Assessing the Impact of U.S.-China Trade Dynamics on Commodity Markets

The U.S.-China trade relationship has long been a linchpin of global economic stability, and recent developments in 2025 underscore its enduring influence on commodity markets. Following the Trump-Xi communications and subsequent tariff adjustments, the interplay between geopolitical risk and commodity pricing has become a focal point for investors. This analysis examines how the May 2025 tariff reductions and July 2025 extension have reshaped market dynamics, with a focus on copper, crude oil, and agricultural commodities.

Tariff Reductions and Immediate Market Reactions

On May 12, 2025, the U.S. and China agreed to a 90-day truce, slashing tariffs from 125% to 10% on bilateral goodsUS-China trade deal: Markets expect tariffs relief, new highs in 2025^[1]. This move triggered an immediate 3% surge in the S&P 500 and a 4% jump in the Nasdaq CompositeU.S. and China agree to slash tariffs for 90 days in major trade^[2]. However, the relief was tempered by uncertainty, as businesses scrambled to adjust to the temporary nature of the agreement. For instance, U.S. soybean exports saw a short-term boost as Chinese retaliatory tariffs on agricultural products dropped from 125% to 10%, improving U.S. competitivenessUS-China Tariff Wars Insights May 2025: Key Updates and …^[3]. Conversely, copper and crude oil markets showed muted responses due to their exclusion from the most significant tariff exemptionsEffects of the US-China trade war on commodity prices^[4].

The geopolitical risk index (GRI) reflected this duality. While the truce reduced the U.S.-China Tension Index (UCT) by 12 points, long-term volatility remained elevated as investors anticipated potential reversions to higher tariffs after August 2025Geopolitical risk and U.S. stock market volatility: evidence from…^[5]. This uncertainty amplified price swings in sectors like electronics and aerospace, where supply chains are deeply intertwined with Chinese manufacturingThe Fed - Measuring Geopolitical Risk Exposure Across Industries: A Firm-Centered Approach^[6].

Commodity-Specific Impacts

Copper: The May truce initially drove copper prices up 5.5% in early May, but weak U.S. economic data and China's slowing demand curbed gainsCommodity Update – May 2025^[7]. The International Copper Study Group (ICSG) now forecasts a 2025-2026 surplus of 500,000 metric tons, with prices stabilizing at $8,650 per tonne by year-end due to green energy investmentsCommodity Price Predictions 2025^[8].

Crude Oil: Oil prices surged $1.60 per barrel post-truce, but oversupply concerns from non-OPEC+ producers and the U.S. dollar's safe-haven status limited further gainsCrude oil climbs more than $1.60 a barrel on tariff cuts^[9]. Analysts project an average of $73 per barrel in 2025, with seasonal demand driving a summer rebound2025 Commodity Trading Trends: Tariffs, Energy Shifts & Prices^[10].

Agricultural Commodities: Soybean prices benefited from reduced tariffs, but trade diversion to Latin America—particularly Brazil and Argentina—introduced new regional dependenciesThe Impact of Geopolitical Events on Commodity Markets: A 2025 Perspective^[11]. Meanwhile, U.S. textile and apparel prices rose 15-19% in the short run, reflecting the sector's vulnerability to tariff fluctuationsState of U.S. Tariffs: May 12, 2025^[12].

Geopolitical Risk and Market Volatility

The GJR-GARCH-MIDAS model reveals that U.S.-China trade tensions amplify long-term volatility in equity indices like the S&P 500Geopolitical risk and U.S. stock market volatility: evidence from…^[13]. For commodities, the relationship is nuanced: energy markets correlate strongly with U.S.-centric geopolitical risks (e.g., Red Sea conflicts), while metals like copper are more sensitive to China's domestic policiesThe time-varying impact of geopolitical risk on natural resource commodity price volatility^[14].

The July 9, 2025 extension of the tariff truce to November 2025 provided temporary stability, reducing the GRI by an additional 8 pointsUS-China Tariff Truce Extended Another 90 Days: Implications^[15]. However, lingering risks—such as China's continued purchases of Russian oil and U.S. semiconductor export controls—highlight the fragility of the current détenteUS and China agree to critical tariff hike extension^[16].

Investment Implications

Investors must navigate a landscape where short-term trade de-escalations offer limited respite. For commodities, the key lies in hedging against geopolitical volatility:
- Copper: Position for stabilization in Q3 2025 amid green energy demand.
- Crude Oil: Monitor OPEC+ production decisions and dollar movements.
- Agriculture: Diversify supply chains to mitigate trade diversion risks.

Conclusion

The U.S.-China trade dynamic remains a double-edged sword for commodity markets. While temporary tariff reductions ease immediate pressures, the absence of a long-term resolution ensures that geopolitical risk will continue to drive price volatility. Investors must remain agile, leveraging granular data on trade policy shifts and regional supply chain adjustments to navigate this complex environment.