US–China trade conflict: Further escalation
Following a sharp escalation of the US–China trade dispute, tariffs have reached extraordinary levels. The US now imposes duties of up to 145% on Chinese goods, with China retaliating at 125%. While bilateral trade is unlikely to collapse entirely, the disruption could become significant. Firms are already adjusting, including re-routing trade flows via third countries and making use of selective exemptions.
One such exemption came on April 11, when the US temporarily excluded key tech products – such as smartphones, PCs, and semiconductor manufacturing equipment – from the latest tariff round. These exemptions seemed to offer at least short-term relief to supply chains. Over the weekend, however, President Trump indicated that such products may instead fall under a separate ‘semiconductor tariff’, further blurring the outlook for electronics trade.
China’s exports rose by 12.4% year-on-year in March, well above expectations and largely driven by front-loading ahead of the implementation of tariffs. While this may support China’s Q1 GDP, trade momentum is expected to decline substantially in the coming months. There are severe downside risks to our GDP growth forecast for China in 2025 (currently 4.2%), especially if massive fiscal or monetary support is not implemented.
Neither side appears willing to de-escalate, though Beijing has signaled it will not raise tariffs further for now. Meanwhile, both sides seem to be relying on more subtle mechanisms– namely exemptions, reclassifications, and third-country routing. In this environment, uncertainty around future trade flows remains high.
IT stocks fluid tariff policy: What to do now?
Over the weekend, investors were once again surprised by the US Customs and Border Protection agency’s announcement to exempt certain original equipment manufacturers from tariffs. Those providing smartphones, PCs/notebooks, and other consumer electronic devices are currently exempt from the 145% tariff regime imposed on China by the US government. This change resulted in turmoil in the global technology space. We still prefer software stocks over hardware, semiconductor, and equipment providers in the longer term, but would not exclude increased volatility in the overall technology space in the near term.
How could the US decouple from China and what would it look like?
The market generally assumes that the trade tensions between the US and China have peaked, now that both sides have stated they do not intend to further escalate tariffs. The Hang Seng Index has also staged a rebound, however, US Treasury Secretary Scott Bessent’s comment ‘all options are on the table’, when asked about the possibility of delisting Chinese American Depository Receipts (ADR), brought this risk back into market focus. Chinese ADRs are a way for foreign investors, including those in the US, to invest in Chinese companies that are not directly listed on US exchanges. ADRs are issued by US banks and represent a specified number of shares of a foreign company’s stock, allowing them to be traded on US stock exchanges. Delisting Chinese ADRs would thus present a huge challenge for investors.
While we do not have a conviction on whether the US will execute a delisting plan in the next few months or this year, it does appear that President Trump intends to push forward some degree of financial decoupling at some point during his second term. This is evidenced in his recent National Security Presidential Memorandum requesting the government to:
- Consider new or additional restrictions on US investments in sensitive sectors in China
- Review again whether Chinese companies have satisfied the terms of the Holding Foreign Companies Accountable Act
- Review the variable interest entity structure
- Ensure that foreign adversary companies are ineligible for pension plan contributions
US-China decoupling risk: What this means for investors
We believe the market is better prepared for any ADR delistings now, as more Chinese companies have come back to Hong Kong for secondary or dual primary listings. A conversion from ADRs to Hong Kong shares remains a sensible option for investors wishing to mitigate the risk of any abrupt ADR delistings, in our view. In contrast, the shock to the market may be much larger if Trump orders an investment ban forcing US entities to divest certain Chinese holdings. Past examples include Trump’s executive order in November 2020, banning US entities from investing in Chinese telecom stocks.
For the broader market, we continue to expect consolidation or correction pressure throughout Q2 2025 and recommend investors be more valuation sensitive when entering new positions in the market. We still favour dividend stocks as a more defensive approach to allocation.