Temporary Separation or Breakup?

We don’t see things as they are, we see things as we are. ~ Anais Nin

Question: Can you help me to understand trade between the United State and China following President Trump’s tariffs on imports?

Answer: At this stage, the global tariffs that President Trump announced are being met with market uncertainty which leads to volatility. As things stand as this is being written, a 10% baseline tariff on most countries, except for China, was set to go into effect April 9, but was paused for 90 days providing time for our trading partners to negotiate. To date, seventy-five countries and many companies are willing to discuss more reasonable trade policies. There’s even potential for some tariffs to be reduced, delayed, or removed all together based on negotiations with individual countries. We may see tariff removals, additional extensions, or delays.

The answer to your question is ever-changing, meaning it’s a challenge to stay current with the most recent developments. China is the most notable exception to the announced pause and is the number one focus of tariff’s being imposed.

As of April 10, the tariff on Chinese imports was 145%, and on April 11, China increased its levy on US imports to 125%. The back and forth is ongoing and impacts markets, trade, industries, and companies. Using an analogy of a married couple breaking up, the US in essence invited all of the couples’ mutual friends over for dinner and intentionally excluded China to send a message. This manifested by pausing the reciprocal tariffs on other countries except for China.

There are exemptions; goods subject to Section 232 tariffs (steel, aluminum, autos, and auto parts) and those set to be subject to Section 232 tariffs (copper, pharmaceuticals, semiconductors, lumber), as well as bullion, energy and other certain minerals that aren’t available in the US are exempt from incremental tariffs. Imports from Russia, North Korea, Cuba, and Belarus are also exempt.

Consumers and businesses have two options to reduce the impact of tariffs: 1) substitute imported goods for domestically made goods, 2) move from goods that are made in the higher-tariff countries, such as China, to goods that are made in relatively lower-tariff countries, such as Mexico.

While tariffs cause near-term economic headwinds, there are factors that could support the economy. These include lowered debt levels by consumers, and a healthy job market; AI and data center buildouts will drive infrastructure development, industrial activity, and electricity demand. Lastly, tax revenue from tariffs could help support additional tax cuts.

Depending on how long the higher tariffs remain in place, the Federal Reserve (Fed) is going to be in a challenging position. Weaker growth and higher unemployment would indicate interest rate cuts. In contrast, any increase in inflation suggests Fed rate policy restraint.

While the Fed can’t prevent a recession from happening, lowering rates sooner than later could prevent a recession, or mean a milder one if there is one at all. Again, there are more questions than answers as we wait and watch for more information on what happens with trade negotiations.

Factoids: According to the US Census Bureau and UN COMTRADE, the US imports 87% of its Christmas decorations from China for approximately $4 billion in sales. We import 77% of our toys, games, and sporting equipment for a total of roughly $32.04 billion. In 2024, the US brought in a total of approximately $462.2 billion in goods from China.

The sheer size of this symbiotic relationship suggests that mediation and some sort of remediation are possible. The World Trade Organization stated that trade between the two partners equals about 3 percent of total world trade. But in the meantime, China has been courting other partners to hedge their bets on future trade with the US by strengthening ties with the Association of Southeast Asian Nations.

Raymond James Chief Investment Officer, Larry Adam said “As uncertainty surrounding the trade war will likely continue over the coming weeks, we expect that market volatility will remain elevated. While never comfortable, pullbacks are a part of the fabric of the market.” Our research team also states that dating back to 1980, markets have experienced one 10% decline per year, on average, with an average maximum intra-year decline of ~13-14%. Despite this, the S&P 500 has had an average annual gain of ~10%. The S&P 500 s an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. “Staying with your long-term asset allocation framework, keeping a long-term horizon and not making abrupt changes is what is most important throughout periods of volatility,” stated Adam. Stay focused and plan accordingly.