Tariff Illusions: Peeling Back the Layers of U.S.-China Trade Drama
- monumentsight
- Apr 20
- 5 min read
Updated: Apr 26
Much like a trompe l’oeil—a visual illusion that tricks the eye into perceiving depth where there is none—tariff reversals may create the illusion of economic strength and cooperation, when in fact the underlying strategic dynamics remain tense and unresolved. As U.S. policymakers discuss unwinding Trump-era tariffs, particularly on Chinese imports, the global market is left to decipher not just the economic impact, but the embedded diplomatic signals. The expectation that China will respond submissively to American overtures is both unrealistic and counterproductive. China does not play the role of a passive recipient of U.S. policy shifts—it negotiates with equal force, and will only concede where mutual benefit is clear.
Intertemporal decision-making
While the U.S. economy has exhibited modest growth in the range of 2–3%, persistent uncertainty—stemming from inflation dynamics, interest rate volatility, geopolitical tensions, and fiscal policy challenges—has increased the probability of heightened market volatility or even a sharp correction in the near term. As a result, caution remains warranted when projecting future market conditions and risk premiums. Reduced fiscal stimulus could lead to higher interest rates, placing additional downward pressure on equities. Simultaneously, gold has been rallying and has now outperformed the S&P 500 on a one-year basis, reflecting a broader shift toward safe-haven assets amid rising uncertainty. These trends suggest investors are increasingly engaging in intertemporal decision-making, reassessing short-term returns versus long-term risks in a more volatile environment. With the U.S. dollar potentially overvalued, global capital flows may shift accordingly, as investors recalibrate their portfolios to preserve value across time horizons. Performance Overview (April 2024 – April 2025):
Gold: The price of gold has increased by over 37% year-over-year, reaching record highs above $3,000 per ounce.
S&P 500: The S&P 500 experienced a 25% gain in 2024. The Statement However, in 2025, the index has faced volatility, with a decline of approximately 3.5% year-to-date as of late March.
This divergence highlights gold's role as a safe-haven asset, particularly during periods of market uncertainty. Factors such as central bank purchases and geopolitical tensions have contributed to gold's strong performance. Combined with big fiscal deficits in the past and continued direction under Trump, inflationary pressures may cause the Fed to react.
Although GDP has surprised to the upside, signs of consumer hesitation are emerging amid high mortgage costs, declines in equity markets, and reduced federal spending—which is down approximately 9% relative to budget expectations. These headwinds are being further amplified by geopolitical uncertainty, including the recent announcement of reciprocal tariffs, which may weigh on forward-looking business and consumer sentiment.
At the same time, shifting trade dynamics are influencing capital markets. A declining trade deficit reduces the volume of U.S. dollars held by foreign nations, which in turn may decrease demand for U.S. Treasury securities—placing upward pressure on yields. Conversely, larger trade deficits have historically supported lower Treasury yields due to increased foreign reinvestment. These crosscurrents are creating a more complex backdrop for investors evaluating interest rate trajectories and future economic growth.
Note that valuation analysis may prove un-useful at least in the U.S. since there are multiple contractions putting upward pressure on pricing multiples due to lowered earnings.
China Relations: Strategic Signaling
The rollback of tariffs could be interpreted as a de-escalation in U.S.-China tensions. Still, it’s critical to note that China will not be maneuvered like a junior partner. Instead, it will assess the policy shift through a lens of strategic reciprocity. Any perceived weakness or asymmetry could prompt China to assert leverage in other arenas, such as rare earth exports, currency devaluation, or regional alliances.
Valuation Implications: Strategic Considerations for CFOs and Appraisers
For CFOs and appraisers, tariff policy reversals affect valuation directly and indirectly. Companies should reassess:
Future cost of goods sold and gross margins
Long-term capital expenditure strategies
Sourcing decisions and geopolitical exposure
Valuation analysts must then recalibrate:
Discount rates, to reflect reduced volatility and sovereign risk
Projected cash flows, accounting for cost improvements or margin expansions
Comparable multiples, especially for globally integrated firms
Macro Risks: Treasury Markets, Monetary Supply, and Confidence
Tariff policy does not exist in isolation—it interacts with monetary policy and global capital flows. A breakdown in U.S.-China trade relations could lead China to offload its substantial U.S. Treasury holdings, flooding the market and creating ripple effects:
Higher U.S. interest rates, as bond prices fall from oversupply
Contraction of monetary supply, tightening lending conditions
China selling Treasuries → flooding the market → lower demand for dollar-denominated assets.
Lower demand for Treasuries can translate to lower demand for USD, since Treasuries are bought with dollars.
That could weaken the dollar unless it's offset by higher interest rates, which could attract foreign capital.
➡️ The net effect on the dollar depends on which force dominates. In periods of uncertainty, the dollar might also strengthen as a safe haven, despite structural weaknesses.This scenario would trigger broader systemic consequences, putting pressure on corporate earnings, sovereign credit ratings, and even central bank responses.
China, the second-largest foreign holder of U.S. debt with approximately $760 billion in Treasury securities, plays a pivotal role in global financial markets. If China were to offload a significant portion of its U.S. Treasury holdings, it could flood the market, drive yields higher, and potentially send mortgage rates and borrowing costs soaring for millions of Americans.
1. Fiscal Impact – U.S. Borrowing Costs Rise
As China offloads Treasuries, bond prices would fall and yields would rise. This means the U.S. government would face higher borrowing costs to finance its $36 trillion in outstanding debt. Higher yields would increase interest payments on new and existing debt, putting additional strain on already fragile public finances and widening budget deficits.
2. Monetary Impact – Pressure on the U.S. Dollar and Market Volatility
Dumping large volumes of dollar-denominated assets could weaken the U.S. dollar, as demand for Treasuries and the greenback declines. A depreciating dollar may stoke inflationary pressures and create instability in equity markets, with capital market volatility spreading across stocks, bonds, and real estate. This could challenge the Fed’s ability to maintain stable monetary conditions and reinforce global diversification away from U.S. assets.
3. Impact on China – Yuan Appreciation and Export Pressure
For China, a Treasury sell-off could backfire by causing the yuan to appreciate. A stronger currency would make Chinese exports more expensive to foreign buyers, threatening export competitiveness—a pillar of China's economic model. Simultaneously, the perception of financial instability could spark capital outflows from China, undermining domestic financial markets and complicating monetary policy management.
Mutual Economic Risk
While China may wield its Treasury holdings as a perceived economic weapon, the interconnectedness of both economies means that aggressive moves could trigger a capital war with global consequences.
Final Thoughts: Balancing Strategy and Realism
Tariff policy can no longer be viewed solely through the lens of domestic economics. It must be analyzed as a lever in a complex, reciprocal negotiation—one that risks being distorted by illusion if leaders expect one-sided concessions. Like a trompe l’oeil, tariff reversals may appear to bring clarity and strength, when they might only mask deeper tensions. For valuation professionals, CFOs, and market analysts, staying grounded in fundamentals and geopolitical realities is essential to avoid being misled by appearances.
For more insights on how trade policy affects valuation and long-term financial planning, connect with us at Monument Valuations.
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