The trade relationship between the United States and China is one of the most significant economic partnerships in the world, deeply influencing global markets, supply chains, and financial stability. As the two largest economies, their trade interactions impact everything from commodity prices and manufacturing costs to technological innovation and currency fluctuations. Tensions, such as tariff hikes or export restrictions, can disrupt global supply chains, raise consumer prices, and trigger uncertainty in financial markets. Conversely, cooperation between the US and China can enhance global economic growth, stabilize international trade, and promote investment confidence. Given their economic scale, policy shifts in either country echo worldwide, making their trade relationship a critical barometer for global economic health.
Tariffs situation before Trump’s second presidency
According to Trump, tariffs will encourage US consumers to buy more American-made goods, increase the amount of tax raised and lead to huge levels of investment. Trump imposed significant tariffs on China during his first presidential term. These were expanded by his successor Joe Biden leading to reduced America imports from Beijing. Leading up to Donald Trump’s second inauguration in January 2025, the US-China trade relationship was marked by escalating tariffs and retaliatory measures. According to the Peterson Institute for International Economics, a nonprofit research organization, the US had imposed tariffs of 20.8% while China had implemented tariffs of 21.2% at the beginning of the year 2025 (view image a). Meanwhile, around 60% of US-China trade was subject to trade war tariffs at the start of 2025, which rose to 100% as trade war escalated (view image b).
US tariffs escalation in early 2025
• January 20: Donald Trump was re-inaugurated as President of the United States.
• February 1: The Trump administration imposed an additional 10% tariff on Chinese imports (in addition to previously implemented tariffs).
• March 4: An additional 10% tariff was added, bringing the cumulative additional US tariffs on Chinese goods to 20%.
• April 2: The US increased tariffs by another 34%, resulting in a total tariff rate of 54% on Chinese imports.
• April 9: Following China’s retaliatory tariffs of 84% on US goods, the US raised its tariffs on Chinese imports to 125%, which was later clarified to be 145%. The White House later clarifies that total tariffs against China are actually now 145%, once his previous 20% fentanyl tariffs are accounted for.
China’s retaliatory measures
• February 4: China imposed a 15% tariff on US coal and liquefied natural gas products, and a 10% tariff on crude oil, agricultural machinery, and large-displacement cars.
• March 10: China added a 15% tariff on US chicken, wheat, corn, and cotton, and a 10% tariff on sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables, and dairy products.
• April 04: China announces plans to impose a 34% tariff on imports of all US products beginning April 10, matching Trump’s new “reciprocal” tariff on Chinese goods, as part of a flurry of retaliatory measures. The Commerce Ministry in Beijing says it will also impose more export controls on rare earths, which are materials used in high-tech products like computer chips and electric vehicle batteries. And the government adds 27 firms to lists of companies subject to trade sanctions or export controls.
• April 10: China upped its retaliation vowing to tax American goods at 84% starting April 10.
• April 11: In response to the US tariff increase, China announced an increase in tariffs on all American imports from the previous 84% to 125%, effective April 12.
Temporary tariff reduction agreement
• Chinese Vice Premier He Lifeng met with the US Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer in Geneva during the Vice Premier’s visit to Switzerland between May 9 and 12. This was the first meeting between US and Chinese officials since Trump instigated a global trade war that culminated in a 145% on Chinese goods and a 125% counter-tariff on US goods.
• May 12, 2025: The US and China reached an agreement to reduce tariffs in an effort to de-escalate trade tensions. The US agreed to cut tariffs on Chinese goods to 30%, while China reciprocated with tariff reductions on US products to 10%.
• This temporary reduction was intended as a 90-day reprieve to facilitate further negotiations. However, the long-term sustainability of this agreement remains uncertain, and the potential for renewed tariff escalations persists.
• The White House and China’s Ministry of Commerce released a joint statement in which they committed to the 90-day tariff pause between the United States and China, initiated on May 14, 2025. This represents a significant de-escalation in their ongoing trade tensions. This temporary agreement reduced US tariffs on Chinese goods from 145% to 30%, while China lowered its tariffs on US imports from 125% to 10%. The US measures still include 20% aimed at putting pressure on Beijing to do more to curb the illegal trade in fentanyl, a powerful opioid drug.
• For the US, this truce has provided immediate relief to sectors heavily impacted by the trade war, such as retail and shipping. Major retailers have experienced a surge in imports, with some reporting nearly a 300% increase post-announcement, leading to a rebound in shipping and logistics industries. Financial markets have responded positively, with the S&P 500 and Nasdaq showing significant gains.
• In China, the tariff reductions have led investment banks to revise GDP growth forecasts upward, reflecting renewed confidence in economic stability. However, analysts caution that the temporary nature of the truce may lead to continued uncertainty, potentially affecting corporate investment decisions
• Despite these short-term benefits, the 90-day duration of the tariff pause is seen by some, including China’s state-backed Global Times, as insufficient for resolving deep-seated trade issues. Without a long-term agreement, there is a risk that tariffs could revert to previous levels, potentially reigniting trade tensions and disrupting global supply chains.
• In the joint statement, China and the US committed to establishing a mechanism for ongoing trade discussions. While specific details remain unclear, potential topics include reducing the US trade deficit and increasing US market access in China. This pause nevertheless offers a potential path for more substantive negotiations in the future.
Economic impact of trade war
The Trump trade war, marked by steep tariffs on Chinese imports and retaliatory measures from China, has had significant and far-reaching economic impacts. For the US, higher tariffs led to increased costs for businesses reliant on Chinese goods, resulting in supply chain disruptions, reduced profit margins, and in many cases, higher prices for consumers. American farmers and manufacturers were particularly hard-hit by China’s retaliatory tariffs, leading to declines in exports and increased reliance on government subsidies. Globally, the trade war fuelled economic uncertainty, slowed investment, and contributed to volatility in financial markets. While the tariffs aimed to pressure China on trade imbalances and intellectual property issues, the broader effect was a chilling of global trade flows and a shift in production strategies, as companies began seeking alternatives to China to mitigate tariff exposure.
Tariffs significance for financial markets
Financial markets have become very news-driven these days. 2025 Trump trade war had a profound impact on financial markets, triggering significant volatility and investor uncertainty. The announcement of sweeping tariffs on April 2, dubbed “Liberation Day,” led to a sharp sell-off in global equities. The S&P 500, the world’s largest most followed equity index, fell over 10% in two days, with U.S. markets losing more than $6 trillion in value—the largest two-day loss in history. Financial markets remained highly volatile and under pressure since Trump took office and became aggressive when it comes to tariffs on different countries.
Although a 90-day tariff pause announced on 12 May 2025 provided temporary relief, leading to a partial rebound in stock prices, the underlying economic concerns persisted. JPMorgan Chase CEO Jamie Dimon warned that the US remains at risk of recession due to the trade policies, citing inflationary pressures and reduced economic growth. Similarly, hedge fund Elliott Management cautioned that the aggressive tariffs could trigger capital flight and undermine the attractiveness of US assets, which enjoyed global investors attraction since decades.
The CBOE Volatility Index (VIX), a fear and uncertainty index, spiked to its highest level, since 2020, in April 2025 reflecting heightened market fear in response to significantly higher tariffs. However, it started cooling gradually, especially at close to US-China 90 days pause, in hope for a better trade deal between the two largest economies.
While markets have shown resilience by recovering most of their losses in recent heightened uncertainty and volatility, the long-term effects of the trade war continue to pose risks to financial stability and economic growth. There are still many unknowns and only the coming months will tell where the trade policies are heading, what impact they will have on economic growth, and what that all means for financial markets. However, these heightened volatilities create investment opportunities for long-term investors as many good quality companies can trade at discounted prices mainly driven by market noise.
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