From 1 November, the United States has threatened to impose an additional 100 per cent tariff on Chinese imports, alongside expanded export controls on critical software, reigniting volatility across global markets.
Markets initially responded with a sharp risk-off move before a more measured tone from President Donald Trump and Beijing’s reluctance to escalate further helped restore calm.
Yet the episode has served as a stark reminder of the fragility in trade relations and has jolted investors out of a period of relative complacency.
US tariffs on Chinese goods have stabilised at around 54 per cent, comprising a 30 per cent increase atop pre-existing 24 per cent levies.
However, in late September, Washington announced a major expansion of its export control regime, restricting Chinese firms’ access to key US technologies.
In response, China unveiled its own expanded export controls, targeting rare earth minerals essential for AI development. With China controlling more than 90 per cent of global supply, the move poses a material threat to the US technology sector and broader economic growth.
“Given the concentration of tech in US equity markets and the pivotal role of AI-related capex in supporting US growth, this move poses a material threat to both the US economy and markets,” said Seema Shah, chief global strategist at Principal Asset Management.
Shah noted that China’s economy remains vulnerable, heavily reliant on US chip-making equipment and facing persistent domestic weakness.
“Beijing’s ongoing economic fragility suggests it too is ill-positioned for a prolonged trade war,” she said.
The proposed 100 per cent tariff would significantly raise the effective China tariff to about 155 per cent, lifting the US average effective tariff rate from roughly 13 per cent to nearly 30 per cent – the highest in over a century.
Preliminary estimates suggest a 3 per cent drag on US gross domestic product and inflation climbing beyond 4 per cent, well above the Federal Reserve’s 2 per cent target.
“Even if treated as transitory, the magnitude would likely compel a more cautious Fed stance,” Shah said. “Such a steep tariff could effectively trigger a trade embargo. Container traffic from China to the US has already collapsed following earlier tariff hikes, raising fears of supply chain disruptions.”
While the US would face slower growth, China’s export-dependent economy would also come under heavy strain. Shah added that a breakdown in trade could dent US tariff revenues and refocus investor attention on fiscal deficits, potentially pushing long-end Treasury yields higher.
She said the severity of a renewed trade war increases the probability of eventual compromise but warned that a return to the previous status quo is unlikely.
“President Trump may be recognising China’s leverage in rare earths, potentially prompting a more conciliatory approach to re-engage negotiations,” she said.
However, she cautioned that the road to compromise is likely to be volatile.
“Even post-resolution, tariffs and non-tariff measures such as export controls and investment restrictions are poised to remain a key geopolitical lever as the US and China continue their strategic rivalry in AI and technology,” she said.
Renewed tensions have underscored market fragility, particularly given stretched valuations and heightened sensitivity to growth shocks.
“Investor complacency around tariffs has been disrupted, prompting a reassessment of risk,” Shah said. “While a compromise is anticipated, markets may remain jittery in the near term.”
Despite these risks, Shah remains constructive on the broader macro backdrop.
“Resilient growth, supported by both monetary and fiscal policy and sustained technology investment, suggests markets can withstand setbacks,” she said.
“In this uncertain environment, a balanced, diversified approach remains essential – staying constructive on risk assets where fundamentals warrant, while managing valuation risks and maintaining portfolio resilience.”
