Fortunately, just last week the Trump Administration announced such a pause, of 90 days on the most burdensome reciprocal tariffs, excepting those placed on China. Tensions are quickly rising in the tit-for-tat US-China trade war. This instability has contributed to one of the worst market tumbles in history. The combined impacts of these tariffs and retaliatory actions have created a climate of uncertainty, causing investors to retreat to safe harbors.
The US-China trade war has escalated in recent weeks, leading to a market sell-off of around 15%. This slide is similar to the much worse 25% drawdown from early 2022 to late 2023. As the trade war escalated and news spread, investors ran for safety. In turn, flows into safe havens ruled the markets during a relatively normal but tumultuous period.
In retaliation against the US tariffs, China has acted swiftly and surely. They are currently applying a mind-boggling 125% tariff on US exports. The issue has been exacerbated by the retaliatory tariffs. As policy, the US import tariff rate on Chinese goods has now spiked to 145%. As a result, the weighted average US import tariff rate has skyrocketed to 28%, the highest rate since 1901. This shift in trade policy has led to a dramatic decline in US reliance on Chinese imports, which has collapsed to pre-2003 levels. Today, only 11% of US imports now come from China, a remarkable shift in the direction of the trade flows.
The financial effect of these tariff changes isn’t hard to figure out. High-yield corporate paper spreads have widened substantially, up almost 180 basis points since February. This widening indicates heightened risk perception among investors, as they reassess their portfolios in light of the ongoing trade tensions.
At the same time, market indices have taken a beating too, with the S&P 500 down about 9% just this year. The spark is the volatility index, the famous VIX, is jammed up high in the 30s. This measurement further emphasizes the first level—marketing market environment is under a blanket of uncertainty. Investors continue to grapple with the implications of these tariffs and their potential impacts on both domestic and global economies.
As a result of these developments the AUD/USD currency pair have fallen sharply today. This drop underscores the real human toll of the trade war’s effects on global markets. In a world where investors favor stability, safe-haven assets—which include currencies with stable value—have grown much more appealing, fueling uneven appreciation between currencies.
The White House confirmed the cumulative tariffs on Chinese goods have risen to 145%, amplifying concerns over future trade relations and economic growth. The never-ending, current U.S.-China trade conflict seems unlikely to be resolved any time soon. Both sides continue to retaliate with tariffs, making negotiations increasingly difficult and slowing progress towards a possible resolution.