While running for President in 2016, Donald Trump expressed disdain for many current trade agreements and promised to bring manufacturing jobs back to the United States from nations where they had been outsourced, such as China and India. After winning the election, he embarked on a protectionist campaign, with China becoming his main target.
In April, the United States slapped new tariffs of up to 245% on Chinese goods, and China immediately retaliated with 125% tariffs, effectively choking off all bilateral trade. Markets panicked: Stocks tumbled, bond yields surged across maturities, and the dollar fell sharply against major currencies.
By May 12, a Geneva deal brought the two countries away from the brink of a full embargo. While this truce didn’t address the underlying issues that fuelled tensions, it did give Beijing a verbal commitment from Washington to avoid decoupling and a mechanism for future negotiations.
The administration, however, continued to escalate on other fronts. In September, a World Trade Organization panel ruled that the first round of U.S. tariffs violated international trade rules, siding with China’s assertion that the United States had acted unilaterally. Although the panel’s ruling was appealed by the Trump administration to the WTO’s paralyzed appellate system, the decision cast legal uncertainty over the President’s authority to impose broad global tariffs.
In the wake of a trade war, economic growth slows, which reduces demand for the products and services sold by American companies. This tends to hurt stock prices, especially in cyclical sectors like technology, energy, and industrials. In addition, a lack of demand for American goods can prompt investors to rotate out of stocks and into safer assets like bonds and gold.