After months of easing tensions and new trade deals suggesting progress in the global trade environment, trade tensions are flaring once again as Trump catches markets off-guard with recent steep tariffs imposed on Chinese imports. In this Policy Watch I will break down these developments and analyse how it is effecting markets.
100% Tariffs From Trump
Trump has recently decided to reignite trade tensions between the US and China by threatening 100% tariffs on Chinese imports, straining a historically fragile relationship between two political and economic heavyweights. This comes in response to China’s ‘aggressive position on trade’ as new rules dictate foreign companies need Beijing’s permission to export products that contain rare earths sourced from China – potentially disrupting global supplies of these rare earths and minerals.
Trump’s outrage at this policy led him, not only to threaten tariffs, but also threaten to cancel his meeting with Xi Jinping at the end of October. The US remains confident that their response is justified and will negatively effect Chinese exports, however, China maintain their confidence that the US cannot block Chinese imports as their products will still enter the US via re-exports due to the importance of Chinese goods. Both countries seem to be stubborn in this situation, claiming they are not in the wrong: the US claim that they did not instigate these trade tensions, while China claim that previous trade talks included many new restrictions against China.
How are Markets Reacting?
These events threaten a similar trade war that was seen at the start of the year as the US and China slapped tariffs of over 100% on each other. Therefore, recent threats have had a massive impact on global markets as the S&P 500 had its largest single day drop since April and the yield on the two year US Treasury sank to its lowest level in three weeks. The US dollar, having already been weakened significantly this year, fell 0.7 percent against other currencies. As US stocks suffered from a massive hit as these new tariffs were announced, many investors moved to safer assets in response, resulting in an increase in prices of government bonds and Gold (bare in mind bond yields move inversely to prices).
Trade Tensions: What’s Next?
The Chinese have made their stand: they are not afraid to fight against Trump’s tariff war, and suggest the US engage with China to return to stable trade conditions or they will ‘take corresponding measures to safeguard its legitimate rights and interests’.
However, the current global economic climate suggests that both countries cannot afford to engage in a trade war, suggesting that these negative trade policies may be an attempt to gain leverage before their set meeting at the end of October. It is also suggested that the impact on the stock market in the US would have been greater if it wasn’t believed that the two nations would strike a deal. Although, following the recent rise surrounding trade uncertainty, a trade war is still very much on the cards as both countries want to show they will not be pushed around, underlining the strategic positioning that continues to define their trade relations.
References
Sevastopulo, Williams, and Leahy. (2025). Donald Trump Threatens Extra 100% Tariff as he Retaliates Against China. Financial Times. Accessed at: https://www.ft.com/content/328e3195-909a-45fb-b118-9dafbd41262b
Balakrishnan, Herbert, and Steer. (2025). US stocks close sharply lower after Trump threatens new China tariffs. Financial Times. Accessed at: https://www.ft.com/content/b9ae2417-2e89-4b0a-bad5-d94f4e980ecc?_gl=1*1h0x13t*_up*MQ..&gclid=b7d7c71413be1a731fafafffb89283d9&gclsrc=3p.ds
Leahy, Sevastopulo, and White. (2025). China blames Trump and US for escalating trade war. Financial Times. Accessed at: https://www.ft.com/content/ce034c1b-97bd-4a79-a4e0-c62cf91aa233?_gl=1*q0qd28*_up*MQ..&gclid=b7d7c71413be1a731fafafffb89283d9&gclsrc=3p.ds
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