Market Bulletin: Tariff Updates, The Most Important Pause

Written By: Nate Garrison, CIO, World Investment Advisors 

US/China Mutually Reduce Tariffs for 90 Days

The United States and China announced early on Monday, May 12, 2025, that they will temporarily lower tariffs on goods imported from each other's nations. This “pause” will last 90 days to give the two governments time to negotiate a longer-lasting agreement on trade between their two countries.

Previously on Wednesday, April 9, President Trump announced a 90-day pause on reciprocal tariffs for all countries that had not retaliated against the tariffs announced by the Trump Administration on April 2. The one (major) exception was China, where Trump announced a further tariff increase to 125% and subsequently – on April 10 – to 145%.¹

With today’s agreement, the combined tariff rate of 145% that the US applies to most imports from China will be reduced to 30% by May 14. Similarly, the tariffs that China charges on goods imported from the US will fall from 125% to 10%. The reduction is far greater than many expected; Trump had previously stated that 80% tariffs on Chinese imports “seems right.” 

US Secretary of the Treasury, Scott Bessent made clear that the US would not reduce future tariffs below 10%, but also that the April 2 rate of 34% would be a ceiling. Any settlement would be in addition to the 20% tariffs the Trump administration applied earlier this year over concerns about Chinese exports of goods tied to the production of fentanyl, a deadly narcotic. Additionally, all tariffs applied on China during the first Trump administration also remain in place.²

This development follows the announcement of a trade deal between the US and the United Kingdom on Thursday, May 8, 2025. The White House has also stated that many other countries are in various stages of advanced negotiations to strike trade deals with the US.

Impacts of a US/China Tariffs "Pause"

The situation is still developing, and much can change over the next 90 days as the two sides negotiate a more permanent trade arrangement. We view this as a truce but not a peace treaty. There are a few potential impacts we’d like to highlight about today’s agreement between the US and China.

Reduces Risk of "Stagflation"

The term “stagflation” refers to economic conditions where the real (i.e., after inflation) growth of the economy is stagnant or negative because inflation is elevated while economic growth is depressed. Stagflation is generally bad for most consumers, as it reduces the real value of their incomes and wealth. 

The agreement today should reduce the cost of Chinese imports into the United States, alleviating near term inflationary pressures on consumers. At the same time, it should provide more breathing room for the many businesses reliant on Chinese trade and avoid devastating impacts to their profits and viability (at least over the next 90 days), which will help improve economic growth. We expect “stagflation” risks to subside as a result in the near term.

Reduces Risks from US/China "Decoupling"

The US and China are the two largest, most important, and most dynamic economies in the world today and in the years to come. The term “decoupling” refers to permanent trade reductions and reduced economic integrations between the US and China. A bitter decoupling would likely have major detrimental impacts to global economic growth. 

Both governments have expressed their commitment to continuing to work together to find a jointly suitable resolution to this theater of the trade war. As such, the risk from “decoupling” disruption is reduced in the near term by this agreement. 

Further Cements Tariffs Role as "Consumption Tax"

We view tariffs as a tax on imported goods, and that acts as a de facto tax on consumer consumption. President Trump’s administration has repeatedly stated that the new tariffs will not fall below 10% regardless of any deal struck, and comments following the announcement of the deal with China were no different. 

We think markets and businesses will begin to incorporate the costs of the 10% import tax in their plans going forward. Additional net revenue would also be helpful for reducing the federal deficit and slowing the growth of US federal debt. What remains to be seen is how much revenue will be generated by the tariffs. Additionally, if income tax revenues are slashed by the tax bill this summer, then net revenue for deficit reduction could be neutral or negative.

Takes Pressure Off the Fed

The Federal Reserve has a dual mandate of maintaining price stability (i.e., steady inflation) and “full employment” (i.e., reasonable unemployment). The tools used by the Fed to seek price stability often have an opposite impact on maintaining full employment, and vice versa. Normally this does not pose much of a problem for the Fed, as inflation and unemployment often run countercyclical to each other (when one is depressed, the other is elevated) so tackling one mandate won’t negatively impact the other. The tariffs present a unique challenge to the Fed’s mission, as they would likely put upward pressure on inflation and unemployment at the same time. Thus, in a potential “stagflationary” environment caused in large part by high tariffs, using their tools to attack issues for one mandate may cause even worse conditions for the other mandate.

President Trump has been vocal about his preference for a rate cut from the Fed to mitigate the impact of his administration’s tariffs on the US economy. The Fed has so far declined to act on rates in either direction. Reducing risks from tariffs with China will likely reduce the need for them to act.

Market Movements Since April 9

US equities, bonds, and the dollar all fell sharply immediately after the tariffs announcement by President Trump on April 2. Since Trump announced a “pause” on most tariffs on April 9 there has been a rally in just about everything across equities, while fixed income has been more muted. 

Equities

Equities have rebounded sharply since April 9 as the world stepped back from the brink of a potentially catastrophic trade war (for now). US, Developed International, and Emerging Markets have all steadily increased by similar amounts since then, with US Large Cap growth equities performing best. In fact, most equities are now positive for the quarter, despite the trade uncertainty.

Returns Source: Morningstar Direct, retrieved 5/12/2025.

What's Next?

Uncertainty Remains Elevated; Inflation and Growth Still in Jeopardy

It is not clear yet if the tariffs “pause” with China (or any other nation) will become permanent. As such, we think there are still real risks to inflation and economic growth. The recent talks reduced the US tariffs on Chinese goods to a level that was not a de facto embargo on Chinese imports, but a permanent end to the trade wars is needed. Until then we expect many consumers will be slower to spend and many businesses will be less willing to make long-term investments, jeopardizing US and global economic growth. 

Long-term Solutions Require Long-term Changes

The Trump administration’s goal is for more balanced trade between the US and China. For that to be realized, China will need to be a more consumption-focused economy, exporting less and/or importing more. This is a tall order, given the decades of focus on manufacturing and exporting. Although the Chinese government has taken steps in recent years to increase domestic consumption, it could be many years before they reorient their economy away from its heavy dependence on exports. In any case, the Chinese government will likely want to do that reorientation on its terms and not by those dictated by the  Trump administration. 

Additionally, we expect that the Trump administration will continue to push for what it calls “strategic decoupling” of moving supply chains of key industries out of China (and other countries) and back to the US. We do not expect the trade situation to revert to the status quo of yesteryear after a final settlement is agreed to by both parties.

Going Forward

Remain Diversified

Over the past year, we have encouraged clients to diversify portfolios that were especially heavy in US large caps (especially large cap growth) stocks into other asset classes, including international equities and investment-grade fixed income. We continue to encourage clients to be properly diversified and allocated in accordance with their risk tolerance and investment objectives. If you have not already, work with your financial advisor to ensure that your portfolio is prudently diversified and invested. 

Invest for the Long Term

It’s normal to watch the markets during periods of extreme volatility with concern. It’s not advisable to check your portfolio balances daily and panic. There have been numerous events and shocks to the economy and markets over their history, and with enough time, markets have always rebounded. Drawdowns are normal, and they are part of the reason why equities return so much more than other asset classes over time. Stick to long-term investing for your goals.

Do Not Panic.

Market drawdowns can sometimes provide investors opportunities to make thoughtful, prudent improvements to their portfolio, but it's important to remain invested in accordance with your personal investment strategy. If your investment horizon aligns with your liquidity needs, and if you are properly allocated and invested to meet your long-term goals, stick to your plan and ride out the storm. Working with your financial advisor can help provide more confidence with this planning.

The WIA Investment Team will continue to monitor policy, markets, and the economy, and provide you updates and our analysis in the weeks and months to come.

For assistance with your workplace retirement plan, please schedule a call with the SMARTMap Financial Advocate team here. 

Sources:
1. Ana Swanson, “Trump Has Added 145% Tariff to China”, White House Clarifies, The New York Times,
https://www.nytimes.com/2025/04/10/business/economy/china-tariffs-145-percent.html, accessed 10 April 2025.
2. Jenny Leonard, US, “China to Slash Tariffs During 90-Day Reprieve for Talks”, Bloomberg, https://www.bloomberg.com/news/articles/2025-05-12/us-and-china-agree-to-major-reductions-in-tariffs-for-90-days,  accessed 12 May 2025.
3. Powell, Jerome. FOMC Press Conference, 7 May 2025, https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250507.pdf,  accessed 12 May 2025.