Recent discussions between U.S. and Chinese representatives have once again brought the specter of tariffs to the forefront, with markets anxiously awaiting Monday’s announcements. This development raises a crucial question: Will we see a decisive resolution, or will continued uncertainty weigh on the global economy?
Breaking Development
In a significant move, both nations have just announced substantial reciprocal tariff reductions for 90 days. Tariffs will decrease by over 115 percentage points on both sides, with China’s duties on US goods dropping from 125% to 10%. Similarly, the US “reciprocal” duties on Chinese imports will fall from 125% to 10%, though China still faces a separate 20% tariff related to fentanyl. This dramatic reduction represents a potential breakthrough in negotiations and signals a mutual willingness to de-escalate trade tensions. Markets will now focus on whether this development marks the beginning of a more comprehensive trade resolution.
Historical Precedent
Notably, the current situation echoes a similar scenario during President Trump’s first term. In 2018, the U.S. initiated a tariff offensive against China. Following negotiations, tariffs settled around the 20% mark. Subsequently, the S&P 500 experienced a significant 31% surge in 2019, recovering from an approximate 6% dip in 2018, which included a substantial loss of over 20% in the fourth quarter – a pattern strikingly similar to the market fluctuations observed in the first quarter of 2025.
Timeline of Previous Tariff Escalation
The specific tariff escalations during that 2018-2019 period included:
- First Six Months of 2018: A gradual increase in tariffs between the two nations.
- July – September 2018: A sharp acceleration in tariff hikes on both sides, with U.S. average tariffs climbing from 3.8% to 12.0% and China’s average tariffs rising from 7.2% to 18.3%.
- September 25, 2018 – June 2019: An extended period of relative stability in tariff levels.
- June – September 2019: Another round of tariff increases was implemented by both the U.S. and China.
Given this historical precedent and recent White House statements hinting at a potential “soft landing” similar to the 2018-2019 outcome, speculation is mounting about whether the S&P 500 could witness another substantial rally in the coming year.
Challenges to Resolution
However, significant challenges could alter this trajectory. A full resolution might depend heavily on public response to these trade policies. Should Americans mobilize en masse against tariffs, their collective voice could persuade business leaders and eventually politicians to advocate for policy changes. This process of building consensus against tariffs would take time – potentially stretching from months to years – and without such pressure, trade tensions could persist through the 2026 mid-terms or even to the 2028 presidential election.
China’s Position
China’s stance presents another critical variable. While China has signaled its willingness to come to the negotiation table with its temporary tariff relaxation, President Xi Jinping is unlikely to concede ground in the long run – particularly when facing a confrontational U.S. administration. While imposed tariffs will dampen demand for Chinese goods and impact producers, the Chinese government stands ready to support its industries, adding complexity to any potential resolution. Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last seven market crashes.
Broader Economic Risks
The broader economic landscape compounds these concerns. The combined challenges of 2025 – including the interconnected impact of tariffs, taxes, and deportation policies – create vulnerability to credit rating downgrades. Such downgrades, paired with eroding foreign investor confidence in unpredictable U.S. economic policies, could lead to diminished demand for U.S. Treasuries and threaten their “safe haven” status. In the most severe scenario, this downward spiral might even raise the possibility of a U.S. debt default that would create market turmoil exceeding that of the 2008-2009 financial crisis. Investors should prepare for sudden, steep declines that could wipe out trillions in market capitalization. Our take on U.S. Debt Downgrade Looming – A Move To Crash S&P By 50%? has more details.
The Verdict
With both nations agreeing to substantial tariff reductions—from 125% to 10%—markets now have clarity that was previously lacking. This mutual de-escalation echoes the resolution pattern seen in Trump’s first term, suggesting we could witness a significant market rally.
However, several factors warrant continued attention: the temporary nature of China’s 90-day reduction window, the persistent 20% fentanyl-related tariff, and the broader economic vulnerabilities discussed.
While this development represents a positive step toward trade normalization, investors should remain vigilant about potential volatility as both nations navigate their complex economic relationship in the coming months. The question now shifts from “what will happen?” to “will this initial agreement hold and expand into a durable trade framework?”
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