Trade tensions between the United States and China have escalated in recent weeks, with both countries implementing unprecedented tariff increases. For the moment, the U.S. has raised tariffs on Chinese goods to 145%, while China has countered with 125% tariffs on American products.
The situation is evolving quickly and continues to affect financial markets. While global tensions can create uncertainty, history shows that markets have weathered similar challenges in the past. Despite the headlines, understanding the economic relationship between these two countries can help long-term investors maintain perspective.
Tariffs against all trading partners have dominated market news, and the 90-day pause now puts the focus on the U.S.-China relationship. The underlying issue runs much deeper than trade policy alone. Current tensions are a result of the “multipolar” world in which the U.S. and China are the two largest economies, both with significant global influence. This is a decades-long shift from the “unipolar” world in which the U.S. was the only major superpower after the Cold War. This naturally creates new challenges and opportunities for each country.
While there are no easy answers as to how the trade war might progress over the next few months, maintaining perspective has become even more important for long-term investors. The U.S. and China remain significantly linked through trade, finance, and global supply chains. Let’s take a step back and look at the bigger picture on U.S. and China tensions.
U.S.-China trade tensions are now in focus
What makes this situation different from previous trade tensions is both the magnitude of the tariffs and the broader geopolitical context. As the accompanying chart shows, the U.S. maintains a significant trade deficit with China. Tariff levels above 100% effectively mean that goods crossing either border would more than double in price, all else being equal.
This increases the price of goods for consumers, raises costs for businesses, and can slow economic activity. The fear of high inflation and worsening profit margins have caused market volatility in recent weeks, with a notable shift in consumer surveys and corporate earnings guidance.
Markets have also been worried about how far the White House would be willing to go in escalating a trade war with China. Since tariffs at these levels are unlikely to be sustainable in the long run, it’s still likely that they represent a negotiating position for the administration. The 90-day pause on tariffs above 10% (except for China), and the exemption for technology products, are evidence that the White House’s main objective is still to achieve deals.
The tariffs implemented in 2018 and 2019 provide some historical context for how markets and companies might respond as the situation evolves. Many companies demonstrated resilience by adjusting supply chains, finding alternative suppliers, or absorbing portions of the increased costs. While markets stumbled in 2018, they performed well in 2019 and again during the post-pandemic recovery. The broader scope of tariffs makes it more difficult for companies this time around, but the historic market rally after the 90-day pause was announced is evidence that markets can recover once conditions improve.
For investors with long time horizons, this challenging market environment can create opportunities. Valuations are much more attractive than they were even just a few months ago, both across the broad market and in sectors like Information Technology and Communication Services that drove the recent bull market. Rising interest rates have led to bond market volatility, but they also mean that investors have more opportunities to generate portfolio income.
China’s economy faces many challenges
While much attention has focused on the U.S. response to trade tensions, China faces its own set of economic challenges. These include persistent concerns of a real estate bubble and financial system instability that could impact its ability to withstand trade tensions. China’s post-pandemic recovery has been uneven, with GDP growth slowing to 5.4% year-over-year in late 2024, according to official Chinese government statistics. Many economists have already reduced their 2025 growth forecasts below the government’s 5% target.
Chinese leaders are reportedly considering more stimulus measures. This would be on top of significant stimulus measures implemented last year, including a 5-year, 10 trillion-yuan stimulus package to support local government debt issues, a commitment to increase the budget deficit, cut interest rates, reduce bank reserve requirements, and measures to support the real estate market.
In recent days, the People’s Bank of China has also allowed the yuan to weaken as a potential offset to tariff impacts, including setting its currency peg to the weakest level since September 2023. Currency devaluation can help boost exports by making goods cheaper for foreign buyers. However, it also carries risks including capital outflows, which is especially risky for China since it could destabilize its financial system further. It can also be seen by the White House as an attempt to circumvent tariffs.
The chart above, which shows major currencies indexed to a level of 100 two years ago, highlights how volatile global currencies have been in recent weeks. In addition to the yuan’s moves, the value of the U.S. dollar index has fallen to the low end of the 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 boosting the value of the dollar.
Most U.S. debt is held domestically
Some investors also worry that China’s holdings of U.S. Treasury securities give them undue influence over the U.S. economy. There have been concerns that recent moves in the bond market are the result of countries like China selling their U.S. Treasuries. While this is difficult to verify, 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 held 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 maintained their “safe haven” status even during periods of uncertainty. This has been true over the past few years despite inflation fears, budget crises, 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.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
The Bigger Picture on U.S. and China Tensions
Trade tensions between the United States and China have escalated in recent weeks, with both countries implementing unprecedented tariff increases. For the moment, the U.S. has raised tariffs on Chinese goods to 145%, while China has countered with 125% tariffs on American products.
The situation is evolving quickly and continues to affect financial markets. While global tensions can create uncertainty, history shows that markets have weathered similar challenges in the past. Despite the headlines, understanding the economic relationship between these two countries can help long-term investors maintain perspective.
Tariffs against all trading partners have dominated market news, and the 90-day pause now puts the focus on the U.S.-China relationship. The underlying issue runs much deeper than trade policy alone. Current tensions are a result of the “multipolar” world in which the U.S. and China are the two largest economies, both with significant global influence. This is a decades-long shift from the “unipolar” world in which the U.S. was the only major superpower after the Cold War. This naturally creates new challenges and opportunities for each country.
While there are no easy answers as to how the trade war might progress over the next few months, maintaining perspective has become even more important for long-term investors. The U.S. and China remain significantly linked through trade, finance, and global supply chains. Let’s take a step back and look at the bigger picture on U.S. and China tensions.
U.S.-China trade tensions are now in focus
What makes this situation different from previous trade tensions is both the magnitude of the tariffs and the broader geopolitical context. As the accompanying chart shows, the U.S. maintains a significant trade deficit with China. Tariff levels above 100% effectively mean that goods crossing either border would more than double in price, all else being equal.
This increases the price of goods for consumers, raises costs for businesses, and can slow economic activity. The fear of high inflation and worsening profit margins have caused market volatility in recent weeks, with a notable shift in consumer surveys and corporate earnings guidance.
Markets have also been worried about how far the White House would be willing to go in escalating a trade war with China. Since tariffs at these levels are unlikely to be sustainable in the long run, it’s still likely that they represent a negotiating position for the administration. The 90-day pause on tariffs above 10% (except for China), and the exemption for technology products, are evidence that the White House’s main objective is still to achieve deals.
The tariffs implemented in 2018 and 2019 provide some historical context for how markets and companies might respond as the situation evolves. Many companies demonstrated resilience by adjusting supply chains, finding alternative suppliers, or absorbing portions of the increased costs. While markets stumbled in 2018, they performed well in 2019 and again during the post-pandemic recovery. The broader scope of tariffs makes it more difficult for companies this time around, but the historic market rally after the 90-day pause was announced is evidence that markets can recover once conditions improve.
For investors with long time horizons, this challenging market environment can create opportunities. Valuations are much more attractive than they were even just a few months ago, both across the broad market and in sectors like Information Technology and Communication Services that drove the recent bull market. Rising interest rates have led to bond market volatility, but they also mean that investors have more opportunities to generate portfolio income.
China’s economy faces many challenges
While much attention has focused on the U.S. response to trade tensions, China faces its own set of economic challenges. These include persistent concerns of a real estate bubble and financial system instability that could impact its ability to withstand trade tensions. China’s post-pandemic recovery has been uneven, with GDP growth slowing to 5.4% year-over-year in late 2024, according to official Chinese government statistics. Many economists have already reduced their 2025 growth forecasts below the government’s 5% target.
Chinese leaders are reportedly considering more stimulus measures. This would be on top of significant stimulus measures implemented last year, including a 5-year, 10 trillion-yuan stimulus package to support local government debt issues, a commitment to increase the budget deficit, cut interest rates, reduce bank reserve requirements, and measures to support the real estate market.
In recent days, the People’s Bank of China has also allowed the yuan to weaken as a potential offset to tariff impacts, including setting its currency peg to the weakest level since September 2023. Currency devaluation can help boost exports by making goods cheaper for foreign buyers. However, it also carries risks including capital outflows, which is especially risky for China since it could destabilize its financial system further. It can also be seen by the White House as an attempt to circumvent tariffs.
The chart above, which shows major currencies indexed to a level of 100 two years ago, highlights how volatile global currencies have been in recent weeks. In addition to the yuan’s moves, the value of the U.S. dollar index has fallen to the low end of the 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 boosting the value of the dollar.
Most U.S. debt is held domestically
Some investors also worry that China’s holdings of U.S. Treasury securities give them undue influence over the U.S. economy. There have been concerns that recent moves in the bond market are the result of countries like China selling their U.S. Treasuries. While this is difficult to verify, 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 held 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 maintained their “safe haven” status even during periods of uncertainty. This has been true over the past few years despite inflation fears, budget crises, 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.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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