The trade war between the US and China escalates again as fears of the US’s actions against Huawei spread to worldwide markets. When the Phase One trade deal was finalized back in January 2020, both countries were looking to re-establish stability, reliability, and trust. New, explosive developments suggest that this precarious peace may soon be at an end. The current trade war began in January 2018 during President Donald Trump’s administration. It started with the US charging China with unfair trade practices and IP theft, and it’s been re-escalating in recent months as both countries have instituted retaliatory tariffs.
The Biden administration has kept these tariffs on goods from China, with President Joe Biden increasing these levies. China just last week added fuel to the trade fire by raising tariffs on U.S. imports to 125%. This action was taken in response to the U.S. increasing tariffs, which have now reached a total of 145%. Market analysts and traders are waiting with bated breath for the next trade release. To be sure, they want to see how these developments affect important economic measures such as inflation and the strength of their currency.
Of the three, the sustained weakness of the US Dollar is most significant. There is a growing consensus among analysts that this trend bodes well for increasing gold prices. Traders are expecting the Fed to get very dovish through aggressive monetary easing. This appears to be the sentiment that has baked in expectations for rate cuts of as much as 90 basis points by EOY 2025. Consequently, the sentiment on the dollar has turned extremely negative.
The Phase One Trade Deal: An Overview
The US-China Phase One trade agreement was designed to push structural reform through direct, conditional coercion against the economic and trade operating system of China. The deal signatories amid rising tensions. It set a significant precedent for reducing the trade disputes that had been simmering for close to two years. China promised to increase its imports of American products by leaps and bounds. They committed to taking steps to ensure more robust protection of IP rights.
Regardless of these agreements, tangible progress on structural reforms has been sluggish at best. Analysts insist that the agreement, meant to build confidence and promote stability, hasn’t led to significant compliance on the ground. The economic picture is still very difficult as both countries continue to pursue their own self-interests. The impact of the COVID-19 pandemic on the global economy continues to be felt hard today. The fire has been existing trade barriers, which are fanning these tensions.
Though the agreement calmed the waters for a time, preventing major retaliatory paybacks, most analysts think the agreement just delayed bigger fights to come. The importance of sustained discussion and give-and-take cannot be overstated, as both nations grapple with difficult fiscal choices.
Market Reactions and Economic Implications
The latest developments in US-China relations are widely known, yet their ramifications are surfacing day by day, including key commodities such as gold. Traders are wary, with a slightly overbought condition showing up on the daily Relative Strength Index (RSI). A generally positive risk tone in larger markets may limit gold’s upside even with its usual allure during uncertain times.
Perhaps the biggest factor determining the market dynamic is the underlying US Dollar, which is weakening. Traders expect that the Federal Reserve will follow a more dovish path in light of recent consumer inflation data. This has triggered growing expectations of a return to rate cutting sooner than later. This situation usually plays into the hands of precious metals such as gold, which is widely recognized as a safe-haven asset in times of economic turmoil.
Market sentiment— In this case an understatement… , embodied the convoluted dynamic between external pressures, namely geopolitical tensions and the domestic monetary policy slate. Traders are hands-on and constantly fine-tuning their game to get ahead of shifting trade patterns. Simultaneously, they are weighing how these changes will impact inflation and currency devaluation.
The Future of US-China Relations
Looking at US-China relations in general, it seems like the US-China trade war is going to continue along its path filled with conflict and discord. The tit-for-tat protectionist policies that dismantled past negotiations, alluding to a trade war that may undermine global economic growth. Tariffs are obviously dug in deep, and neither side is caving. Analysts expect this to bring what would be a long stretch of confusion.
Even adventurous President Biden largely continues Trump’s executive trade policy—including the current tariffs. In retaliation, China responds with tougher measures of its own. The latest decision to increase tariffs on US imports reflects a strategy aimed at countering American pressures while asserting its own economic power.