A trade war no one could afford to win

A client asked at the start of last week: “Will the US and China reach a trade agreement?”

Our short but confident answer was: Yes.

Longer answer: Because the maths, the money and the politics all say they must.

And sure enough, the US and China have this morning announced an agreement to reduce tariffs on each other’s goods for 90 days, marking a major step forward.
As a result, US tariffs on Chinese imports will drop to 30%, while Chinese tariffs on US goods will decrease to 10%.

Tariffs make for good headlines. They let politicians look tough and they can, at a superficial level, sound great to voters. However, the reality is more sobering: the US and China are deeply entwined, not just as trading partners, but also as consumer markets for each other.

This isn’t just about the price of microwaves at Walmart. It’s about the almost $1.2 trillion in revenue that US companies make by selling into China. That’s four times the size of the trade deficit in goods.

Let’s repeat that. US companies generate four times more revenue in China than the US trade deficit with China.

For example:

• Apple sold 43 million iPhones in China in 2024
• McDonald’s operates 6,820 restaurants there
• Walmart runs 364 stores on the mainland
• And, collectively, the S&P 500 earns 7% of its revenues from China

If the US were to decouple fully from China, the cost wouldn’t just be higher prices for consumers – it would be a meaningful hit to corporate earnings, market valuations and, by extension, the pensions of many millions of Americans.

And on the other side of the Pacific…

China needs the US just as much. Exports are a key pillar of growth, and with domestic manufacturing under pressure, Beijing has every incentive to avoid a continuing escalation of tensions. Why? Because the one thing a centrally controlled government cannot afford is social unrest – and factory closures, job losses and economic uncertainty could lead to exactly that.

This is why, behind the scenes, US and Chinese officials resumed trade talks over the weekend. The logical outcome was always resolution – not to zero tariffs, but to a middle ground that allows both sides to save face and move on.

It’s important to remember that tariffs aren’t a tax on China. They’re a tax on Americans buying goods from China. That’s why a climbdown was always likely – not because of diplomacy, but because neither side can afford the economic consequences of a full decoupling. When you realise your economic opponent is also your customer, your supplier and your investor, it suddenly pays to be flexible.

Key takeaway:

A full trade decoupling between the US and China was always unlikely – the economic ties run too deep on both sides. The whole tariffs episode has highlighted the importance of global diversification and a multi-asset approach, which can help manage geopolitical risks and uncover opportunities as markets respond to policy shifts.