Welcome to the first issue of our new economic and business roundup. Each month we’ll focus on the top 3-5 forces shaping markets, geopolitics, and corporate decision-making.
1) Is the Trade War Really Winding Down?
The US and China have agreed to a one-year truce in their escalating trade conflict, alongside new framework understandings with Japan, Korea, and Australia as well as exploratory signals toward Brazil and India. At first glance, it may appear that the global trade war is easing. A deeper look suggests otherwise:
Headline Deal: The US will suspend its “liberation tariffs” of ~24% on Chinese imports for another year in return for China pausing its retaliatory 24% tariffs for the same period. The US Commerce Department will delay its “50% rule” while China will delay export controls on critical minerals and rare earths. The US will also remove 10% tariffs tied to fentanyl enforcement concerns, and both sides will temporarily hold off on countervailing measures in shipping and maritime logistics.
Reality: Other than fentanyl cooperation, the agreement largely returns both sides to the pre–Liberation Day status quo. Many mechanisms that once managed disputes (e.g., JCCCT) remain dismantled. Crucially, this agreement covers only a narrow set of retaliatory tariffs – i.e., Section 232 investigations are not off the table.
Risks: Washington retains broad flexibility to escalate through export controls, financial sanctions, and scrutiny of Chinese-listed companies. Beijing would likely view such actions as escalatory and now appears to have genuine leverage over critical minerals and rare earths, a structural advantage it will likely maintain for years.
Bottom Line: The truce lowers immediate volatility, but strategic rivalry remains fully intact. Expect potential re-escalations and policy volatility in 2026.
2) USMCA: The Next Flashpoint?
With China temporarily stabilized, North America becomes the key trade risk zone.
Tariff Environment: While headline tariff rates in the U.S. have increased, the real-world impact remains more moderate due to a wide range of exemptions and carve-outs. As a result, the average effective tariff rate is roughly 10%, well below the statutory rate of approximately 18%. The impact is even less in North America; in June, more than 75% of imports from Mexico and Canada entered duty-free under USMCA provisions.
Policy Uncertainty: Negotiations with Canada and Mexico are expected to resume soon, despite the recent tension sparked by an Ontario ad. A pending Supreme Court challenge could invalidate a portion of current tariffs, though not those on steel, aluminum, autos, or auto parts. Most importantly, the 2026 USMCA review is approaching, and any resulting agreement could introduce meaningful changes to rules and tariff levels.
Bottom Line: North American supply chains remain highly uncertain and volatile.
3) Government Shutdown: No Obvious Exit Ramp
The federal shutdown shows few natural paths to resolution.
Political Dynamics: Both sides have framed the dispute in zero-sum terms, making a face-saving deal difficult, despite a logical compromise emerging around extending ACA subsidies with targeted adjustments.
Battlefield: Republicans aim to pressure Democrats via cuts (e.g., SNAP) and federal workforce strain. Democrats are betting that looming health-care premium spikes shift leverage in their direction.
Bottom Line: Upcoming elections may shift negotiating incentives. Until then, expect policy paralysis, data disruptions, and delayed federal decision-making.
4) The US Economy: The Calm Before the Storm?
Yes, the Fed did cut rates to 3.75% and halted balance-sheet reduction and markets did respond by pushing major indices to record highs, seemingly confident that the real-economy impact of trade tensions will be modest and that further easing is ahead. Yet structural pressures are building and at least two “Gray Rhinos” are getting ready to charge:
Tariff Pass-through: Corporate absorption of tariff costs is unsustainable and the first consumer impacts are emerging (e.g., rising auto-loan delinquencies).
AI Bubble Risk: AI-related investment has been the primary engine of GDP and market activity. If momentum fades, the correction could be sharp.
Fed Independence Risk: Pressure for aggressive easing will intensify as the next Fed Chair appointment approaches. Short-term rates may fall materially faster than long-term yields once the transition occurs.
Bottom Line: Wall Street is pricing a “soft landing” but Main Street suggests considerable fragility below the surface.
Key Take-Aways
Continue to plan for policy volatility, not stability. The US-China truce is unlikely to hold through 2025. Incorporate strategic scenarios, not linear forecasts.
Build tariff flexibility into contracts. Use explicit tariff pass-through clauses in supplier agreements. Treat Mexico and Canada with heightened caution given USMCA uncertainty.
Prepare for multiple gray rhinos. Watch for a potential AI-investment correction, renewed trade escalation, monetary policy turbulence and a messy Fed leadership change.
Strategic Posture. Investment optionality and resilience investments now will pay outsized dividends as volatility returns.