By Dr. M. Ray Perryman | Published in syndication May 14, 2025
In yet another predictable blink in the unsustainable trade saga, tariffs on goods from China (that will be largely paid by US businesses and consumers) were slashed from 145% to 30% for a 90-day period. This move is purportedly a pause before the levy returns to the former level of 145% if no agreement is reached. Maintaining a tariff of that level on an ongoing basis is not remotely feasible, and the stakes are high.
The market response to the reduction was strong and immediate. All major market indices soared, erasing much of the tariff-related losses. It should be noted, however, that markets are reacting more than usual to individual decisions due to the heightened uncertainty, and tariffs remain at levels above those that were observed in the 1930s despite decades of movement toward both freer trade and US economic dominance. Any signs that we are moving somewhat more toward normalcy are likely to be warmly received.
Other markets also had predictable responses. Oil prices rose significantly (though not to levels observed a few months ago), as many analysts who feared a lengthy global recession had their concerns tamped down to some extent. Because oil demand ultimately depends on economic conditions, prices rose from recent lows with the more favorable outlook (which is good news for Texas as the nation’s top producer, although current levels remain close to breakeven levels).
Gold is considered a safe haven, and dialing down the trade war (and resulting uncertainty and inflation fears) caused prices of the metal to fall. Yields on US treasurys, another safe haven asset, were also up as investors sold them to switch back into other types of investments. The dollar strengthened. These movements, taken together, suggest that markets are now betting that we will get to a more stable and responsible global trade policy soon (let’s hope so).
This is not to say that the current situation is a good thing; it’s just a step in the right direction. We estimate that the cost to the US economy of sustained 30% tariffs on imports from China would include $173.3 billion in annual gross product each year and almost 1.4 million jobs when multiplier effects are considered. While large and impossible to maintain, these totals pale in comparison to those associated with the 145% levels, as the empty docks at major West Coast ports make readily apparent.
The ongoing negotiations between the US and China (and other countries) are crucial to ongoing expansion in the country and, indeed, the world. The clock is rapidly ticking on the time that we have to stop engaging in a policy that centuries of history and basic math demonstrate is counterproductive. Stay safe!
Dr. Perryman is deeply gratified to join his daughter, Skye, as recipients of the 2025 Sissy Farenthold Social Justice Award. Sissy left an enduring legacy of promoting justice and equality for everyone which will be celebrated at a dinner in Houston on June 6. This event honors the life and achievements of this remarkable Texan.
