Navigating the U.S.-China Tariff Truce: Seizing Short-Term Gains While Hedging Structural Risks

Clyde MorganMonday, May 12, 2025 9:11 am ET
16min read

The U.S.-China tariff truce, announced on May 11, 2025, has injected a much-needed dose of optimism into global markets, with equity indices surging on the news. While the 90-day reduction in punitive tariffs—from 145% to 30% for the U.S. and 125% to 10% for China—creates a window of opportunity for trade-sensitive sectors, investors must tread carefully. Lingering baseline tariffs, unresolved policy disputes, and inflationary pressures threaten to undermine gains. This article outlines a tactical strategy: rotate into industrials and tech exporters to capitalize on short-term momentum while hedging risks via bond ETFs like FBND.

Short-Term Opportunities: Trade-Sensitive Sectors Light Up

The tariff truce has sparked a rally in industries heavily exposed to cross-border trade. With tariffs slashed, companies in industrials (e.g., machinery, aerospace) and technology (semiconductors, hardware) face reduced cost burdens, enabling stronger profit margins and export volumes.

Key plays to consider:
1. Industrial exporters: Companies like Boeing (BA) or Caterpillar (CAT), which rely on Chinese demand for aerospace and construction equipment, benefit from the tariff rollback.
2. Tech hardware: Firms like Texas Instruments (TXN) or Analog Devices (ADI), whose components face reduced levies, could see a rebound in supply chain efficiency and sales.
3. Trade ETFs: The iShares U.S. Industrials ETF (IYK) or the Technology Select Sector SPDR Fund (XLK) offer diversified exposure to tariff-sensitive winners.

Long-Term Risks: Baseline Tariffs and Inflationary Pressures Linger

While the truce provides relief, it’s critical to note that 10% baseline tariffs remain in place on Chinese goods, and the U.S. maintains a separate 20% levy on fentanyl-related imports. These unresolved issues cloud the path to full normalization.

Moreover, inflation data reveals mixed signals. While U.S. CPI dipped to 2.4% in March 2025, China’s deflation (-0.1% in April) hints at weak demand. However, core inflation risks persist:

  • Supply chain bottlenecks: Even with lower tariffs, global logistics remain fragile, with rare earth export controls and “unreliable entity lists” still threatening disruptions.
  • Fed policy uncertainty: The Federal Reserve faces a dilemma—tolerating inflation or tightening further. A rate hike in late 2025 could undermine equity gains.

Investment Strategy: Rotate Aggressively, Hedge Prudently

Step 1: Rotate into Trade-Sensitive Equities
- Act now: The truce’s 90-day window is short, and markets are pricing in immediate benefits. Tech and industrials are poised for further gains as trade volumes rebound.
- Target sectors: Focus on companies with clear exposure to China-U.S. trade flows, such as semiconductor firms or industrial manufacturers.

Step 2: Hedge with Bond ETFs Like FBND
- Why bonds?: The truce’s fragility means markets could reprice risk if talks sour. Bond ETFs like the iShares Core U.S. Aggregate Bond ETF (AGG) or the iShares Short Treasury Bond ETF (SHY) provide ballast.
- Opt for flexibility: The iShares Core U.S. Short-Term Corporate Bond ETF (IBSD) offers higher yields than Treasuries while maintaining liquidity.

Conclusion: Balance Momentum with Caution

The tariff truce is a short-term catalyst for trade-sensitive equities, but investors must not ignore the long-term risks of unresolved tensions and inflation. By rotating into industrials/tech stocks while hedging with bond ETFs, you can capture gains while mitigating downside exposure.

Final call to action: Deploy 60% of your trade-sensitive allocation to sectors like industrials and tech, with 40% in bond ETFs like FBND. Monitor the June 2025 CPI reports and tariff renegotiations closely—adjustments may be needed if inflation accelerates or talks collapse.

In this fragile equilibrium, agility and diversification are key. Don’t miss the rally, but never let your guard down.

The views expressed here are for informational purposes only and should not be construed as investment advice.

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