Traders breathed a major sigh of relief on Monday afternoon as President Donald Trump secured last-minute agreements with Canada and Mexico, postponing 25% tariffs for 30 days. In exchange, both nations pledged to deploy 10,000 troops to their respective borders with the US to curb the flow of fentanyl (originating from China), other illicit drugs, and migrants.
However, as the trade deadline passed at midnight without a broader resolution, Trump’s 10% tariff took effect on China—prompting a swift response from Beijing, which retaliated with duties, export controls, and an investigation into US big tech.
Bloomberg reports that Beijing slapped a 15% tariff on US coal and liquefied natural gas exports, targeting oil and farm equipment with a 10% levy, escalating trade tensions between the world’s largest economies. There were also new export controls on tungsten, tellurium, ruthenium, molybdenum, and ruthenium-related items.
Separately, China’s State Administration for Market Regulation announced a surprise probe into Google for violating the country’s anti-monopoly law.
Authorities also placed Calvin Klein owner PVH Corp. and US gene sequencing company Illumina on a blaclist of entities that opens pathways to possible fines and/or other sanctions, such as trading halts and/or cancellation of work permits for foreign staff.
Capital Economics told clients: “These moves are warnings that China intends to harm U.S. interests if need be, but still give China the option to back down.”
“This can be interpreted as a warning shot to US enterprises with a high-dependency on China’s market,” Lynn Song, chief economist for Greater China at ING Bank in Hong Kong, told clients, adding, “There is still hope that tariffs could get quickly unwound or pushed back after face-to-face talks.”
Song noted that Beijing’s counter was “fairly muted retaliation” because levies on US energy account for a small share of China’s imports.
Goldman’s Shubham Ghosh told clients: “However, as the measures ended up being more restrained than expected and affected only a small portion of US imports into China and avoided large ticket items like soybeans and aircrafts, dip buyers emerged as hope was kept alive for more “back and forth” negotiations between the two powers.”
Trump’s goal in this round of the trade war is to halt the flow of fentanyl from Canada and Mexico while also curbing the production and export of precursor fentanyl chemicals originating from China. The tariffs serve as a tool to bring the respective countries in line with his ‘America First’ agenda.
On Monday, White House Press Secretary Karoline Leavitt told Fox News that Trump plans to speak with Chinese President Xi Jinping about “illegal Chinese fentanyl that is killing tens of thousands of Americans every single year.”
In markets, Khoon Goh, head of Asia research at ANZ Banking Group, noted, “Unsurprisingly, a risk-off tone has taken hold of markets, with the yuan weakening and causing spillover into other Asian currencies.”
Goh continued, “If there is no news of any deferral, we will see a further selloff in Asian asset markets, with the focus back on tomorrow’s fix.”
Rajeev De Mello, global macro portfolio manager at Gama Asset Management, commented on the Sino-US trade war: “China will be forced to react though on its own terms and targeting specific sectors.” He said, “Markets will be supported at lower levels by the expectation that market-friendly measures will be announced when China markets re-open after the Lunar New Year holidays.”
The takeaway from institutional desks is that China’s trade retaliation has been fairly muted as Trump plans to speak with President Xi to “make a deal” and end the drug death crisis. However, Trump has warned: “If we can’t make a deal with China, then the tariffs will be very, very substantial.”
Earlier, UBS Group CEO Sergio Ermotti warned that the markets have not fully priced in the inflation risk of tariffs: “I can see inflationary pressure” on the back of tariffs, “and that, in turn, would mean that central banks would need to stop their easing path and potentially even reverse.” He added that this is “something that is not priced in the market.”
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