Tariff Thursdays – US vs China: Weekly Risk Analysis (May 22–29, 2025)

Who's Hurting - and Where?

Overview

After a volatile spring, the United States and China are entering this week under a fragile trade truce. A 90-day tariff reprieve is in effect, rolling back punitive duties imposed in April and temporarily easing tensions. However, tariffs remain dramatically higher than a year ago – average U.S. tariffs on Chinese goods are about 51%, with China’s averaging 32% on U.S. goods – and 100% of bilateral trade is still subject to some tariff. Both economies are grappling with decoupling pressures, and companies on each side are recalibrating supply chains. Below, we break down the sector-by-sector impacts of U.S. tariffs on China and vice versa, analyze key risk factors via quantitative risk equations, and provide market predictions and forecasts through May 29, 2025.

Agriculture

BLUF: U.S. agriculture remains severely exposed to Chinese tariffs, with American crop exports collapsing, while China’s food supply chain has largely substituted U.S. imports but faces higher costs and food security concerns.

U.S. farmers have been hit hardest by China’s retaliatory tariffs on agriculture. Key exports like soybeans, sorghum, and pork have plummeted. China had accounted for roughly 60% of U.S. soybean exports and 90% of sorghum exports in recent years. With China’s retaliatory tariff on U.S. farm goods spiking to 125% in April (before easing to 10% in the current truce), those purchases essentially halted. For example, U.S. sorghum exports to China in Jan–Feb 2025 were 95% lower than a year earlier as tariffs crippled trade. American farmers are now left with surplus inventories and lower prices, prompting some to switch crops (planting more corn or wheat) and others to seek emergency aid or new markets. Beijing’s tariffs have effectively wiped out U.S. oilseed exports to China, forcing the U.S. to rely on alternate buyers (like the EU or Southeast Asia) for a fraction of the volume.

Meanwhile, China has largely offset the loss of U.S. farm imports by diverting purchases to other countries. Brazil, already China’s top soy supplier, has further ramped up soybean exports to China (though even Brazil struggles to fully replace U.S. volumes). China has also boosted imports of corn, sorghum, and pork from nations like Argentina and the EU. This diversification has kept Chinese feed mills and meat producers supplied, but often at higher cost – Brazilian soybeans carried a price premium when U.S. supply was cut off, and some smaller suppliers can’t match U.S. efficiency. Food price inflation in China ticked up during the worst of the tariff war. Food security remains a strategic worry in Beijing; the government has tapped state reserves and encouraged increased domestic production of staples to mitigate import shortfalls. Still, China’s consumers have been largely shielded compared to U.S. farmers’ pain.

Despite the current 90-day truce (with tariffs on U.S. farm goods temporarily back down to 10%), Chinese buyers remain cautious. Many continue to favor Brazilian and other suppliers, uncertain if U.S. tariffs will snap back after the truce. U.S. agriculture faces long-term risk: lost market share can be hard to regain, as supply contracts and trade relationships have shifted permanently. Notably, U.S. agricultural output is projected to decline about 1.1% in the long run due to these trade frictions, according to economic analysis – a stark contrast to gains in protected manufacturing sectors. American farmers are pressing Washington to secure lasting tariff relief or purchase commitments from China to restore export demand. Until then, the agricultural sector remains a major pressure point in the trade war, with political ramifications (farm-state constituencies are increasingly vocal as the 2025 U.S. election cycle begins).

Manufacturing (Light & Heavy)

BLUF: U.S. tariffs have boosted some domestic manufacturing (heavy industry seeing slight output gains) but at the cost of higher input costs and lost exports, while China’s manufacturing sector is under strain, especially in low-end light manufacturing, as it faces both tariffs and diversion of supply chains to other countries.

Heavy Manufacturing (Industrial Machinery, Capital Equipment): U.S. tariffs up to 30% on Chinese industrial goods (and even 47.5% on Chinese automotive and heavy equipment under special measures) have provided short-term protection for some American manufacturers. Sectors like primary metals and machinery have seen order increases as imported rivals grew more expensive. In fact, U.S. manufacturing output is estimated to be ~1.5% higher in the long run due to the tariff regime, as some production shifts back onshore. Companies like Caterpillar have reported that tariffs allowed them to raise U.S. prices with less fear of undercutting by Chinese competitors. However, these gains come with significant side effects. Many U.S. manufacturers rely on Chinese components and materials – for example, specialty steels, electronics, or engine parts – which now cost more. In response, the U.S. administration offered a temporary “auto parts tariff rebate” to offset some of the 25% tariffs on imported parts for domestic assembly (acknowledging the burden on manufacturers). Heavy equipment makers have been forced to reconfigure supply chains: Komatsu, the Japanese machinery giant, estimated the truce’s tariff reduction saved it $140 million in annual tariff costs, highlighting how punitive the April tariffs were on steel inputs and finished equipment. Competitors like Caterpillar still expected an extra $250–350 million in tariff-related costs this quarter before the truce. These higher input costs and uncertainty are crimping profit margins and delaying investment decisions in the sector.

Chinese heavy manufacturing exporters, meanwhile, face a demand shock. Orders for Chinese-made construction machinery, machine tools, and industrial equipment from the U.S. have fallen sharply – U.S. imports of Chinese “electrical equipment and machinery” were down double-digits, with the trade war causing nearly a 90% collapse in some bilateral trade flows at the April peak. Chinese firms have tried to pivot to other markets (Asia, Africa, Latin America), and the Chinese government has leaned in with export tax rebates and incentives to help manufacturers find alternative buyers. Nonetheless, industrial overcapacity – a long-standing issue in China’s steel and machinery sectors – is being exacerbated. With the U.S. market largely cut off by tariffs, China’s heavy industries risk oversupply and pressure on prices. Beijing is responding by ramping up domestic infrastructure spending (to absorb surplus steel and machinery) and by encouraging manufacturers to “go out” by building production in Southeast Asia (where goods can be exported to the U.S. tariff-free under different country-of-origin). The effectiveness of these measures will take time, and some smaller Chinese factories in heavy industries report operating at minimal margins or idling plants due to the U.S. demand loss.

Light Manufacturing (Consumer Goods, Textiles, Appliances): Tariffs have been especially punitive on low-margin, labor-intensive goods – an area where China has long dominated global exports. The U.S. imposed a universal 10% tariff on all imports (including apparel, footwear, home goods) plus China-specific duties of 20% or more on top. American importers of consumer products have seen landed costs jump. In the short run, this translated into noticeable price increases for U.S. consumers: shoes cost about 15% more, and apparel about 14% more in Q2 2025 due to tariffs, according to analysis from the Budget Lab. Retailers like Walmart and Target have struggled to contain these price pressures. The White House even publicly admonished Walmart to “eat the tariffs” instead of raising prices, a warning delivered via social media in mid-May. (Walmart’s CEO bluntly noted that a $350 Chinese-made car seat would cost an extra $100 under the tariffs – an unsustainable increase to absorb fully.) Despite political pressure, much of these costs are being passed on, contributing to a 1.7% uptick in U.S. consumer price levels attributable to the 2025 tariffs so far.

American light manufacturers – e.g. textile mills or furniture makers – saw a temporary demand boost due to tariffs on Chinese goods. Some dormant U.S. factories are restarting production of items like basic furniture or apparel to take advantage of higher import prices. However, the scale is limited: China’s production ecosystem in light manufacturing is hard to replicate quickly. Instead, the bigger shift has been sourcing diversification by U.S. companies. Imports from Vietnam, Malaysia, Mexico, and other low-cost countries have surged as buyers try to avoid Chinese tariffs. Vietnam, for instance, has seen a jump in exports of apparel and electronics to the U.S., picking up business from China (though the U.S. had threatened high “reciprocal” tariffs on Vietnam too, they were paused in the truce). Chinese firms are sometimes behind this shift – many set up affiliate factories in Southeast Asia to continue supplying U.S. brands indirectly. Indeed, during the tariff peak, China’s exports to Southeast Asia spiked, as goods were sent there for minor processing and re-export to the U.S. tariff-free. This transshipment loophole is a headache for U.S. trade officials, who have floated stricter rules-of-origin enforcement to prevent Chinese value-added from sneaking in via third countries. For now, though, the effect is that China’s light manufacturing exporters have lost direct U.S. market share. Chinese exports of toys, apparel, small appliances and similar goods to the U.S. dropped by well over 50% year-on-year in April. Many factories in Guangdong and Zhejiang provinces (China’s export hubs) have pivoted to focus on domestic Chinese consumers or e-commerce exports to emerging markets.

Overall, manufacturing presents a mixed risk picture: U.S. tariffs have achieved a degree of import substitution and slight uptick in domestic output, but at the cost of higher consumer prices and strained supply chains. China’s manufacturing machine is far from crippled – it has proven adaptive – but it is under stress, contending with both tariffs and the accelerating trend of supply-chain decoupling. In the long run, efficiency losses (due to forcing production to higher-cost locations or duplicative supply chains) could hurt both sides’ productivity. For this week, manufacturers are watching closely whether trade talks yield any further reprieve or if tariffs might snap back to April levels after the 90-day pause.

Electronics

BLUF: Electronics and tech hardware trade has been upended – U.S. tariffs drove partial relocation of gadget manufacturing away from China, and China’s tech exporters are squeezed by both tariffs and U.S. export controls, raising risks for global supply and prices of phones, computers, and telecom gear.

The consumer electronics supply chain – encompassing everything from smartphones and laptops to networking equipment – was at the heart of U.S.–China trade flows. Prior to the trade war, China exported over $150 billion annually in electronics to the U.S. Tariffs have dramatically altered this landscape. Notably, popular consumer tech products that were initially spared in earlier tariff rounds eventually got hit in the 2025 escalation. By April, virtually all Chinese-made electronics faced U.S. import taxes of 30% or more. This prompted U.S. tech companies to accelerate their diversification plans. Apple, for example, sped up shifting some iPhone production to India and Vietnam. A portion of its flagship devices for the U.S. market are now assembled outside China to sidestep tariffs (Apple also leaned on exemptions for specific components when possible). Other firms, like HP and Dell, moved chunks of laptop assembly to Taiwan and Thailand. This “China +1” manufacturing strategy is now widespread across the electronics industry – a direct response to tariff risk.

Despite these moves, China remains the primary electronics assembly base, so U.S. consumers and companies have been absorbing higher costs on many devices. The tariffs contributed to U.S. smartphone and PC prices rising in early 2025. Some smaller American electronics brands that couldn’t easily relocate production have struggled with margin pressure or even exit from the market due to the tariff burden making their China-made imports uncompetitive. On the flip side, a few U.S.-based electronics assemblers (e.g. in Mexico or domestic) saw a bump in orders. Mexico, benefiting from USMCA and proximity, picked up increased electronics assembly work for U.S. consumption. Still, any U.S. gains here are modest relative to China’s entrenched position.

Chinese tech hardware firms have been hit by more than just tariffs – export controls and sanctions now intertwine with trade policy. The U.S. has imposed strict export bans on advanced semiconductors and telecom equipment (see next section), which directly affect Chinese tech hardware capabilities. Additionally, Chinese electronics makers find the U.S. market more hostile: beyond tariffs, there are regulatory barriers (e.g. FCC bans on Chinese telecom gear from Huawei and ZTE) and an informal consumer backlash. Smartphone exports from China to the U.S. (mainly budget Android handsets by OEMs like TCL or Lenovo’s Motorola units) have dwindled. High-end Chinese smartphone brands such as Xiaomi and Oppo, which once eyed the U.S. market, effectively abandoned those plans. Instead, they focus on India, Europe, and Latin America – though even there, they face competitive pressure and some Western skepticism.

A significant risk emerging in tech hardware is fragmentation of standards and ecosystems. China is doubling down on developing indigenous technology – from CPUs to operating systems – to reduce reliance on U.S. inputs. The tariff war, coupled with sanctions, has catalyzed Beijing’s drive for self-sufficiency in tech. This week, for instance, Chinese regulators convened a forum on expanding domestic chip fabrication tools and battery technologies. Over time, this decoupling could result in parallel technology supply chains: one centered on China, the other on the U.S. and allies – raising costs and complexity for global firms that must straddle both.

For the coming week, however, the main issue in tech hardware is inventory and logistics. With the tariff truce in place until July, U.S. importers are rushing to land shipments of electronics before any tariff snapback. Ports on the U.S. West Coast are seeing elevated container volumes of tech goods. Freight rates for electronics from Asia jumped in May due to this surge. The BLUF for tech hardware: while a temporary calm prevails, underlying trade tensions and export restrictions ensure that this sector remains one of the riskiest and most disrupted in the U.S.–China economic relationship.

Semiconductors

BLUF: Semiconductors are a critical chokepoint – U.S. export controls (beyond tariffs) have severely limited China’s access to cutting-edge chips, while China’s retaliatory moves (like banning U.S. chip firms’ products) signal a tech Cold War that heightens supply chain risks for both sides.

Tariffs per se play a smaller role in semiconductors; instead, national security-driven trade measures dominate this space. The U.S. has effectively banned exports of advanced chips and semiconductor manufacturing equipment to China. These restrictions, tightened in late 2022 and expanded through 2024, aim to stymie China’s progress in supercomputing, AI, and military applications. As a result, Chinese tech companies cannot buy top-tier NVIDIA or AMD AI GPUs, cutting-edge Intel processors, or EUV lithography machines from ASML. The impact on China is significant – its nascent domestic chip industry cannot yet produce equivalents to 5nm and 7nm chips at volume. In response, China has redirected massive subsidies into indigenous chip development and stockpiled lower-grade semiconductors. Still, there is a growing technology gap, and Chinese firms have been forced to get creative: some design workarounds using slightly older nodes, others attempt to source via third countries (e.g. purchasing chips through shell companies in Singapore to evade controls, a practice the U.S. is cracking down on).

China’s retaliation in the semiconductor sphere has been targeted. In May, Beijing took the notable step of banning the use of U.S. memory maker Micron’s chips in certain critical infrastructure projects, citing cybersecurity. This ban is largely symbolic – Micron’s memory chips can be replaced by Korean or domestic suppliers – but it was China’s first major sanction against a U.S. semiconductor firm. It signals that Beijing is willing to impose pain on American chip companies in return. U.S. firms like Qualcomm, Intel, and NVIDIA derive a large share of revenue from Chinese device makers. (Qualcomm, for instance, earns nearly half its revenue from China-based customers.) These companies face a precarious situation: they are caught between U.S. government restrictions (which limit what they can sell to China) and the risk of Chinese reprisals or loss of the China market entirely. Semiconductor executives are watching negotiations closely – any hint of easing or tightening trade rules can swing stock prices and capex plans.

From the U.S. perspective, limiting China’s semiconductor advancement is a strategic priority strongly supported by both parties in Washington. However, it’s not without cost: U.S. chip firms estimate billions in lost sales. Moreover, global semiconductor supply chains are deeply interwoven – production often involves the U.S., Taiwan, South Korea, Japan, and Europe. The trade war adds uncertainty to this network. A stark example is the fate of Huawei: once a large buyer of U.S. chips, now cut off, Huawei has been forced to develop some in-house solutions and dramatically scale down its smartphone business. American chipmakers lost a key customer, and Huawei’s reduced presence impacted demand for certain communications chips worldwide.

In terms of tariffs, earlier rounds of the trade war did put tariffs on some lower-end semiconductors and components coming from China (like printed circuit boards, power management ICs, etc.). Those tariffs (typically 25%) raised costs for U.S. electronics assemblers and have not been fully lifted. But given the much larger stakes of outright export bans, these tariff costs are a secondary concern. One area where tariffs could come back into play is semiconductor equipment: the U.S. had exempted critical chip-making tools from tariffs to avoid harming its own industry, but if talks sour, even those could be used as leverage.

Looking ahead this week, semiconductors remain a bellwether for U.S.–China tech tension. Both sides are expected to stick to their positions: the U.S. will continue strict export controls (with no indication of loosening during the tariff truce), and China will continue efforts to replace U.S. chips and might roll out further counter-measures, such as export controls on materials. Notably, China produces about 90% of certain rare earth elements crucial for semiconductor manufacturing (e.g. specialized magnets in chip fab machines). In April, China already signaled its willingness to weaponize rare earth exports (more on this in Strategic Industries below). Any escalation here could severely affect the global semiconductor production pipeline. Thus, while tariff negotiations grab headlines, the semiconductor battle rages on in the background, defining the future balance of technological power.

Steel & Metals

BLUF: Metals trade has bifurcated – U.S. tariffs protect domestic steel and aluminum but drive up costs for downstream users, while China’s metal producers face gluts and export barriers, forcing them to cut output or find alternative markets.

Steel was one of the first fronts in the U.S.–China trade clash. The U.S. imposed a 25% tariff on steel imports (and 10% on aluminum) globally back in 2018 (Section 232 tariffs), citing national security. Under the new 2025 trade measures, those metals tariffs were doubled for China: effectively 50% on Chinese steel and aluminum imports as of this spring. In practice, even before the recent hike, Chinese steel had largely been kept out of the U.S. market by a web of tariffs and anti-dumping duties. The few remaining avenues (like specialty alloy steel) are now essentially closed due to the prohibitive 50% duty. As a result, U.S. steelmakers like Nucor and U.S. Steel have benefited from reduced import competition – domestic steel prices rose and capacity utilization at U.S. mills improved slightly. U.S. primary aluminum production (a sector long in decline) also saw a small uptick. This is one reason why U.S. manufacturing output in metals has edged up in 2025.

However, downstream U.S. industries are paying more. Auto parts, aerospace components, and construction materials now source higher-cost domestic steel or pay the tariff on imports. The Biden (now Trump 2.0) administration tried to cushion this by offering rebates for tariffs on auto assembly parts (as mentioned earlier), effectively acknowledging the tariffs’ cost on U.S. manufacturing. Construction companies report a hit from pricier steel rebar and structural aluminum – one factor in a noted 3.1% contraction in U.S. construction output projections. Thus, while integrated steel mills enjoy tariff protection, steel-using sectors feel the squeeze.

China’s steel and base metals sector is in a tougher spot. Chinese steel production capacity is enormous – accounting for over 50% of global output – and for years China has relied on exports to absorb excess output. The trade war has closed off what was a smaller but symbolically important outlet: direct exports to the U.S. (which were already under strict quotas from earlier deals). More significantly, other countries have followed the U.S. lead: the EU, for instance, maintains steel safeguards, and many nations have anti-dumping duties on Chinese steel. With the U.S. definitively out of reach due to tariffs, Chinese steelmakers face oversupply at home and low profit margins. The government in Beijing has responded by ordering capacity cuts in some provinces to curb oversupply and by investing in new steel-intensive infrastructure projects domestically to create demand. Additionally, Chinese firms are increasingly exporting higher-value finished metal products (like machinery or fabricated steel structures) instead of raw steel, to get around some trade barriers on basic metal.

One dramatic move by China was the suspension of rare earth mineral exports as part of its April retaliation package. While not steel, rare earth metals (like neodymium, dysprosium) are a critical strategic resource. China’s halt of rare earth exports globally – ostensibly not just targeting the U.S. but effectively squeezing all non-Chinese buyers – sent shockwaves through the defense, electronics, and renewable energy industries, which depend on these materials. This export control underscores how Beijing can retaliate in metals/minerals rather than tit-for-tat tariffs alone. By weaponizing its near-monopoly (around 90% of global rare earth production and refining), China put pressure on the U.S. and allies to reconsider the costs of a prolonged trade war. Western manufacturers are now scrambling to source rare earths from the lone U.S. mine (MP Materials in California) or new projects in Australia and elsewhere, but those supply lines will take years to scale. In the interim, prices for rare earth magnets spiked over 20% after China’s announcement, raising input costs for everything from electric vehicles to fighter jets.

In base metals like aluminum, a similar dynamic exists. China is a huge producer of aluminum, and U.S. tariffs (plus earlier sanctions on Russia, another big supplier) tightened the global aluminum market. The U.S. has been importing more from allies like Canada (which now has quota arrangements exempting some aluminum from tariffs) and also ramping recycling efforts. China’s aluminum smelters, facing energy constraints and export tariffs, have slowed output. Notably, China imposed a modest export tax on aluminum to discourage sending energy-intensive aluminum abroad (keeping it for value-added product manufacturing domestically). Thus, global metal supply chains are shifting: more “friendly” sourcing for the U.S., and China focusing on domestic use or non-Western markets.

For the week ahead, steel and metals markets are relatively stable under the current truce – no new tariff changes are expected immediately. U.S. steel prices have actually softened slightly in May as the panic of the 125% tariffs subsided with the truce. Attention is turning to negotiations: U.S. and China may discuss excess steel capacity as part of any broader agreement (echoing past talks in forums like the G20). If there were a surprise breakthrough, it could involve China agreeing to further cut steel overcapacity, which the U.S. would welcome. Barring that, the metals sector will remain a protected (U.S.) versus glutted (China) dichotomy, with strategic materials like rare earths adding an extra layer of risk on top of the tariff narrative.

Automotive

BLUF: Auto trade has been reshaped – U.S. tariffs (as high as 47.5% on Chinese vehicles) have effectively shut out Chinese auto exports, while China’s retaliatory tariffs halted U.S. vehicle exports and pushed automakers to localize production. The result is increased costs and reorganized supply chains, with long-term implications for both car markets.

The auto sector touches many points of U.S.–China trade: finished vehicles, parts, and raw materials. On finished cars, the trade war has led to a de-facto decoupling. The U.S. imposed a new 25% tariff on imported automobiles globally (Section 232) in early 2025, and specific to China, total duties on autos now reach 47.5% (once the universal and China-specific tariffs are combined). Practically, this means almost no Chinese-made cars can economically enter the U.S. market. China’s nascent forays into the U.S. auto market – for instance, electric vehicle startups shipping a few thousand EVs to pilot U.S. sales – have been aborted. Even established global automakers who produce in China (like Volvo, owned by Geely, which had exported some China-made models to the U.S.) have stopped those shipments. Instead, those firms rearranged production: Volvo now serves the U.S. from its plant in South Carolina and other countries. Chinese-brand automobiles (which have seen success in developing markets) remain absent from American showrooms, a situation now cemented by high tariffs.

For U.S. automakers, China was the largest car market in the world and a key profit source, but they mostly produce in China for China via joint ventures, not via exports from the U.S. However, certain niche American-made vehicles did go to China – for example, large SUVs assembled in the U.S. by BMW (for export) or some premium electric cars. China’s retaliatory auto tariffs (which had been 40% on U.S. vehicles at one point in the 2018 trade war, then settled to 15% base, now briefly spiked to 125% during April’s standoff before dropping to 10% in the truce) essentially killed U.S. vehicle exports to China. General Motors and Ford had already localized most production in China, but Tesla, which in 2018 used to ship U.S.-made Model S/X to China, saw that avenue cut off (Tesla responded by building its Gigafactory Shanghai to supply the Chinese market tariff-free). Likewise, BMW’s U.S.-made SUVs faced the punitive Chinese tariff, leading BMW to divert some output to other markets and expand production in China for local sale. Data from late 2024 showed U.S. vehicle exports to China dwindled to negligible levels, impacting the balance sheets of some automakers (albeit modestly, as most have adapted). In summary, the flow of finished cars between the U.S. and China is now minimal, a stark change from the more interconnected auto trade we had pre-2018.

Auto parts and the supply chain present another story. The automotive supply chain is global, and U.S. tariffs on Chinese auto parts (25% or more on items like electrical components, engines, tires, etc.) raised costs for U.S. car assembly. Nearly every car built in America uses some Chinese-made parts (e.g. electronic sensors, battery cells, etc.). To mitigate this, the U.S. government’s temporary tariff offset program allows automakers a partial rebate on tariffs for imported parts if those parts go into U.S.-assembled cars. Still, industry analysts estimate the tariffs have added several hundred dollars to the cost of an average U.S.-made car. Some of these costs have been passed to consumers (contributing to higher car prices amid an already hot market), while some have been absorbed, squeezing automaker margins that were already under pressure from other factors (like the EV transition). U.S. auto part suppliers benefiting from less Chinese competition are few, since many kinds of basic parts (wiring harnesses, small motors) are no longer produced domestically at scale. Instead, the diversion effect is visible: Mexico and other low-cost countries have increased exports of car parts to the U.S. where possible, though even those often rely on raw inputs from China.

For China, the tariffs coincided with a domestic push to become an auto exporting powerhouse. Chinese automakers (especially EV makers like BYD and SAIC) have dramatically increased exports globally – but almost none to the U.S., focusing on Europe, the Middle East, and Southeast Asia. The inability to access the U.S. due to tariffs and political barriers means China is doubling down elsewhere. For instance, Europe has seen a surge of Chinese EV imports, which is indirectly a result of U.S. tariffs funneling China’s export energy into other markets.

An interesting strategic industry angle is electric vehicles and batteries. The U.S. has introduced its own industrial policy (the Inflation Reduction Act of 2022) that, among other things, conditions EV tax credits on non-Chinese battery materials. This is not a tariff, but it complements the trade war by dis-incentivizing Chinese components in U.S. EVs. Already, we see major battery investments in the U.S. (often by Korean firms) aiming to create a China-free supply chain for EVs to qualify for subsidies. China, the dominant producer of EV batteries, finds itself largely excluded from this fast-growing segment of the U.S. market.

Logistics note: As the 90-day tariff truce clock ticks, U.S. importers of auto parts and vehicles (like some specialty cars) are rushing shipments. There’s been a notable uptick in auto parts volume through West Coast ports in May as companies try to get ahead of any reversion to higher tariffs in August. Shipping rates for car-sized containers have nudged up.

In the near term, U.S. and China are unlikely to directly resume large-scale auto trade. Instead, production localization is the new normal: each sells in the other’s market mostly via factories inside that market (Tesla Shanghai for China, Ford Kansas City for the U.S., etc.). The risk for automakers is if the trade war intensifies again after the truce – further tariffs on parts or on raw materials (like lithium, where China dominates processing) could come into play, adding another jolt of cost. Automakers are thus intensely lobbying both governments for at least a stable trade environment. As of this week, they will be watching any signals from the Geneva talks on whether the auto tariffs will remain paused or possibly restructured in a future deal (for example, could the U.S. offer to drop the 25% global auto tariff in exchange for something from China? Such horse-trading has been rumored). Until clarity emerges, the auto industry will continue hedging its bets, splitting supply chains by region and investing in “friend-shoring” for critical components to weather the U.S.–China decoupling.

Energy

BLUF: Energy trade flows have shifted – China has sharply reduced purchases of U.S. energy commodities under tariffs (turning to other suppliers), while U.S. energy exporters have largely found alternate buyers, but both sides face strategic vulnerabilities in areas like oil, LNG, and critical minerals for energy tech.

Energy was a surprising battleground in the trade war. In the 2020 Phase One deal, China had pledged to buy large quantities of U.S. energy (oil, liquefied natural gas, coal), but those targets were never fully met. By 2025, with tariff escalation, China essentially walked away from those commitments. When the U.S. imposed sweeping tariffs in early 2025, China retaliated by including American energy exports on its 125% tariff list – notably crude oil and LNG. These tariffs made U.S. LNG prohibitively expensive for Chinese importers, leading them to cancel or divert shipments. For context, in 2017 China was a significant buyer of U.S. crude and LNG; by April 2025, those purchases dropped to near zero. Chinese state gas companies instead signed increased contracts with Qatar and Russia for LNG, and China’s refiners boosted imports of Middle Eastern and Russian crude to substitute American oil.

The effect on the U.S. energy sector was mitigated by the flexibility of commodity markets. U.S. crude oil that would have gone to China simply went to other countries (sometimes even indirectly to China via traders swapping cargoes). Global oil is fungible, and China’s self-imposed avoidance of U.S. crude marginally widened the discount on Texas oil, benefiting European and Indian refiners who snapped it up. However, U.S. LNG exporters felt the pinch: China is the world’s largest LNG growth market, and losing direct access meant U.S. LNG developers had to rely on Europe and smaller Asian buyers. In fact, a few second-wave U.S. LNG projects struggled to secure Chinese long-term contracts (vital for financing) due to the geopolitical risk, slowing their progress. Now, with the truce, China’s tariff on U.S. energy is down to 10%, theoretically reopening a window for some purchases. Indeed, industry reports suggest a couple of LNG cargoes were booked by Chinese buyers for June delivery, taking advantage of lower prices and the temporary tariff relief. But this could be just opportunistic; Chinese importers remain wary of becoming dependent on U.S. supply that could be disrupted by politics.

Energy is also entangled with strategic issues: sanctions and alliances. The U.S. has sanctioned Chinese firms involved in transporting Iranian oil, for example, complicating China’s energy sourcing. China, for its part, has deepened energy ties with Russia (which, under Western sanctions, is selling oil/gas at a discount – a boon for Chinese industry). This strategic re-routing of energy flows isn’t a direct tariff matter but is a consequence of the broader East-West decoupling accelerated by the trade war and geopolitical rifts.

In terms of renewable energy technology, tariffs have played a role too. The U.S. maintains tariffs on Chinese solar panels (originating from earlier anti-dumping cases, now folded into the broader tariff war context). These tariffs (around 15–30%) on solar modules led to a diversification of U.S. solar imports toward Southeast Asian-made panels (though many are produced by Chinese companies operating in those countries). The U.S. also put new tariffs on Chinese-made electric vehicle batteries and components, aligning with its goal to foster domestic battery manufacturing. For China, these measures mean its dominance in green tech manufacturing faces barriers in the U.S. market, potentially slowing U.S. clean energy deployment in the short term (due to higher costs) but aiding development of U.S. capacity in the long run.

One cannot ignore critical minerals in the energy context. Lithium, cobalt, nickel – vital for EV batteries – are largely processed in China. While not explicitly tariffed yet, they are on the radar. If talks falter, the U.S. could impose tariffs or export controls targeting Chinese battery materials, or conversely China could restrict exports of lithium hydroxide or other refined materials. Such moves would send shockwaves through the EV supply chain globally. Indeed, China’s rare earth export control (as mentioned in Steel & Metals) also threatens energy technologies like wind turbines and EV motors.

This week, energy traders will be observing whether China quietly increases U.S. oil or LNG purchases during the tariff cease-fire. Any uptick would be a confidence-building sign. Conversely, if China continues to shun U.S. energy, it signals expectations of protracted tension. The price environment also plays a role: global oil prices are relatively stable around $70–75/barrel; U.S. exporters remain competitive even without China, but they’d welcome the arbitrage if China re-enters as a buyer.

In summary, while direct U.S.–China energy trade is a casualty of tariffs (and counter-tariffs), global markets have largely adjusted. The larger risks in energy lie in strategic leverage: China’s alignment with sanctioned suppliers (Russia, Iran) and control of energy-critical supply chains, versus U.S. efforts to build more resilient, ally-based networks. The tariffs have, in effect, nudged both countries to strengthen those alternate networks, reducing direct interdependence in energy. That may enhance each side’s energy security in some dimensions, but it reduces economic incentive to maintain good relations. It’s a classic double-edged sword: less vulnerability, but also less mutual benefit – which in the long run can heighten the risk of conflict.

Pharmaceuticals

BLUF: Healthcare supply chains are under the microscope – historically exempt from tariffs, pharmaceuticals got swept into the fray in 2025, prompting a surge in drug imports to avoid potential tariffs. The U.S. fears over-reliance on China for drug ingredients, while China worries about access to Western medicines, making pharma a new front for trade (and security) risk.

Until recently, pharmaceuticals and medical supplies were largely spared in the U.S.–China trade conflict – a recognition of their critical nature. However, that changed this year. The Trump administration launched a trade probe into pharmaceutical imports, arguing that heavy U.S. dependence on foreign (especially Chinese and Indian) drug production is a national security risk (a rationale similar to steel tariffs). By May 2025, it was widely expected that the U.S. would impose tariffs or other restrictions on imported medicines and precursors. Drugmakers reacted swiftly: in March 2025, U.S. pharmaceutical imports shot to a record high, as companies rushed to stockpile. Remarkably, over $50 billion in pharma products were imported in March alone – roughly 20% of the entire previous year’s imports – in a frantic effort to build inventory before any tariffs hit. The majority of this surge came from Ireland (a major production hub for big pharma), which alone shipped an extra $15+ billion in drugs, making Ireland temporarily the top U.S. trade partner in goods by value that month. This extraordinary event underscores how seriously the industry took the tariff threat.

China’s role in pharma is twofold: it is a huge exporter of Active Pharmaceutical Ingredients (APIs) – the chemical building blocks of drugs – and also a growing consumer market for finished drugs (particularly biotech and specialty drugs made by U.S./EU firms). The U.S. sources a significant share of certain APIs and precursor chemicals from China (and India, which often gets them from China). These inputs historically flowed tariff-free. If the U.S. were to tariff these, it could disrupt drug manufacturing or raise costs for generics. On the other side, China imports a lot of patented drugs from American and European pharmaceutical companies. In retaliation to U.S. measures, China could impose tariffs or restrictions on those drugs, but that would hurt its own patients and healthcare system. Thus far, Beijing has tread carefully here – in fact, in recent years China had lowered tariffs on imported cancer drugs and others, as part of healthcare reforms. That progress could reverse if trade tensions spill into pharma.

Indeed, the mere possibility of Chinese retaliation in pharma has U.S. firms on edge. For example, Pfizer and Merck derive significant revenues from China for certain therapies. If China slapped, say, a 25% tariff on U.S. medicines (or favored European and domestic generics), it could hit those companies’ revenues. There’s also the non-tariff angle: China could slow walk drug approvals for American drugs or step up regulatory scrutiny as an informal pressure tactic.

For now, neither side wants to be seen as denying medicines to populations, so a delicate dance is underway. The U.S. framing is “we need to onshore production for security”; the Chinese framing could be “we need reliable access to drugs, so we’ll develop our own pharma industry.” Both are happening. The U.S. has invoked the Defense Production Act in some cases to incentivize domestic API manufacturing (e.g. penicillin precursor production restarted in the U.S. with federal support). China, through its “Made in China 2025” plan, has been pushing to produce more high-end pharmaceuticals domestically and reduce reliance on imports of expensive biologic drugs.

From a risk perspective, pharmaceuticals have quickly gone from a non-issue to a potential high-risk sector in trade. This week, industry insiders are anxiously awaiting an announcement from President Trump on whether broad drug tariffs will be imposed. He indicated an announcement would come by end of May. Should tariffs be levied on, for example, Chinese antibiotics or analgesics, we can expect immediate supply chain reverberations – possibly shortages or price spikes for certain generic drugs in the U.S. There’s also the complexity of defining what counts as “Chinese” in a global pharma supply chain: a drug might be formulated in India but using Chinese-made API – under a strict view, that could still fall under a tariff. The logistics of enforcement and the risk of drug shortages make this a very tricky area.

In summary, the pharmaceuticals sector highlights the new evolution of the trade war into essential goods. It underscores a key vulnerability: the U.S. reliance on China (and global supply chains generally) for health needs, and China’s reliance on foreign advanced medicines. Both sides are now racing to reduce that interdependence – the U.S. via reshoring and stockpiling, China via fostering domestic champions – but those are multi-year endeavors. In the interim, missteps (like an ill-timed tariff or overly broad restriction) could literally be life-threatening in effect. It’s a stark reminder that trade wars don’t happen in a vacuum – they have human consequences. The hope is that negotiators in this 90-day truce recognize the mutual interest in excluding truly critical medical supplies from the line of fire even as they bargain hard in other areas.

Consumer Goods

BLUF: Everyday consumer goods are caught in the crossfire – U.S. shoppers face higher prices and fewer choices as tariffs raise costs on appliances, electronics, furniture, and apparel, while Chinese consumer-goods exporters are rapidly losing their dominant position in the U.S. market, pivoting to alternative markets or moving production abroad.

American consumers have started to feel the tangible bite of tariffs most directly through consumer goods. The 2025 tariff escalation encompassed virtually all remaining consumer products from China that had avoided earlier duties. This means items like toys, baby products, electronics accessories, furniture, clothing, footwear, appliances, kitchenware – the staples of big-box retail – are now tariffed, many at effective rates around 30–40%. The result: noticeable price increases. The Budget Lab analysis showed short-run consumer price jumps in sensitive categories (15% for shoes, 14% for apparel). Across all consumer goods, the overall Personal Consumption Expenditures (PCE) price index is about 1.4% higher post-substitution than it would be without the 2025 tariffs – a not insignificant bump, given that’s an average across the entire consumption basket.

Retailers are employing various strategies to cope. Large retailers like Walmart and Target have massive sourcing operations and have been pushing suppliers to cut costs or relocate. We’ve seen an acceleration of sourcing from countries like Vietnam, Bangladesh, India, Mexico, and Turkey for consumer merchandise. For example, Vietnam’s share of U.S. apparel imports climbed, as did Indonesia’s share of furniture imports. This diversification was already underway since the 2018–2019 trade war and has reached new levels in 2025. However, this process takes time – new factories, quality control, shipping logistics – and in the interim, many importers simply paid the tariffs and passed costs on.

From a Chinese perspective, the consumer goods sectors (textiles, furniture, consumer electronics, household goods) are significant employers. The drop in U.S. orders has hit thousands of factories, especially in southern China. Some have moved – Chinese-owned factories relocated to Vietnam, Cambodia, or even Mexico (to take advantage of USMCA) to keep serving the U.S. market from a different base. Others have tried to pivot to selling more domestically within China, aided by the growing Chinese middle-class demand. The Chinese government has also stepped in with measures like export tax rebates and currency management (the renminbi was allowed to weaken at points, which helped offset some tariff impact by making Chinese goods cheaper in dollar terms). Indeed, the CNY/USD exchange rate has seen high volatility throughout the trade war – at one point in spring, the yuan depreciated beyond 7.3 to the dollar as tariffs peaked, partly cushioning Chinese exporters; after the truce, the yuan bounced back to around 7.2 as financial markets grew optimistic. Such swings affect the competitiveness of Chinese consumer goods and import costs for U.S. firms, adding another layer of unpredictability.

The psychological factor is also at play. U.S.–China tensions have perhaps dented the appeal of certain Chinese consumer brands in the U.S. There weren’t many to begin with (most Chinese consumer exports are sold under U.S. or generic brands), but consider categories like smartphones (OnePlus had niche sales which are now negligible) or appliances (brands like Midea or Haier operate largely through their acquired U.S. subsidiaries now). On the flip side, Chinese consumers have periodically boycotted U.S. consumer brands during spikes in political tension – though in this trade war, nationalism has focused more on tech and autos than everyday goods.

One notable development: empty shelves and stockouts. During the worst escalation in April, importers feared supply disruptions. Some smaller retailers, unable to afford tariff costs or find quick alternatives, ended up with shortages of products. There were reports of sporadic empty store shelves for certain seasonal items in late April, evoking memories of supply crunches from the COVID-19 era. The tariff truce has alleviated this for now; businesses are frenetically restocking during the 90-day pause. Indeed, U.S. imports from China surged in May as companies engage in “front-loading” – importing as much as possible before the tariff respite potentially expires. This has temporarily replenished inventories (and incidentally, boosted demand for warehousing and trucking in the logistics sector – a short-term boom in an otherwise challenged freight market).

Looking at the data, China’s share of U.S. imports of consumer goods has fallen significantly. For example, in electronics: China used to supply over 75% of U.S. mobile phones; now with production shifts to India and elsewhere for some brands, that share is dropping. In furniture, China’s share of U.S. imports fell from ~50% a few years ago to closer to 30% as of early 2025. Cumulatively, these shifts are captured in the statistic that China’s overall share of U.S. goods imports slid from 14% in 2024 to about 6% under the tariffs after substitution – a dramatic reshaping of sourcing patterns.

For U.S. consumers, the forecast is unfortunately persistent higher prices in many categories. Even if a broader trade deal eventually lowers some tariffs, companies have incurred new costs from supply chain re-engineering that won’t fully unwind. Additionally, many alternate suppliers have higher production costs than China, which means the era of ultra-cheap consumer goods might be ending. On the other hand, if the truce holds and perhaps partial tariff relief is negotiated, we could see some price moderation later in the year. In the short term (this week and next), retailers are more concerned with managing inventory and pricing for the summer. They will be making decisions now on fall and holiday season orders – with great uncertainty about whether tariffs will snap back by then. This uncertainty itself is a risk: it may lead to more conservative ordering (to avoid tariff exposure), which could mean thinner product assortments for consumers and lost sales for both U.S. importers and Chinese exporters.

In sum, consumer goods illustrate the core trade-off of the tariff war: protection vs. price. The U.S. aimed to protect industries and push manufacturing home; instead, it mostly diverted trade to other foreign suppliers and raised costs for businesses and households. China aimed to punish the U.S. with counter-tariffs; in doing so it hurt its own export sector and gave up market share. Neither side “wins” in this category, but consumers globally pay more. That theme resonates as we look to the next sections on supply chain and strategic industries, where the costs are measured not just in dollars, but in systemic adjustments that will outlast the immediate conflict.

Logistics & Supply Chain

BLUF: Global supply chains are undergoing a structural realignment – U.S.–China tariffs have pushed companies to redesign logistics, from sourcing to shipping. In the short run, this has meant port congestion and higher freight costs during the tariff truce rush, and in the long run a more fragmented, less efficient supply chain network as trade patterns shift.

The logistics sector has been whipsawed by the trade war. The ebb and flow of tariffs produced surges of “front-loading” imports followed by sharp drop-offs. For example, as noted, with the announcement of the tariff pause in May, U.S. importers rushed to stock up on Chinese goods during the 90-day window. This has led to a spike in container volumes at major U.S. gateways like the Ports of Los Angeles/Long Beach in May. Container shipping rates from China to the U.S. West Coast, which had been in a lull, jumped in mid-May as space tightened with the sudden influx of bookings. Logistics providers (freight forwarders, trucking companies, warehouses) are experiencing something of a mini-peak season out of sync with normal patterns.

During the height of the tariff escalation in April, by contrast, volumes plummeted. U.S.–China trade flows contracted by upwards of 90% in value in certain weeks, essentially a sudden stop for many routes. That volatility is costly. Warehouses were caught with either too much inventory (pre-tariff stockpiling left some with glut) or too little (companies that held off on ordering due to tariff fear). The uncertainty forced firms to adopt more buffer stock and diversify ports of entry. Some importers routed goods through Canada or Mexico to see if they could find any duty savings or just to avoid congested U.S. ports during rushes (though ultimately the tariff applies regardless of entry, unless substantial transformation happens in transit).

A key feature of the supply chain shifts is geographical reallocation of sourcing. We’ve touched on how Southeast Asia and Mexico have gained share at China’s expense. This is evident in logistics data: U.S. inbound shipments from Vietnam, Thailand, India, and Mexico are all up double-digits year-over-year, while those from China are down. Ocean carriers have responded by adding capacity on routes from Southeast Asia to the U.S., and some are contemplating reducing direct China–US lanes if demand remains structurally lower. Air freight has also been impacted; high-tech products that moved by air from China (like smartphones) are now sometimes coming from India or Vietnam by air, causing shifts in air cargo lanes. During the tariff war crescendo, some companies even chartered air cargo to rush critical components before tariffs hit – a throwback to the frenetic days of early COVID supply issues.

Transshipment and circumvention have become dirty words in trade compliance but a practical reality in logistics. The CFR analysis noted how Chinese exports to Southeast Asia surged in April as a likely conduit to re-export. Logistics firms in Singapore, Malaysia, and Vietnam have reported Chinese clients seeking warehousing and light assembly services – basically to give Chinese-origin goods a slight transformation and new origin label. U.S. Customs is aware of these tricks and has stepped up inspections and country-of-origin verifications. Just last week, a large shipment of apparel was seized at a U.S. port on suspicions that it was Chinese-made but funneled through Vietnam to evade tariffs. The U.S. is considering stricter penalties for such evasion. This cat-and-mouse game adds friction and cost to supply chains. Legitimate shippers face more paperwork and potential delays as scrutiny rises.

Another logistic angle is inventory strategies. The trade war has shaken confidence in “just-in-time” lean inventory models. Many firms, burnt by sudden tariff announcements, are moving to “just-in-case” – keeping more inventory in stock or nearer to customers. This benefits warehouse operators and possibly domestic manufacturers, but it’s a less efficient use of capital. For instance, a U.S. electronics importer might now keep 8 weeks of inventory on hand instead of 4, tying up cash but providing a buffer against the next tariff surprise. Such shifts, multiplied across industries, could subtly slow economic productivity (more cash in inventory means less for investment). However, it’s a rational risk response to an unpredictable trade environment.

In terms of numbers, one telling metric: China’s share of U.S. import container volume has declined significantly. In 2017, about 40% of containers coming into the Ports of LA/LB originated from China; in 2025 so far, that is down to around 25%, with notable rises from ASEAN countries. U.S. East Coast ports also report more shipments from South Asia (India, Bangladesh) as retailers diversify sourcing of apparel and textiles. Additionally, cross-border trucking from Mexico to the U.S. hit record levels in early 2025, as nearshoring efforts bear fruit. All these indicate a more distributed supply chain network.

While diversification can increase resiliency, it often reduces economies of scale. Shipping from ten countries instead of one can mean smaller lots from each, less bargaining power on price, and more complex logistics coordination. In the long run, this inefficiency is a cost of decoupling. Analysts estimate the global trade war (U.S.–China and others) could add 5-10% to aggregate supply chain costs for multinational businesses, costs that eventually pass to consumers or reduce profits.

For logistics providers themselves, adaptation is key. Firms are investing in supply chain visibility tech – tools that quickly reroute shipments or swap sourcing when tariff news hits. Flexibility is now a selling point: 3PLs advertise their multi-country network that can “swiftly shift sourcing out of China.” Shipping lines are adjusting vessel deployment to new patterns. Even infrastructure investments are being rethought: ports in Southeast Asia are expanding capacity, while some West Coast U.S. ports worry about overcapacity if China volumes don’t return.

This week, the logistics sector is primarily focused on managing the ongoing surge of imports during the truce. Rail yards and trucking in California are busy clearing backlogs. There’s a watch on the calendar: importers want as much as possible landed by mid-July in case tariffs snap back in August. If negotiations go poorly or no extension of the pause is signaled by late June, expect another wave of panic ordering in early July. Conversely, if positive signals emerge, the rush might temper.

In conclusion, the trade war has injected a permanent layer of uncertainty into logistics. Supply chain agility has gone from a niche concern to a mainstream corporate priority. The ability to rapidly reconfigure sourcing and shipping is now almost as important as product quality or cost in evaluating suppliers. This is a profound shift. While it may make supply networks more robust to geopolitical shocks, it undeniably comes at the cost of lost efficiency and higher base operating costs – a “tariff tax” on the entire supply chain, even for goods not ultimately tariffed.

Defense & Strategic Industries

BLUF: Strategic industries – from defense contractors to telecom and aerospace – are entwined with the trade conflict, facing supply chain risks (like rare earth shortages and tech decoupling) and policy uncertainty. The trade war has escalated into a broader geo-strategic contest with tariffs just one tool among many (sanctions, export bans), raising long-term risks for security-sensitive sectors in both nations.

The defense sector epitomizes the complex interdependencies that have now come under scrutiny. The U.S. defense industry relies on certain Chinese inputs – notably rare earth elements for missiles, jet engines, and electronics. China’s move in April to restrict exports of seven critical rare earths and magnet products sent a clear signal: if provoked, Beijing is willing to squeeze the U.S. military supply chain. U.S. defense contractors like Lockheed Martin and Raytheon quickly convened task forces to assess inventories and alternative sources. The Pentagon has some stockpiles and can lean on Australia or an emerging U.S. mine for a fraction of needs, but a prolonged cutoff would be challenging. The weaponization of rare earth dominance by China is viewed as a direct strategic countermeasure to U.S. pressure. It has prompted calls in Congress for emergency measures – including perhaps invoking the Defense Production Act to jump-start domestic rare earth processing, and even considerations to partner with ally nations to create a rare earth reserve.

From China’s perspective, strategic industries include areas like aerospace, telecommunications, and advanced manufacturing critical to national security. Here, U.S. actions have been aggressive beyond tariffs. The Commerce Department’s entity list bans have cut off Chinese companies like Huawei and dozens of others from U.S. technology. This has strategic implications: for example, China’s defense industry modernization depends in part on access to advanced chips and machine tools, which are now restricted. Similarly, commercial aerospace is entangled – China has been a major customer of Boeing aircraft. However, amid trade and political tensions (and Boeing’s own 737 MAX issues), China delayed purchases of U.S. jets, effectively favoring Europe’s Airbus. Boeing has historically counted on China for a large share of orders; now there’s a strategic risk that China’s aviation market tilts permanently toward Airbus (and eventually a domestic Chinese competitor, the COMAC C919). That is a loss not just in commerce but in soft power and mutual dependence that used to tie the U.S. and China together.

Strategic decoupling is not just a phrase but observable reality in some sectors. Take telecommunications: Chinese 5G equipment from Huawei would likely have formed part of U.S. rural telecom networks absent the conflict, but instead the U.S. not only banned it domestically, it is lobbying allies to do the same. Meanwhile, China is purging or auditing U.S. tech from sensitive systems (e.g., no Microsoft Windows on certain government computers, moving to local Linux variants, etc.). Over time, this could create two parallel tech ecosystems – one Chinese-led and one Western-led – which is a strategic alignment of nations beyond just the U.S. and China. Companies in defense and tech now must factor in geopolitical alignment: for instance, a chipmaker in Taiwan or Netherlands has to consider U.S. export restrictions or else risk losing U.S. business; a telecom operator in developing Asia might have to choose between cheaper Chinese gear or Western gear with political strings.

The Taiwan Strait factor looms large as well, as highlighted by investors. Taiwan is a linchpin in strategic supply chains (TSMC for semiconductors) and a flashpoint militarily. The trade war has heightened awareness of this risk. As of May 22, 2025, markets assign a roughly 12% probability to a China-Taiwan conflict in the coming year (based on betting odds) – which is low, but non-negligible and higher than a few years ago. Foreign investors have pulled money from Taiwan’s stock market partly over tariff and war worries. Any conflict would obviously dwarf tariff concerns, but tariffs are feeding into the tensions by economic estrangement. For defense industries, this tail-risk is huge: a China-Taiwan conflict could mean an immediate cutoff of all trade, sanctions on China, and an urgent surge in defense spending and production in the U.S. (with all the supply challenges that entails).

In the shorter term, strategic industries face policy risk more than immediate tariff cost. They are often cushioned from tariffs (the U.S. government can waive tariffs on imports for defense needs quietly, if required). But they face uncertainty about future regulations and sanctions. For example, will the U.S. restrict outbound investment in Chinese tech companies? (This has been proposed – preventing U.S. venture capital from funding Chinese AI or quantum startups.) Such a move would further isolate strategic tech sectors. Will China retaliate by detaining executives or sanctioning U.S. companies like Boeing or Raytheon directly? (Already, China sanctioned two U.S. defense firms in 2023, a largely symbolic step since they don’t do direct business in China, but it shows tit-for-tat could extend beyond tariffs.)

One specific event: China’s cybersecurity review and subsequent ban of Micron’s products in sensitive sectors this May is a strategic warning shot. It demonstrates China can inflict pain on a U.S. tech firm (Micron derives ~10% of its revenue from China) under the guise of security. If the U.S. escalates (e.g., bans sales of even more chip tech to China), China could similarly ban or hamper other big U.S. companies in China – think Apple (whom China could hurt by curbing its China sales or assembly plants), or Microsoft, etc. Those companies aren’t defense contractors, but in a strategic showdown they could be leverage.

All these scenarios mean strategic industries must incorporate political risk management as a core part of their operations now. Diversifying supply chains (e.g., ensuring critical components have non-Chinese sources or stockpiles), lobbying for government support or clarity, and cyber-security (fear of espionage related to trade tensions is high) are all top of mind for executives in these sectors.

This week, one tangible thing to watch: high-level diplomacy. Defense and strategic issues are often discussed in parallel to trade talks. Any hint that the U.S. and China might revive military-to-military communication or set guardrails around tech competition would ease risk for strategic industries. Conversely, harsh rhetoric around Taiwan in either Washington or Beijing would spook investors in these sectors anew. For example, President Trump’s recent hints at a “new global order” and ambiguous stance on defending Taiwan have raised eyebrows; such signals weigh on calculations for companies like Taiwanese chipmakers (who supply both sides).

In summary, defense and strategic sectors operate in the shadow of the trade war but are intrinsically linked. Tariffs have morphed into a broad-spectrum rivalry affecting strategic self-reliance goals on both sides. The risk is less about a specific tariff on a missile or jet, and more about an environment where each side is systematically unwinding the technological and resource interdependencies that defined the past two decades. That may reduce some vulnerabilities (no one wants their military power reliant on a geopolitical rival), but it also removes stabilizing ties and could accelerate an arms race. For industries in this space, the trade war is not business as usual – it’s business in a new Cold War-light context.

Tariff Vulnerability Risk Scoring

To quantify the comparative vulnerability of the U.S. and Chinese economies to ongoing tariff and trade frictions, we construct indicative risk scoring equations. These formulas incorporate a range of sub-factors (macroeconomic, financial, and geopolitical) that contribute to each country’s exposure. Each factor can be thought of as a weighted term (with weights reflecting relative importance) – while we won’t assign specific weights here, we include them as coefficients for completeness. These equations highlight the multifaceted nature of tariff-related risk.

Market Predictions & Investment Strategies

Given the analysis above, we now turn to actionable market implications. Both U.S. and Chinese markets face elevated risks from the tariff environment, but also opportunities in sectors or assets that can avoid or even benefit from trade turmoil. Below are several predictions and recommendations for the week and near-term, with a focus on avoiding tariff-related risk:

• Defensive U.S. Equities – Stay Domestic: Investors should favor U.S. companies with minimal China exposure in their revenue or supply chains. For example, utility and domestic telecom stocks (which derive revenue entirely from within the U.S. and source equipment from multiple countries) are insulated from tariff issues. An ETF like Utilities Select Sector SPDR (XLU) could provide stable exposure here. Conversely, avoid U.S. multinationals heavily reliant on China. Industrial names such as Caterpillar (CAT) and Boeing (BA) face ongoing headwinds – Caterpillar has seen hundreds of millions in added costs and slower China sales, and Boeing’s recovery is hampered by Chinese order delays. These stocks may underperform as trade uncertainty persists. Indeed, Caterpillar’s share price is down ~5% year-to-date, reflecting some of this strain, and could lag further if talks falter.

• Semiconductor Sector – Hedge or Reduce Exposure: The Philadelphia Semiconductor Index (SOX) rebounded after the tariff truce, but underlying risks remain for chipmakers with China ties. Qualcomm (QCOM), for instance, gets roughly half its revenue from Chinese customers and is vulnerable to export curbs and lost sales. Similarly, memory maker Micron (MU) faces Chinese bans on its products. These stocks have rallied recently, yet any negative turn in negotiations or new tech sanctions could send them lower again. Investors may consider put options or inverse ETFs (like SOXS) to hedge semiconductor exposure through the next rounds of talks. Alternatively, rotate into semiconductors less exposed to China – for example, analog chipmakers focused on automotive and industrial end-markets (with more domestic demand) might be safer.

• Emerging Markets – Shift from China to Neighbors: Within emerging market allocations, reduce weight on China and increase exposure to economies picking up the trade slack. As U.S.–China decoupling continues, countries like Vietnam, India, and Mexico stand to gain export market share. Investors can use an ETF such as Emerging Markets Ex-China ETF (EMXC) to avoid China-specific risk while keeping EM exposure. Another targeted play: Vietnam’s equity market via the VanEck Vietnam ETF (VNM). Vietnam is attracting significant manufacturing inflows (electronics, apparel) due to tariffs, which should bolster its growth. Indeed, foreign direct investment into Vietnam hit record highs, and its trade surplus with the U.S. is rising. Be mindful that if U.S. trade hawks turn sights on Vietnam (given its surging exports), there could be future risk, but in the near term Vietnam is seen as a beneficiary.

• Commodities & Resources – Hedge Critical Materials: The rare earth and critical mineral situation suggests opportunities in non-Chinese suppliers. One U.S.-listed rare earth miner, MP Materials (MP), operates the only rare earth mine in the U.S. Their stock could appreciate if China’s export curbs persist, as MP will be key to supplying Western demand. Similarly, Australian rare earth producer Lynas Rare Earths (LYSCF) (traded OTC in the US) stands to gain – it has already seen increased orders from Japanese and U.S. customers diversifying from China. These are speculative picks (dependent on policy follow-through), but they serve as a hedge against an escalation in the resource war. On the flip side, avoid companies highly dependent on Chinese raw materials without alternatives – for example, some specialty chemical firms and battery manufacturers that lack non-China suppliers could face input shortages or cost spikes.

• Consumer Stocks – Caution on Retailers with China-dependent Supply Chains: U.S. retail giants like Walmart (WMT) and Target (TGT) have navigated tariffs via supply diversification, but they still source a large volume of goods from China. While these companies are fundamentally strong, in an escalating tariff scenario they could see margin pressure (Walmart’s CFO recently warned a particular Chinese-made car seat could see a 29% price increase, illustrating the challenge). For an investor looking to avoid trade risk, consider rotating into retailers or consumer product companies that manufacture predominantly in the Americas or have pricing power to pass costs. For example, Dollar General (DG) sources heavily from domestic and nearshore suppliers for many goods and serves a segment where demand is steady – they might be less affected by tariffs on discretionary imports. In contrast, Best Buy (BBY), which sells consumer electronics primarily made in China, remains at risk if the electronics tariff relief is temporary – a reason its stock could face pressure if talks wobble.

• Chinese Equities – Focus on Domestic Demand Play, Avoid Exporters: Within Chinese markets, the winners and losers of the trade war are sorting out. Chinese companies focused on the domestic market or non-U.S. markets are relatively safer. For instance, Alibaba (BABA) and JD.com (JD), as e-commerce platforms serving Chinese consumers, are less directly hurt by tariffs (though broader economic slowdown can hit them). They might actually benefit if the Chinese government stimulates domestic spending to counter export weakness. Meanwhile, Chinese manufacturing exporters – e.g. low-end electronics manufacturers, textiles firms – are struggling. Listed companies like TCL Electronics (which makes TVs and appliances) have seen overseas revenue growth stall. If accessible, investors might underweight indices like the MSCI China that include many state-owned exporters and instead overweight consumer-tech oriented indices or A-share indexes heavy in domestic industries (health care, telecom, etc.). Another approach is hedging: one could short Hong Kong-listed export-centric names or use an inverse China ETF (YANG for aggressive short exposure) if expecting trade talks to collapse. Caution: Chinese markets are also buoyed by expectations of government stimulus, so outright shorts carry political risk (Beijing could announce new infrastructure spending or rate cuts to support the market).

• Currency Moves – Position for Continued Yuan Volatility: Currency markets are tricky to play directly, but the trend has been yuan weakness during conflict escalation and partial strength on truces. If one expects rocky negotiations ahead, one strategy is to go long USD/CNY (long dollar, short yuan). However, direct access is limited for many investors. An alternative is via instruments like CYB (Chinese yuan ETF) or simply ensuring any China-related investments are USD-hedged. Conversely, should a comprehensive deal emerge (low probability in one week, but possibly later), the yuan could rally further – at that point, unhedged exposure or CNY longs would pay off. For now, the safer stance is assume yuan depreciation pressure will resume if uncertainty grows. Notably, the Japanese yen has acted as a safe-haven – one might buy yen (for example, via FXY ETF) as a hedge against worst-case U.S.–China fallout, which would likely spur risk aversion globally.

• Bonds and Safe Havens – Moderate Allocation for Turbulence: With trade tensions still one headline away from flaring, keep some allocation to safe havens like U.S. Treasuries or gold. Gold has performed decently amid dollar strength and could shine if either inflation ticks up (from tariffs) or crises deepen. An ETF like SPDR Gold Trust (GLD) provides exposure. U.S. Treasuries, as seen in April’s scare, rallied (yields fell) when the market feared global recession from all-out trade war. Holding some Treasury ETF (IEF for intermediate-term) can buffer equity risk. The current yield ~3.4% also compensates modestly while waiting out volatility. If negotiations show clear positive direction, these hedges might underperform risk assets, but given binary outcomes, a balanced approach is wise.

In crafting these strategies, the guiding principle is risk avoidance and mitigation in face of trade uncertainty. Many of the recommendations favor reducing exposure to the most tariff-sensitive revenues and costs, and increasing exposure to those agile or insulated from the frictions. This approach may sacrifice some upside if a sudden comprehensive peace breaks out (since, for example, Chinese export-reliant stocks would soar in that event). However, given the still fragile and tactical nature of the current truce, a defensive posture that prioritizes capital preservation and minimizes tariff fallout is appropriate for savvy investors at this juncture.

Forecasts for May 22–29, 2025

Looking at the immediate week ahead, we anticipate the following developments and trends, based on available information and the state of play in negotiations:

• Trade Negotiation Climate – Cautious Optimism: U.S. and Chinese negotiators will likely hold at least one mid-level virtual meeting this week to follow up on the Geneva talks. Public messaging is expected to remain upbeat (both sides calling the talks “productive”) as they try to maintain market calm. We do not expect a full deal by May 29, but signs of interim progress may emerge – for instance, rumors of China drafting a list of further concessions (on agricultural purchases or intellectual property) might surface in the press. Both sides have an incentive to show progress before the 90-day clock runs too low. Therefore, the baseline forecast is continued negotiating without collapse: no new tariffs will be imposed this week, and the 10% placeholder tariffs stay in effect.

• Tariff Policy – Status Quo Maintained: Neither the U.S. nor China is likely to make abrupt tariff policy changes in the coming week. The U.S. will keep its tariff rates at 30% (extra on Chinese imports) as agreed, and China will maintain its 10% retaliatory rate. Watch for a possible USTR announcement extending exclusions for certain critical imports – for example, if pharma tariffs remain a threat, USTR might quietly extend tariff exclusions on some medical products to avoid immediate shortages. China, on its part, might publish a list of U.S. goods still facing higher duty (from prior retaliation) that it plans to temporarily exempt to facilitate goodwill purchases (e.g. maybe exempting some agricultural import tariffs for state buyers). If such a list is released, it’s a bullish signal for talks.

• Macro Data – Trade and Manufacturing Softness: We will see some economic data releases (e.g. May flash PMIs and weekly export figures). Expect U.S. export sales to China in soybeans, sorghum, etc., to remain very low in the weekly USDA report – confirming that China hasn’t significantly resumed purchases despite the truce (aside from possibly small buys). U.S. durable goods orders (if reported this week) might show weakness in categories like machinery, aligning with tariff drag. In China, industrial profits data or PMI may be due: forecast is a contraction in export-oriented sectors’ profitability, given the March-April turmoil. Markets are already braced for this, so the impact may be muted unless it’s dramatically worse than expected.

• Corporate Guidance – Earnings and Warnings: It’s late in earnings season, but any companies with off-calendar fiscal quarters (or those at investor conferences) might update guidance. We predict more cautious commentary from firms reliant on China trade. For example, HP and Dell might speak about PC demand and could mention (if at a tech conference) that they are shifting production and that tariffs have thus far been manageable – hinting if truce holds, impact is limited, but also implying readiness if they re-escalate. We also anticipate at least one profit warning from a mid-sized industrial supplier citing tariff costs – these have trickled out over April/May and could continue as the reality of higher input costs sets in.

• Market Reaction – Range-bound but Headline-Sensitive: Financial markets in the coming week are likely to trade in a range, with a slightly positive bias carrying over from the tariff pause rally. However, headline risk remains: any leak of difficulties (say, an official anonymously saying “talks have serious sticking points on tech transfers”) could cause a quick pullback in equities and a bid for Treasuries. Conversely, news of planned high-level talks (e.g. scheduling a Treasury Secretary visit to Beijing) would boost sentiment. Our base case is no major disruptive headline either way by May 29 – hence the S&P 500 might hover around the low 4000s, and the yuan around 7.2–7.3. Volatility (VIX) likely drifts lower into high teens if news is quiet. One specific forecast: tech stocks will be volatile around any export control rumors – if Washington hints at expanding the chip ban list, expect NASDAQ to wobble; we lean towards no new moves this week as focus stays on negotiation.

• Geopolitical Wildcards – Taiwan and Others: May 24 marks the anniversary of something significant in Taiwan (hypothetically) or a possible U.S. Navy transit in the Taiwan Strait could occur – these events can spike tensions briefly. We forecast no major Taiwan brinkmanship this week from either side, as both Washington and Beijing know it could derail trade talks. Still, smaller actions (like U.S. lawmakers visiting Taipei or China doing a local military drill) could prompt hawkish commentary. We expect the risk to be verbal only – investors increasingly are attuned to this and differentiate between rhetoric and concrete escalation.

• Chinese Stimulus Watch: On China’s side, as data comes in weak, we might see policy responses. Perhaps not in one week, but Chinese state media might drop hints of forthcoming Reserve Requirement Ratio (RRR) cuts or fiscal measures to support exporters and SMEs. If any minor policy is announced (e.g. increased VAT rebates for exporters), that’s a sign China is cushioning tariff pain. We believe such moves are more likely in June once more data confirms the slump, but keep an eye out this week for statements at an economic forum or central bank commentary.

In summary, the week of May 22–29 is poised to be a holding pattern period – the calm after the storm of early May and before any next inflection. Both sides will focus on fleshing out a possible deal framework. The key forecast is that the tariff truce holds through the week, with no backsliding. Markets should remain relatively stable under that assumption. Our risk forecast assigns a 20% probability to negative shock (talks breaking down or new threats) in the week, a 10% probability to overly optimistic breakthrough, and a 70% probability to status quo continuation.

Therefore, investors and policymakers alike should use this window to plan and fortify. As detailed in the Market Predictions, now is the time to adjust portfolios to be resilient to either outcome, and for companies to secure supply lines and lobby for any relief needed. By next Tariff Thursday (May 29), we will likely be in a similar position, hopefully with a bit more clarity on which direction the winds are blowing as the 90-day ceasefire period nears its midpoint.

Sources

• Yale University – The Budget Lab. “State of U.S. Tariffs: May 12, 2025.” Analysis of tariff impacts on price levels, GDP, and sector output; includes tariff rate history and effects (BudgetLab.Yale.edu).

• PBS NewsHour / Council on Foreign Relations – Zoe Liu. “Trump’s truce with China on tariffs comes at a cost to U.S. credibility.” May 18, 2025. Insight into the 90-day tariff pause agreement, currency impacts, logistics rush, and strategic implications (PBS.org/Newshour).

• Reuters – Chuck Mikolajczak. “Dollar strengthens after China-US truce eases growth fears.” May 12, 2025. Details on tariff rollback (145% to 30%, etc.), market reaction with dollar, yuan, stocks rising on truce news (Reuters.com).

• Reuters – Ankur Banerjee. “‘No place to hide’ from any China-Taiwan conflict, investors say.” May 22, 2025. Discusses investor concern on Taiwan tail-risk, capital outflows from Taiwan, Polymarket odds of conflict ~12% (Reuters.com).

• Reuters – Lewis Jackson et al. “China hits back at US tariffs with export controls on key rare earths.” April 4, 2025. Reports China’s rare earth export curbs (around 90% of global supply), part of retaliation package; lists affected elements and industries (Reuters.com).

• Reuters – Michael Erman. “Pharma imports to US surged in March as drugmakers look to avoid tariffs.” May 6, 2025. Reveals $50+ bln drug import in March (20% of yearly total) ahead of potential pharma tariffs; highlights Ireland’s role and Trump’s probe (Reuters.com).

• Reuters – Tom Polansek. “Trump trade war dries up sorghum sales to China but US farmers plan to plant more.” April 15, 2025. Statistics on sorghum exports dropping 95%, farmer responses, tariff impacts on agriculture with anecdotal detail (Reuters.com).

• Reuters – Kantaro Komiya & Miho Uranaka. “Exclusive: US-China trade truce may ease Komatsu’s tariff pain by $140 million, CEO says.” May 22, 2025. Komatsu CEO quantifies tariff cost reduction due to truce (~20% of a 94b yen hit), commentary on adjusting supply chain (steel sources, production shifts), Caterpillar’s tariff cost estimate, etc. (Reuters.com).

• Brookings Institution – Joshua Meltzer. “The impact of US tariffs on North American auto manufacturing and USMCA.” 2025. Breaks down new tariff regime: 145% on China then reduced, 25% global auto tariff, details on effective rates (47.5% autos on China, 30% others), transshipment incentives via Mexico/Canada (Brookings.edu).

• IFPRI (International Food Policy Research Institute) – Joseph Glauber & David Laborde. “US–China trade war 2.0: Implications for global oilseed markets.” May 2025 blog. Analyzes how 125% tariff would wipe out US soybean exports to China, global trade rerouting, lists tariff timeline early 2025 (10% + 34% + 50% etc.), Chinese matching 125% (IFPRI.org).

• Peterson Institute for International Economics – Chad P. Bown. “US-China Trade War Tariffs: An Up-to-Date Chart.” May 14, 2025. Provides average tariff levels post-truce (51.1% US on China; 32.6% China on US), context that these cover 100% of trade, and timeline of tariff increases reaching 126.5% before reduction (PIIE.com).

• Associated Press – Josh Boak. “Trump warns Walmart not to raise prices due to his tariffs – ‘I’ll be watching’.” May 2025. President’s Truth Social quote directing Walmart to “EAT THE TARIFFS,” illustrating political pressure on retailers and example of 29% price increase on a $350 car seat (APNews.com).

• U.S. Census Bureau – Trade statistics 2024/2025. Used for data on bilateral trade values, import shares by country, etc. showing changes in import sources (e.g. China share falling, Vietnam/Mexico rising).

• USTR and China Ministry of Commerce releases (2025). Tariff lists and announcements, confirming which products and rates were effective when (e.g. USTR notice on Feb 4 10% tariff on all imports, Apr 2 125% on China, May 12 mutual reduction).

• Company Reports and Industry Data. Examples: Caterpillar and Boeing earnings commentary on China, Qualcomm revenue breakdown (~46% China), port throughput data from LA/Long Beach (source: port authorities), etc., to back up specifics in text.

Disclaimer

All information, analysis, and opinions provided herein are generated by machine learning models and are furnished solely for informational purposes; they do not constitute professional financial, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security. These materials may contain errors, omissions, or biases, and we make no guarantees regarding their accuracy, completeness, or timeliness, explicitly disclaiming any liability for reliance on them. Past performance is not indicative of future results, and model outputs are subject to inherent limitations, assumptions, and market conditions that can change without warning. Recipients should consult their own qualified financial, legal, and tax advisors before making any investment, legal, or tax-related decisions, and accept full responsibility for their actions. This content is intended solely for the original recipient, may not be redistributed or reproduced without prior written consent, and by using these materials, you agree to indemnify and hold harmless the provider and its affiliates from any claims arising from their use.