Recent weeks have seen growing trade tensions between the United States and China, with both countries raising tariffs to unprecedented levels. Currently, the U.S. has increased tariffs on Chinese goods to 145%, while China has responded with 125% tariffs on American products. This situation is changing rapidly and affecting financial markets. While global tensions often create uncertainty, looking at history shows that markets have overcome similar challenges before. For those investing for the long term, understanding the relationship between these two major economies can help maintain a clear perspective.
U.S.-China trade tensions have taken center stage
Tariffs (fees imposed on imported goods) against trading partners have been dominating market news, and the 90-day pause now puts attention on the U.S.-China relationship. The issue goes beyond just trade policy. Current tensions reflect a “multipolar” world where the U.S. and China are the two largest economies, both with major global influence. This represents a shift from the “unipolar” world where the U.S. was the only major superpower after the Cold War. This change naturally creates new challenges and opportunities for each country.
While no one can easily predict how the trade situation might develop over the coming months, keeping perspective is crucial for long-term investors. The U.S. and China remain deeply connected through trade, finance, and global supply chains.
What makes this situation different from earlier trade tensions is both how high the tariffs are and the broader global political context. As the chart shows, the U.S. buys much more from China than China buys from the U.S. (a trade deficit). Tariffs above 100% essentially mean that goods crossing either border would more than double in price. This makes products more expensive for consumers, increases costs for businesses, and can slow down economic activity. Fears about rising prices and shrinking company profits have caused market swings in recent weeks, with noticeable changes in consumer surveys and company financial forecasts.
Markets have also worried about how far the White House might go in escalating a trade dispute with China. Since tariffs at these high levels probably can’t last long-term, they likely represent a starting point for negotiations. The 90-day pause on tariffs above 10% (except for China) and the exemption for technology products suggest that the White House’s main goal is still to reach agreements.
The tariffs put in place in 2018 and 2019 provide some background on how markets and companies might respond as the situation unfolds. Many companies showed they could adapt by changing supply chains, finding new suppliers, or absorbing some of the increased costs. While markets struggled in 2018, they performed well in 2019 and again after the pandemic. The wider range of tariffs makes it harder for companies this time, but the strong market rally after the 90-day pause was announced shows that markets can recover when conditions improve.
For investors with long-term goals, this challenging market environment can create opportunities. Stock prices are much more attractive than they were a few months ago, both across the broader market and in sectors like Information Technology and Communication Services that led the recent market rise. Rising interest rates have caused bond market ups and downs, but they also mean that investors have more chances to earn income from their portfolios.
China’s economy faces many challenges
While much attention has focused on how the U.S. is responding to trade tensions, China faces its own economic challenges. These include ongoing concerns about a real estate bubble and financial system instability that could affect its ability to handle trade tensions. China’s recovery after the pandemic has been uneven, with economic growth slowing to 5.4% compared to last year in late 2024, according to official Chinese government figures. Many economists have already lowered their 2025 growth predictions below the government’s 5% target.
Chinese leaders are reportedly considering more stimulus measures (government actions to boost the economy). This would add to significant stimulus implemented last year, including a 5-year, 10 trillion-yuan package to support local government debt, a commitment to increase the budget deficit, cut interest rates, reduce bank reserve requirements, and measures to support the real estate market.
Recently, the People’s Bank of China (China’s central bank) has allowed its currency, the yuan, to weaken as a potential way to offset tariff impacts, setting its currency to the weakest level since September 2023. When a country’s currency becomes weaker, it can help boost exports by making goods cheaper for foreign buyers. However, this approach also carries risks including money flowing out of the country, which is especially risky for China since it could further destabilize its financial system. It can also be viewed by the White House as an attempt to get around tariffs.
The chart above shows major currencies indexed to a level of 100 two years ago, highlighting how volatile global currencies have been recently. In addition to the yuan’s movements, the value of the U.S. dollar index has fallen to the low end of its range over the past three years. This is the opposite of what some expected since, in theory, tariffs tend to reduce imports, lowering the need for foreign currency, and thus increasing the value of the dollar.
Most U.S. debt is held domestically
Some investors worry that China’s holdings of U.S. Treasury securities (government bonds) give them too much influence over the U.S. economy. There have been concerns that recent movements in the bond market result from countries like China selling their U.S. Treasuries. While this is difficult to confirm, what’s clear is that China’s Treasury holdings represent about 2.1% of total U.S. government debt according to government data. Importantly, most Treasury securities are still owned domestically by U.S. individuals, corporations, and other federal, state, and local government entities.
If China were to significantly reduce its Treasury holdings, it could potentially cause short-term market volatility and temporarily push up U.S. interest rates. However, China and other countries hold U.S. Treasuries, the dollar, and other foreign assets for an important reason: to maintain financial stability. The U.S. dollar and Treasury securities have consistently kept their “safe haven” status even during uncertain times. This has remained true over the past few years despite inflation fears, budget issues, U.S. debt downgrades, and more.
The bottom line? While escalating U.S.-China trade tensions create uncertainty, history shows that financial markets are resilient in the long run. A diversified portfolio aligned with your long-term financial goals remains the best approach to navigating the changing global landscape.
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