shows that Trump’s first-term trade war with China, which began in 2018, did not lead to weakness in manufacturing until the next year. This Friday is the deadline for reaching deals and, according to tracking by Goldman Sachs, trading partners (including Canada, Mexico, South Korea and Brazil) accounting for 56 per cent of U.S. imports have yet to sign preliminary agreements. (1)

In the U.S., the stock market is up, the country's employment is relatively strong, the economy is expanding and the expected surge in inflation has yet to materialize. The BMO's chief economist Douglas Porter believes that two key factors are driving this resilience. One is that other nations have not really been retaliating against the U.S., so their own exports are not facing that much pressure. The other is that the U.S. consumer has been significantly sheltered so far, as U.S. businesses have not passed on the costs of tariffs. When this eventuallly happens, inflation will start to rise. So, it is no surprise that Federal Reserve kept short-term interest rates at a level of 4.25 per cent to 4.5 per cent, as it already views inflation to be a bit above its target.

Canada's economy has also shown surprising resilience and has fared better than anyone expected. As a result, the Bank of Canada’s held interest rates at 2.75 per cent.

Currently, most businesses and consumers on both sides of the border have been sheltered from the worst impacts of the tariffs. This is dependent on a fine and tricky balance of importers eating some costs, exporters dropping some prices and countries limiting retaliatory measures. Any moves that further upend this balance come with risks for both Canada and the U.S. (2)

As we move further into the second half of the year, it is important to remember that tariff situation is fluid. Trump has shown, in the past, that the deals that he strikes can and do unravel, thanks to his habit of making new tariff threats and trying to renegotiate deals. Sentiment in countries that have signed preliminary deals may begin to sour. The 27-member E.U. bloc has to hammer out key aspects of the recent deal and already there is a growing resistance to the deal. Canada, despite Trump’s tariff actions, is still not playing ball. Negotiations with China continue but it is expected there will be another pause of their historically high tariffs on one another. (3)

We’re tired of talking about tariffs, but we know how important these type of trade negotiations are to Canadians and the Canadian economy. So, we’ll keep talking about it and speaking with you about your concerns for as long as necessary. For now, this is the world we are living in.

Read and Watch

Want deeper insight into topics in your Weekly Update? Then, read and/or right click:

Bank of Canada holds interest rates, citing ‘clouded’ economic outlook

U.S. economic rally in Q2 masks underlying weakness

German politicians furious at von der Leyen over new EU-US trade deal

Japan says US trade deal eases tariff uncertainties, but risks remain

US-China trade talks: why Beijing unexpectedly emerged in a stronger position

Raymond James Markets & Investing: Why the recent trade deals are important - CIO Larry Adam, July 25, 2025

Raymond James Economy & Policy: Weakness in housing ups the ante - Chief Economist Eugenio J. Alemán, July 25, 2025

Looking Back

Gains in technology stocks helped lift Canada’s main stock index, the S&P/TSX (TSX) composite index last week. This despite tariff concerns arising from Trump’s letter to Prime Minister Mark Carney threatening to impose 35 per cent tariffs if Canada doesn't make a trade deal by the deadline. The White House, however, stated that these tariffs would apply only to goods (about 20 per cent of Canada’s exports to the U.S.) not compliant with the Canada-U.S.-Mexico Agreement on trade. (4)

Last week, the S&P 500 Index and Nasdaq Composite Index achieved record highs while the Dow Jones Industrial Average also rose. Stocks were supported by headlines around several new trade deals during the week, including announcements that the U.S. had reached agreements with Japan, Indonesia, and the Philippines. Reports that the U.S. and European Union (EU) were progressing toward a deal ahead of August 1—which President Donald Trump has set as the deadline to impose 30 per cent tariffs on European goods—also appeared to boost investor sentiment during the week.

In a week of fewer economic data releases, the highlight of the calendar was S&P Global’s report of its U.S. flash Purchasing Managers’ Index (PMI) data for July. According to the report, U.S. business activity growth accelerated at the beginning of the third quarter with the composite PMI output index jumping 1.7 points to a seven-month high of 54.6 (remember that readings above 50 signal expansion). Notably, this expansion was entirely driven by growth in the services sector, with the services PMI rising to 55.2 from 52.9 in June. The manufacturing PMI dropped from 52.9 in June to 49.5 in July, the lowest reading since December due to a fading boost from tariff front-running. The National Association of Realtors also reported that existing home sales declined 2.7 per cent month over month in June.

The pan-European STOXX Europe 600 Index ended last week marginally up. Investors watched for signs of progress in U.S. and European trade talks. Cautious optimism around a possible EU-U.S. trade deal seemed to support investor sentiment, although the EU said it could retaliate with counter-tariffs in the absence of an agreement. The European Central Bank (ECB) held rates steady which underpinned the euro’s gains against the U.S. dollar. Once again, the other major stock indexes in Europe ended the week mixed.

Japan’s stock markets made strong gains last week. Segments of the market, notably the auto original equipment manufacturers segment, climbed on the announcement that Japan and the U.S. had reached a trade deal. The agreement sets a 15 per cent tariff for most Japanese goods exported to the U.S., including autos. The U.S. had threatened to impose a 25 per cent tariff rate, so the outcome was viewed as favourable. On the economic data front, the Tokyo-area core consumer price index (CPI), regarded as a leading indicator of nationwide price trends, rose 2.9 per cent year on year in July and down from 3.1 per cent in June. This is still significantly above the Bank of Japan’s (BoJ’s) two per cent target. As a result, more investors expect that the BoJ could raise interest rates again this year.

Mainland Chinese stock markets rose last week, on hopes for an extension of a tariff truce with the U.S. ahead of another round of trade talks between both countries. This has raised hopes for a continued stabilization in U.S.-China relations after both countries had appeared on track for decoupling when the Trump administration imposed 145 per cent tariffs on China in April this year. (5)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.