United States stocks are at their lowest level since President Donald Trump was sworn in two weeks ago, and other global financial markets slumped after he ordered tariffs on Canada, Mexico and China while world leaders responded to his threats to expand tariffs to the European Union as well.

The benchmark S&P 500 on Monday fell 1.7 percent at the opening bell on the heels of the year’s biggest daily losses on a string of Asian and European bourses over fears of an economically damaging trade war.

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Trump said his tariffs on the three largest US trading partners, which were to take effect on Tuesday, might cause Americans some short-term pain but, “long term, the US has been ripped off by virtually every country in the world.”

Later on Monday, Trump said he will pause new tariffs on Mexico for one month after Mexico agreed to reinforce its border with the US with 10,000 National Guard officers to stem the flow of illegal drugs, particularly fentanyl.

Mexican President Claudia Sheinbaum said the agreement also includes a US commitment to act to prevent trafficking of high-powered weapons to Mexico. The two leaders spoke by phone on Monday, just hours before US tariffs on Mexico, China and Canada were to take effect.

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The two countries will use the monthlong pause to engage in further negotiations, Trump said.

Speaking in Washington, DC, on Sunday after returning from his Mar-a-Lago estate in Florida, Trump indicated that the 27-nation EU would be next in the firing line but did not say when.

“They don’t take our cars. They don’t take our farm products. They take almost nothing, and we take everything from them,” he told reporters.

EU leaders meeting at an informal summit in Brussels on Monday said Europe would be prepared to fight back if the US imposes tariffs but also called for reason and negotiations.

Trump hinted that Britain, which left the EU in 2020, might be spared tariffs, saying: “I think that one can be worked out.”

The US is the EU’s largest trade and investment partner. According to Eurostat data from 2023, the US had a deficit of 155.8 billion euros ($161.6bn) with the EU in the trade of goods, offset by a surplus of 104 billion euros ($107.6bn) in services.

EU foreign policy chief Kaja Kallas said there were no winners in a trade war and, if one broke out between Europe and the United States, “then the one laughing on the side is China.”

Markets swoon

Trump said on Monday that he had spoken with Canadian Prime Minister Justin Trudeau and would do so again at 3pm (20:00 GMT).

Both Canada and Mexico had announced retaliatory tariffs on the US.

Economists said the Republican president’s plan to impose 25 percent tariffs on Canada and Mexico and 10 percent tariffs on China would slow global growth and drive prices higher for Americans.

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The fear is that these tariffs will push up prices on groceries, electronics and all kinds of other items for US households, putting upward pressure on a US inflation rate that’s largely been slowing since its peak nearly three years ago. Stubbornly high or accelerating inflation could keep the US Federal Reserve from cutting interest rates, which it began doing in September to give the domestic economy a boost.

Trump has argued tariffs are needed to curb immigration and narcotics trafficking and spur domestic industries.

Financial market reaction on Monday reflected concerns about the fallout from a trade war. Shares in Tokyo ended the day down almost 3 percent and Australia’s benchmark – often a proxy trade for Chinese markets – dropped 1.8 percent. The mainland Chinese market was shut for the Lunar New Year holidays.

About lunchtime in Europe, Germany’s DAX index was down 1.8 percent, France’s CAC down 1.9 percent and Britain’s FTSE 100 down 1.5 percent.

The Chinese yuan, Canadian dollar and Mexican peso all slumped against a soaring dollar. With Canada and Mexico the top sources of US crude oil imports, US oil prices jumped more than 1 percent while petrol futures rose nearly 3 percent.

Trump’s tariffs will cover almost half of all US imports and would require the United States to more than double its own manufacturing output to cover the gap – an unfeasible task in the near term, ING analysts wrote.

Other analysts said the tariffs could throw Canada and Mexico into recession and trigger “stagflation” – high inflation, stagnant growth and elevated unemployment – at home.

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In Europe, economists at Deutsche Bank said they were currently factoring in a 0.5 percent hit to gross domestic product (GDP) should Trump impose 10 percent tariffs on the EU.

National emergency

A White House fact sheet gave no details on what Canada, Mexico and China would need to do to win a reprieve.

Trump promised to keep the sanctions in place until what he described as a national emergency over fentanyl, a deadly opioid, and illegal immigration to the US ends.

China called fentanyl America’s problem and said it would challenge the tariffs at the World Trade Organization and take other countermeasures but also left the door open for talks.

Canada said it would take legal action under the relevant international bodies to challenge the tariffs.

Automakers would be particularly hard hit with new tariffs on vehicles built in Canada and Mexico burdening a vast regional supply chain in which parts can cross borders several times before final assembly. Ford and General Motors shares fell 4 percent to 5 percent.

Shares in Volkswagen, Porsche, Stellantis and Daimler Truck all fell by about 5 percent to 6 percent in European trading on Monday.

Analysts at the investment bank Stifel estimated that 8 billion euros ($8.2bn) of VW’s revenues would be impacted by tariffs and 16 billion euros ($16.5bn) at Stellantis.