US–China Trade War: Scenarios and Financial Positioning

Introduction

The economic rivalry between the United States and China has intensified into a multifaceted “trade war,” encompassing tariffs, technology restrictions, and strategic competition. As of 2025, U.S. tariffs on over $360 billion of Chinese goods remain in place – a legacy of the 2018–19 trade clash that raised the average tariff rate from under 3% to around 19%​

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. China’s retaliatory tariffs and non-tariff measures likewise persist. Despite talk of decoupling, bilateral trade reached a record $760.9 billion in 2022​

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, and U.S. goods imports from China in 2023 exceeded $400 billion​

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. This underscores that while tensions run high, supply chains remain deeply intertwined​

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. Looking ahead, we develop plausible scenarios over the next 6 months (short-term) and beyond (long-term) for how the US–China trade war could unfold. Each scenario considers geopolitical and macroeconomic dimensions, including key triggers that could shift probabilities. For each scenario, we then outline alpha-generating financial positioning ideas across asset classes – emphasizing equities but also covering bonds, commodities, and currencies. A summary table at the end contrasts the scenarios and optimal positioning. These scenarios range from a potential thaw in relations to an all-out catastrophic breakdown, with intermediate outcomes in between. Policymaker statements and expert analyses are cited to ground our scenarios in current realities and risks.

Short-Term Scenarios (Next 6 Months)

Scenario 1: Partial Trade Truce (De-escalation)

Geopolitical/Macro Outlook: In this optimistic scenario, Washington and Beijing dial back tensions to stabilize their economies. Facing domestic pressure to curb inflation and avert recession, U.S. authorities might suspend or roll back some tariffs on consumer goods. Indeed, economic models suggest that high tariffs raise prices and hurt growth – a 100% tariff on Chinese imports would be “disastrous,” virtually wiping out U.S. imports from China​

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and boosting U.S. consumer prices by an estimated 0.7 percentage points over a year​

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. Acknowledging such costs, officials could opt for détente. Beijing, for its part, may increase purchases of U.S. products or strengthen IP protections as goodwill gestures. Recent high-level dialogues (e.g. the Biden–Xi meeting in late 2023) underscored a desire to avoid conflict and find areas of cooperation​

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. While a comprehensive trade deal is unlikely, a halt on new escalations and selective easing of restrictions (such as removing some Trump-era tariffs or export bans) could occur. This would slightly improve business confidence and trade flows. However, core strategic frictions (tech and security) would persist, capping the scope of any truce. Key Triggers: Cooling inflation reducing the political need for tariffs, successful diplomatic engagement (summits or back-channel talks), and China’s economic policy moderation could all tilt toward a truce. A push from U.S. industry (which has borne tariff costs) might also encourage relief. Conversely, any military flare-up (e.g. in Taiwan) would instantly derail this scenario. Market Impact & Positioning: Easing tensions would be a bullish catalyst for equities globally – particularly for Chinese and Asian emerging market stocks that suffered from trade uncertainty. Investors could overweight Chinese equities and multinationals with China exposure, expecting a relief rally. For example, Chinese stocks in sectors hammered by tariffs (tech hardware, industrials) may rebound strongly, as tariff removal improves earnings. U.S. companies reliant on Chinese markets (e.g. certain semiconductors, consumer brands) would also benefit. On the other hand, defensive assets and safe havens might lag. Possible positioning includes:

Equities: Go long Alibaba, Apple, or semiconductor firms with high China revenues; long EM equity indices (FXI, EEM) vs. short U.S. defensive sectors.

Fixed Income: Tilt away from U.S. Treasuries (yields may rise on improved growth outlook). Within credit, favor corporate bonds of firms with China exposure (lower risk of supply shocks).

Commodities: Slightly underweight gold (reduced safe-haven demand) and long industrial metals (anticipating rising Chinese demand if trade improves).

FX: Go long Chinese yuan (CNY) and Asian currencies versus the USD – a de-escalation could strengthen the yuan from its recent lows​

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. Also short JPY and CHF as safe havens lose appeal.

Scenario 2: Status Quo Stalemate (Controlled Tensions)

Geopolitical/Macro Outlook: The most probable baseline is a continuation of the status quo – neither meaningful improvement nor dramatic escalation. Both sides maintain existing tariffs and tech export controls, but refrain from new major measures in the next six months. The Biden administration, like its predecessor, has embraced an “aggressive economic approach” toward China​

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, and has so far maintained tariffs and added restrictions (e.g. on semiconductor exports)​

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. Beijing continues measured retaliation and industrial policies to reduce reliance on the U.S. (for instance, curbing exports of critical minerals, and substituting imports). Global supply chains keep slowly adjusting: China’s share of U.S. imports has slid from ~22% in 2017 to ~14% in 2023​

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as production shifts to “connector” countries (Vietnam, Mexico, etc.), but absolute trade volumes remain high​

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. The macro impact of this stalemate is moderate – a drag on China’s growth (~0.6 percentage points lower GDP in coming years under current tariffs​

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) and a modest inflationary tax on U.S. consumers (tariffs cost the average U.S. household ~$1,900/year​

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). However, these costs are not severe enough yet to force a political course-change. Key Triggers: This scenario holds absent any major catalyst. Ongoing talks yield no breakthroughs, and upcoming political events (e.g. the 2024 U.S. election aftermath) result in continuity. Businesses continue diversifying supply chains at the margin, but no shock compels an urgent decoupling. One wildcard is the U.S. economy – if it weakens, pressure might mount to ease trade barriers for growth, pushing toward Scenario 1; if it runs hot, hawks might seize the chance to tighten screws, edging toward Scenario 3. Market Impact & Positioning: In a steady-state standoff, markets may largely price in the existing trade barriers. There would be no big directional shock, but ongoing sector rotation as investors position for a world of gradual decoupling. Key themes and trades:

Equities: Favor domestically oriented sectors and companies insulated from tariffs. U.S. health care, local services, and small-cap firms focused on the U.S. market should outperform globally exposed manufacturers​

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. Conversely, continue underweighting companies with high China supply-chain or revenue dependence (e.g. apparel retailers, certain electronics makers) as they face margin pressures. An investor might go long U.S. healthcare providers and utilities (stable, local demand) and short retailers or tech hardware firms reliant on Chinese imports, given tariffs pose “significant profitability headwinds” to U.S. retail​

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Fixed Income: Hold a neutral duration stance. With no new trade shock, U.S. Treasury yields move mainly on Fed policy. Credit-wise, monitor sectors like autos and tech that are navigating higher input costs – spreads there could widen modestly.

Commodities: Expect little net change. Industrial commodities see mixed effects: e.g. oil demand is not directly hit in a stalemate, but strategic metals (like rare earths) remain at risk of Chinese export curbs. It could be prudent to go long rare-earth suppliers outside China as a hedge, since China has threatened to restrict rare earth exports in retaliation​

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. Gold likely range-trades – no new crisis to spur it, but ongoing geopolitical uncertainty supports it at the margin.

FX: Range-bound currencies. Perhaps a mild EM Asia underweight vs. USD as the trade war overhang keeps investor caution on export-driven Asian currencies. The Chinese yuan would likely gradually depreciate to offset the still-elevated U.S. tariffs​

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(a trend already seen as CNY weakened past 7.3 per USD).

Scenario 3: Renewed Escalation (Trade War 2.0)

Geopolitical/Macro Outlook: In this scenario, hostilities flare up significantly in the coming months. This could be triggered by a political shift in Washington – for instance, a more hardline posture following the 2024 election. (Notably, if former President Trump returned to office, he has threatened sweeping new tariffs on China​

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.) Indeed, under a hypothetical “Trump 2.0,” tariffs could jump by 20 to 60 percentage points, sharply raising the effective tariff on Chinese imports​

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. Short of a change in leadership, escalation could stem from specific disputes: e.g. the U.S. imposing broad outbound investment controls or stricter tech bans, or China retaliating against U.S. firms or curbing exports of critical inputs (such as rare earth elements or key electronics components). An example timeline of rapid escalation is illustrated by analysts at IG, who envisioned the U.S. hiking tariffs from 10% to over 100% on all Chinese imports within weeks of an initial provocation​

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, with Beijing responding in kind (blacklisting U.S. companies, halting rare earth shipments, etc.). While 100% tariffs are an extreme case, even a move to, say, 40–60% tariffs across the board would be drastic. The macroeconomic fallout would include surging prices for U.S. consumers, significantly lower growth in both countries, and roiled financial markets. Economist estimates suggest a full-blown tariff war (45% U.S. tariff on China plus retaliation) could cut U.S. GDP by ~1% and world trade by 10% below baseline in the long run​

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. In the short run, a sudden escalation would likely tip the U.S. toward stagflation: higher inflation (via import costs) and a hit to business investment and exports. China’s growth would also drop 1–2 percentage points​

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, with its export sector reeling. Both equity markets would slump on earnings downgrades and uncertainty. Importantly, second-order effects might amplify the shock: if China restricts exports of vital materials (e.g. rare earths used in electronics and EVs), it could cripple U.S. supply chains in tech and defense manufacturing. A Wedbush analysis warned that 50% U.S. tariffs (and related curbs) on Chinese and Taiwanese tech imports could “essentially cause a shut-off valve” for the U.S. tech industry – setting it back a decade and raising consumer electronics prices 40–50%​

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. This scenario thus risks not only a cyclical downturn, but also structural damage to industries and a collapse in any remaining trust between the two superpowers. Key Triggers: Potential triggers include: political events – e.g. a U.S. policy shift to appear tough on China (tariffs, sanctions) or Chinese nationalist reaction to a perceived provocation (such as high-profile U.S. visits to Taiwan or new sanctions on Chinese officials); security incidents – an accident in the South China Sea or a spy balloon-style incident leading to tit-for-tat sanctions; or economic aggression – China might weaponize its leverage in critical supply chains if pushed (as hinted by its rare earth export ban threat​

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). A failure of diplomatic channels and any breakdown of talks would raise the odds. Notably, the U.S. 2024 election outcome is pivotal – a leadership favoring protectionism could rapidly accelerate this escalation, as reflected in scenario analyses by the Economist Intelligence Unit (EIU) and others​

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. Market Impact & Positioning: A sharp escalation would roil global markets, but also create clear winners and losers. Volatility would spike as investors flee risk. Our positioning aims to short the most vulnerable assets while taking long positions in any potential havens or beneficiaries:

Equities: The immediate play is risk-off: short broad equity indices (especially in export-reliant markets like China, Korea, Germany) and rotate into only the most defensive stocks. Within U.S. equities, sectors with China exposure get hit hardest – technology (semiconductors, hardware), manufacturing, and consumer products (e.g. Apple, chipmakers, auto companies) would see earnings crumble from lost sales or higher input costs. By contrast, domestic-focused, inelastic sectors would comparatively outperform. For instance, healthcare services and utilities (which are tariff-insulated) might hold up​

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. One could long a defensive basket (e.g. healthcare providers) against a short in a China-sensitive basket (e.g. the Philadelphia Semiconductor Index). Another strategy: within Asia, short Hong Kong/Chinese equities (which in one severe case fell >20% into bear market territory​

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) while going long India or ASEAN markets that could pick up manufacturing share in the long run.

Fixed Income: Escalation puts the Fed in a bind – higher tariffs spur inflation, but growth would falter. Initially, long-term Treasuries could rally on a rush to safety and expectations that the growth hit will force eventual rate cuts (similar to 2019 when the last trade war inversion led to Fed easing). In fact, during a late-2023 tariff scare, investors flocked to Treasuries, knocking the 10-year yield below 4% on flight-to-quality​

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. We would overweight long-duration U.S. Treasuries (or Treasury futures) as a hedge. Investment-grade bonds of non-cyclical sectors might also outperform as investors seek stability. However, inflation-protected securities (TIPS) are also valuable – markets may underestimate the inflation impulse from supply shocks, so holding TIPS hedges against upside CPI surprises. Credit: Avoid high-yield and EM dollar debt, as risk spreads would blow out.

Commodities: Expect bifurcation. Industrial commodities likely slump in demand – e.g. oil could weaken due to anticipated global growth declines (unless a conflict chokes supply routes). However, certain commodities become strategic flashpoints: critical minerals and metals may see price spikes if supply is curtailed. A prime example is rare earth metals – crucial for electronics and EVs – where China controls the majority of global supply. Any Chinese embargo (as threatened) could send prices soaring and benefit non-Chinese producers. Thus, a potential trade is long rare earth oxide prices or equities of producers in Australia/US. Another likely winner is gold, the classic panic asset. We would increase allocation to gold or gold miners, as trade war escalation often drives investors into precious metals (gold tends to thrive on the “fear trade” in such geopolitical crises). In 2019’s escalation episodes, gold rallied strongly amid equity turmoil. We’d also watch agricultural commodities: China might cease buying U.S. farm goods (as it did before), which could depress U.S. soybean/corn prices initially – yet if China then faces food shortfalls, global prices could whipsaw. Active traders could consider long volatility or option strategies on agri-commodities.

FX: A flight to safety in FX would likely propel the U.S. dollar higher against most currencies (as in past global risk-off episodes). The Chinese yuan would depreciate markedly – potentially managed past key lows as Beijing lets the currency buffer some tariff pain​

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. We’d position long USD vs. CNY (offshore yuan) and vs. other trade-sensitive currencies (Korean won, Taiwanese dollar, Australian dollar). The Japanese yen could rally too as a safe haven (though if the trade war is seen as U.S.-centric risk, USD might outperform even JPY). Also, expect capital flight from China – short CNH and possibly short HKD (within its peg bounds) could be plays. In a truly severe tariff spiral, U.S. allies’ currencies might strengthen relative to China’s as trade realigns – for instance, the Mexican peso or Vietnamese dong could see inflows as supply chains reroute. But near-term, the overwhelming move is risk aversion: long USD, long JPY, short EM FX.

Relative Value & Thematic Plays: Within this escalation scenario, some relative trades merit highlighting. For example, long U.S. Defense stocks vs. short Consumer Discretionary: Rising geopolitical risk and decoupling would boost defense spending and contractors’ revenues, while consumer goods companies face cost pressures. Additionally, one could go long Vietnam/Mexico equity markets vs. short Chinese equities, as those countries absorb manufacturing that diverts from China – a trend likely to accelerate under heavier tariffs (Vietnam’s exports to the U.S. have jumped in recent years as “transshipment” hubs​

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). Another theme is automation and reshoring: U.S. firms will try to mitigate China risks by bringing production home or to allies – investors could buy industrial automation firms, robotics, or U.S. construction and manufacturing ETFs (expecting government incentives for local production). These thematic plays aim to capture the longer-term adjustments that a protracted trade war would set in motion.

Long-Term Scenarios (Beyond 6 Months)

Scenario A: Strategic Détente by 2030 (Managed Competition)

In this best-case long-term scenario, the U.S. and China gradually find a modus vivendi – a form of managed coexistence reminiscent of a Cold War détente. By the later 2020s, recognizing the mutual economic damage of endless confrontation, both sides opt to stabilize trade relations. Tariff levels might remain elevated relative to pre-2018, but cease rising and even modestly recede as minor trade agreements are reached. Strategic rivalry continues, yet is bounded by new “guardrails”: improved military-to-military communication, agreements on certain global rules (e.g. AI governance, climate goods), and tacit understandings on limiting economic warfare. Geopolitical Dimension: This scenario could emerge if China moderates some of its more aggressive economic practices and the U.S. acknowledges that a degree of economic interdependence is preferable to full decoupling. A core bargain might involve the U.S. accepting China’s continued development and regional influence, while China refrains from seeking global hegemony or forcibly altering the territorial status quo (especially regarding Taiwan)​

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. Trust remains low, but both nations step back from the brink, focusing on domestic challenges. By the 2030s, trade frictions dwindle and the punitive tariffs of the late 2010s/2020s are partly rolled back​

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. Bilateral trade flows would still be significant, even if not at prior peaks, as both economies remain intertwined to a substantial degree. In this outcome, global supply chains reconfigure but don’t shatter – China continues to be a major trading partner (albeit with a somewhat reduced share), and companies operate in both markets with more certainty. Macroeconomic Effects: A détente would be a boon to long-term growth and price stability. U.S. inflation would be lower by perhaps ~0.5% annually than in a high-tariff world (as supply chains optimize), and U.S. firms would have larger markets and inputs. China would likely maintain more robust GDP growth with less external drag. Global GDP could be several percentage points higher in the 2030s under this cooperative scenario than under a fragmented scenario​

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. That said, this isn’t a return to pre-2017 “Chimerica” globalization – security considerations still prevent a full return to free trade bliss. Key tech sectors remain decoupled to protect national security (“small yard, high fence” approach persists for cutting-edge tech​

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), but outside of sensitive areas, trade and investment flow relatively freely. Triggers/Signs: This scenario might gain traction if moderate leadership comes to power in either capital (leaders who prioritize economic growth over confrontation). If, for example, domestic economic troubles in China force Beijing to seek foreign investment and export growth, it may soften its stance to entice the U.S. Likewise, in the U.S., if voters prioritize economic issues and inflation relief, politicians may recalibrate trade policy away from blanket tariffs toward targeted diplomacy. Allied pressure could also play a role – U.S. allies and U.S. businesses lobbying for a more predictable U.S.–China relationship. Breakthroughs on global challenges (climate cooperation, global health) might build trust incrementally. Financial Positioning: A long-term thaw offers a tailwind for risk assets and global diversification, so positioning would favor a pro-risk, pro-globalization tilt:

Equities: This is a scenario to lean into emerging markets and cyclical growth. Chinese equities and those of trade-dependent Asian economies would have a structurally higher ceiling. A family office could take long-term positions in sectors that benefit from restored trade flows – for instance, luxury goods and agriculture (as Chinese consumer demand opens more to U.S./European products), or U.S. multinationals with significant China exposure (e.g. firms like Boeing or GM would see revived export potential if tariffs drop and China refrains from favoritism against foreign firms). Also, global supply chain beneficiaries: logistics and shipping companies would benefit from higher trade volumes. Thematic plays: Emerging market consumer stocks (as middle-class growth resumes with less fear of sanctions), and Tech – while core strategic tech stays bifurcated, a détente might allow some normalization for companies like Qualcomm, Nvidia, etc., which in this scenario can sell to China more freely (within agreed limits) – boosting earnings.

Fixed Income: Improved macro stability means lower risk premia. One would position for narrower credit spreads globally – e.g. going long EM sovereign bonds (China, Southeast Asia) expecting ratings improvements and capital inflows. U.S. Treasuries might see slightly higher yields (stronger global growth outlook), but the overall bond environment is benign with moderate inflation. It could pay to extend duration in corporate bonds of companies that were borderline due to trade issues – they might get upgraded if trade headwinds ease. Chinese government bonds could also rally as foreign investors gain confidence in China’s stability and seek its relatively high yields.

Commodities: A smoother U.S.–China relationship would likely increase global demand over the long haul (no trade war to depress investment). So broad commodities (energy, metals) have positive demand trajectory, though not a super-spike. However, one commodity might underperform: gold, as reduced geopolitical risk lowers safe-haven demand over time. Thus, one might underweight gold in strategic allocation. Conversely, industrial metals (copper, aluminum) could be relative winners as global infrastructure and trade projects proceed with fewer restrictions. Oil demand would also be higher (a cooperative world likely means higher growth), but simultaneously, cooperation on climate could check fossil fuel use – so perhaps a neutral stance on oil, with a slight bias to upside demand risk.

FX: Reversal of “safe-haven premium.” The U.S. dollar might gradually weaken versus EM and high-yield currencies as capital flows diversify. We would position for strength in Asian currencies – Chinese yuan, Korean won, Singapore dollar – as trade resumes vigor. The yuan could appreciate if China opens its financial markets in the spirit of détente and if the trade surplus remains high with fewer U.S. tariffs. Commodity currencies (Aussie, Canadian dollars) would also benefit from revived global trade and Chinese commodity import demand. Meanwhile, currencies like the Japanese yen and Swiss franc might underperform as less risk aversion reduces their appeal. In short, a long-term risk-on currency rotation: long EM FX, short USD and JPY (on a trend basis).

Scenario B: Prolonged Cold War (Partial Decoupling)

This scenario envisions the U.S.–China economic conflict grinding on for years or decades, defining a new normal of partial decoupling and bloc-based globalization. Unlike the détente scenario, here strategic distrust persists or worsens, yet an outright catastrophic break is avoided. It is essentially an elongated version of the status quo, with periods of stress and uneasy calm, but overall an inexorable pull toward two competing economic spheres. The U.S. and allied economies increasingly “de-risk” supply chains away from China (as Treasury Secretary Yellen advocates de-risking, not decoupling, though in practice it edges toward decoupling), while China doubles down on self-reliance programs (e.g. “Made in China 2025”) and seeks new markets via its Belt and Road initiative. Tariffs and export controls remain in place and could even ratchet higher at times, but neither side imposes an absolute embargo. By the late 2020s, U.S.–China trade is notably lower as a share of their economies: bilateral trade might be, say, half of today’s level. High-tech trade is largely severed – for example, by 2030 China has indigenous suppliers for most chips and is no longer buying U.S. semiconductors, while the U.S. sources critical minerals and pharmaceuticals from non-Chinese suppliers. Global Macroeconomic Dimension: This decoupling is costly: studies by the IMF and others estimate that a bifurcated world could reduce long-run global GDP by 1.5–5% versus baseline, depending on how severe the split is​

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. The U.S. economy, with its diversified partners, might fare slightly better than China’s in relative terms, but still faces higher production costs and lost export markets – a permanent efficiency loss. For instance, Oxford Economics modeling finds that even a less-than-total tariff war (e.g. 25–45% tariffs) would leave U.S. GDP ~1% lower and China’s ~1.4% lower than otherwise in the long term​

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. Inflation runs higher due to duplicated supply chains and less specialization; central banks struggle with supply-side constraints. However, unlike the catastrophic scenario, the system adjusts gradually – there is time for businesses to adapt by diversifying suppliers (Vietnam, India, Mexico see big investment) and for new trade pacts among like-minded countries (e.g. USMCA, EU-U.S. deals, RCEP within Asia minus U.S.) to partially fill the void. Geopolitically, the world divides into two semi-cohesive blocs: a U.S.-led bloc that curtails tech trade with China, and a China-centric bloc (including Russia, Iran, parts of the Global South) that trades within its own networks. Some neutral countries (e.g. in Europe or Southeast Asia) try to maintain ties with both but face pressure to choose sides on key technologies and standards. Key Triggers/Assumptions: This scenario is essentially an extrapolation of current trends. Its realization would be reinforced if hawkish policies on both sides continue unabated. For example, if U.S. legislation further restricts investments and imports from China (as several bills propose​

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), and China responds with its own subtler protectionism (state subsidies, informal boycotts of U.S. brands), decoupling marches on. The absence of any serious attempt at rapprochement (perhaps due to entrenched public opinion hostile to the other country) would cement a long-term standoff. Notably, even a leadership change might not avert this: as an AP analysis noted, both Republican and Democratic establishments have converged on tougher China trade stances​

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. This bipartisan consensus makes a prolonged economic cold war quite plausible. External shocks could accelerate decoupling – e.g. another pandemic or conflict that highlights over-reliance on China might prompt a rush to “secure” supply chains domestically or in allied nations, locking in the separation. Financial Positioning: In a drawn-out partial decoupling, investors should anticipate a reordering of winners and losers in the global market. This is a structural, secular theme to position for, with less emphasis on immediate volatility and more on long-term allocation shifts:

Equities – Regional & Sectoral Allocation: The broad implication is to underweight Chinese equities and companies heavily tied to China, and overweight markets poised to gain from supply-chain realignment. For example, India, Southeast Asia, Mexico, and other “friend-shoring” destinations could enjoy decades-long investment booms. An investor could build a basket of stocks or ETFs in these markets (e.g. Indian industrials, Vietnamese exporters, Mexican manufacturing firms) to capture the secular growth as multinationals build factories there. Meanwhile, Chinese equities may suffer a valuation discount (geopolitical risk premium, lower foreign capital inflows), so trim direct China exposure. Within U.S. equities, favor sectors backed by industrial policy and deglobalization trends: domestic manufacturing, defense, cybersecurity, critical minerals mining, and infrastructure. The U.S. government is pouring money into local semiconductor fabs (via the CHIPS Act) and EV supply chains; those companies have a tailwind in a world where security of supply is paramount. Conversely, sectors that thrived on global integration – think of apparel retailers reliant on low-cost Chinese labor, or tech firms relying on Chinese sales – face secular headwinds. One thematic play: automation and robotics firms in the U.S. (and developed allies) stand to gain as labor-intensive production shifts from China and needs to be cost-competitive – thus factories will heavily automate. Another theme: Resource nationalism – owning stakes in companies that control strategic resources (lithium, rare earths, etc.) outside of China, as countries race to secure these for their own bloc.

Fixed Income: Over the long haul, partial decoupling could raise government debt levels (due to defense and industrial spending) and put mild upward pressure on interest rates (higher cost structures). Still, it’s a slow burn. For bonds, the strategy might be to favor allied and domestic debt over Chinese debt. U.S. Treasuries remain the world’s safe asset – in a bifurcated world, that might even strengthen (if Chinese capital can’t freely flow into Treasuries, the U.S. will rely on domestic and ally investors, but those might still prefer Treasuries over Chinese bonds given rule-of-law concerns). Chinese bonds could become less attractive to international investors, potentially requiring higher yields to attract capital. Credit: within the U.S., we’d watch for which companies handle the transition well. Likely, U.S. firms that successfully localize supply chains will have more stable cash flows (good for credit), whereas firms that cannot easily replace Chinese inputs could see margin pressure (negative for credit). One actionable idea is long-term U.S. infrastructure bonds or green bonds – as decoupling might involve large projects (ports, chip plants, power grids) to support new supply chains, offering investment opportunities in debt financing those projects.

Commodities: Partial decoupling means duplication of supply chains, hence potentially higher demand for certain commodities. For instance, to secure critical materials, the U.S. and allies will stockpile and invest in mining – bullish for commodities like rare earths, lithium, cobalt, nickel. We would maintain long exposure to critical metals needed for technology and defense, expecting sustained demand and possibly tight supply (since not buying from China might mean more expensive extraction elsewhere). Energy commodities might see a shift: the West could reduce reliance on Chinese refining capacity, invest in domestic capabilities – so perhaps neutral to slightly positive for oil/gas in allied nations. However, if decoupling slows global growth somewhat, that can dampen broad commodity demand. On net, focus on strategic commodities over broad index. Also, agriculture might split – China might import less from the U.S. (more from Brazil, etc.), affecting grain trade flows but not necessarily prices globally. Gold could maintain a role as a hedge – interestingly, in a polarized world, central banks (notably China and Russia) have been increasing gold reserves to reduce reliance on the dollar system. So gold demand from central banks could remain robust​

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. An investor may keep a core gold position as a hedge against the tail risks inherent in a cold war environment.

FX: A world of two blocs could lead to more fragmented currency movements. The U.S. dollar might retain its dominance within its bloc, but China will push for greater use of the renminbi in its own sphere. Over time, this could erode the dollar’s share of global reserves modestly. We might see the emergence of parallel financial systems – one centered on USD, one on CNY. For positioning, one might hold a basket of ally currencies (USD, EUR, JPY) as the relatively stable bloc, and be cautious on currencies of countries caught in between or heavily tied to China’s economy (such as some emerging Asian currencies). The Chinese yuan could become more widely used in Asia and Africa, but unless fully convertible, it won’t rival the dollar globally. Investors could short currencies of economies most hurt by decoupling – e.g. those who rely on re-exporting Chinese components. For example, if South Korea struggles to replace the Chinese market for its electronics, the KRW might underperform over time. On the other hand, currencies like the Indian rupee or Mexican peso might see structural appreciation if those economies benefit from supply chain relocation and more FDI. Thus, a selective long EM FX strategy: long the “new supply chain” beneficiaries (INR, MXN, VND) and short the China-dependent ones (KRW, THB, AUD to an extent).

Overall, the prolonged cold war scenario calls for diversification and picking the structural winners of a bifurcated world, while hedging tail risks. It’s not an explosive crisis, but rather an endurance test for corporations and investors – rewarding those who adapt.

Scenario C: Catastrophic Breakdown – Full Decoupling or Conflict (Worst Case)

Description: This is the tail-risk scenario that keeps security analysts up at night: the US–China confrontation escalates to a truly catastrophic level for the U.S. economy (and the global economy). It could manifest as an abrupt, complete economic divorce (“avalanche decoupling”) or even a direct military conflict that forces a full decoupling overnight. The most plausible pathway discussed in policy circles is a war over Taiwan that draws in the U.S. and leads to an immediate severance of most trade and financial ties. In such an event, both governments would impose maximal sanctions: the U.S. would embargo Chinese goods and freeze financial assets; China might nationalize U.S. corporate assets in China and cut off all exports to the U.S. (including rare earths, pharmaceuticals, electronics), truly pulling the plug on supply chains. As Foreign Affairs analysts warn, “a sudden economic break between Beijing and Washington would be devastating for the United States and catastrophic for the rest of the world. Financial panic and supply chain disruptions would fracture the international economic order and undermine U.S. leadership”​

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. In essence, this scenario is Great Depression meets Cold War – a seismic shock that could rival or exceed 2008 and 2020 in severity, especially for the U.S. economy which has not faced a peer adversary decoupling of this magnitude in the modern era. Specific Pathways: The spark could be a Taiwan invasion or military clash in the South China Sea. Short of hot war, another conceivable trigger is a drastic miscalculation like a Chinese financial sanction on the U.S. (e.g. dumping U.S. Treasuries) met with a U.S. retaliatory asset freeze – spiraling into financial warfare that effectively cuts off economic ties. Regardless of cause, the outcome is full cessation of U.S.–China commerce for a protracted period. This means the U.S. suddenly loses its top source of many goods – everything from smartphones and solar panels to basic antibiotics (the U.S. source ~80% of its antibiotics from China). American companies lose access to 1.4 billion consumers in China overnight. On the financial side, confidence in U.S. Treasuries could be shaken if China (a major creditor) sells off holdings, potentially spiking U.S. interest rates. The supply shock would send U.S. inflation skyrocketing in the short run, even as the collapse in trade sends the global economy into deep recession. Economic Impact: Catastrophic indeed – analysts project major contractions for both economies. The Stimson Center notes that in a Taiwan war scenario, the U.S. and China “would most likely suffer major economic contractions… global trade would shrivel, and supply chains would freeze, plunging the global economy into a tailspin”​

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. Taiwan’s destruction alone would wreak havoc, given it produces 92% of advanced chips​

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– suddenly, the U.S. (and everyone) would face acute semiconductor shortages, crippling everything from cars to data centers. A prolonged cutoff from China would mean the U.S. cannot quickly source alternatives for many goods, causing severe scarcity and rationing until domestic or third-country production can ramp up (which could take years for complex products). Unemployment would surge as industries from electronics assembly to aerospace (Boeing’s China market gone) downsize. Financial markets would likely crash initially – a “financial panic” as Foreign Affairs put it​

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– with U.S. equities potentially dropping 30-50% in a short span, reflecting the sudden loss of corporate earnings and sky-high uncertainty. It’s hard to overstate the chaos in this scenario: imagine 1970s-style stagflation but in a far more interconnected world – perhaps inflation in the low double digits due to supply shortages, combined with a double-digit unemployment recession due to demand collapse and confidence crisis. The dollar’s status could also be shaken; while investors might flee to dollars at first for safety, the U.S. could face questions about its long-term fiscal capacity if it’s embroiled in an expensive economic/kinetic war. Importantly, even after the initial crash, the recovery would be slow because the global economic order would be shattered. The WTO and multilateral trade regimes would likely be paralyzed (two linchpins of the system at war). Allies would scramble to form new trade blocs, but the efficiency losses are large. In an extreme worst case, if the conflict went nuclear (a possibility in a full war, however remote), the devastation is beyond economic – but even a non-nuclear full conventional war would set economies back by decades. Triggers: The primary trigger is geopolitical aggression crossing red lines – notably a Taiwan invasion. U.S. and Chinese leaders have signaled that conflict must be avoided, yet each side is also ramping up military preparations. Miscalculation is the danger. Short of war, a cycle of escalation that neither side backs down from (e.g. U.S. sanctions leading to Chinese retaliation, leading to more sanctions…) could reach a breaking point. Key warning signs would be: explicit threats of asset freezes, orders for companies to leave a country (for instance, a U.S. order to divest from China or vice versa), or moves to a wartime footing. Another trigger could be domestic instability in China – if severe economic troubles or political instability occur, the leadership might externalize the crisis by aggressively confronting the U.S., even at great cost. Market Positioning: In a truly catastrophic scenario, preservation of capital becomes the priority – traditional notions of alpha give way to survival and then opportunistic bets on the eventual rebound or new order. That said, a nimble (and perhaps very contrarian) strategy can yield outsized returns even in disaster by anticipating the dislocations:

Immediate Term Hedging: Initially, one would want maximum hedges – long put options on broad indices, long volatility (VIX futures or options), and a heavy allocation to safe havens outside the conflict zone. The classic safe haven would be gold – likely soaring to unprecedented levels as no fiat currency would be wholly trusted (even the dollar might be questioned). Gold is one of the few assets with no liability attached, making it invaluable when sovereign assets could be frozen or defaulted. Already, officials like Yellen have acknowledged that a full decoupling would be “economically disastrous”​

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– if that looms, gold and possibly Bitcoin (as an alternative store of value) could surge. Long gold, long volatility, long cash in a mix of stable jurisdictions is the triad for the initial phase. U.S. Treasuries might rally briefly as a reflex, but one must be cautious – if China dumps Treasuries or if war spending soars, U.S. bonds could later face selling. It might be prudent to hold some Swiss government bonds or other non-U.S. safe debt as well.

Equities: All equities would slump initially, but some could eventually benefit or at least recover faster. For instance, U.S. domestic manufacturers and substitution industries would, after an adjustment period, see enormous demand – companies making products that used to be imported would get a windfall (assuming they can source inputs). Investors could start bottom-fishing essential sectors once prices have collapsed – e.g. U.S. steel producers, textile makers, electronics manufacturers – essentially betting on a forced renaissance of American manufacturing due to necessity. Defense and aerospace stocks likely outperform the broader market (though even they might dip initially in a market panic) – ultimately, a conflict means massive government spending on defense, benefiting contractors. An alpha idea here is to go long stocks of companies that produce critical components domestically; for example, a company like Texas Instruments that still manufactures some semiconductors on U.S. soil might fare better than peers entirely reliant on Asian fabs. Similarly, firms in sectors of energy and food – areas where North America is relatively self-sufficient – could gain. Think of Canadian potash miners (replacing Chinese fertilizers) or U.S. shale oil producers (if Middle East supply is constrained due to war alliances). On the short side, one would absolutely avoid or short companies like Nike, Apple, Starbucks – consumer brands that not only lose the China market but also their supply chain. Also, any company with a significant portion of manufacturing in China would be in existential crisis (e.g. many apparel retailers).

Fixed Income: In the depths of the crisis, corporate defaults would spike, especially for firms suddenly cut off from supplies or markets. High-yield bonds and leveraged loans would trade at deep distress. A daring but potentially very profitable strategy would be to prepare to buy distressed debt of companies that you judge can weather the decoupling (or that have valuable enough assets to recover later). For instance, if a major industrial firm’s bonds crash to 50 cents on the dollar, but you believe the U.S. government will bail it out as a strategic industry, that could yield a huge gain. Sovereign debt positions should favor countries likely to stay neutral and stable – perhaps some allocation to things like Swiss franc assets, Singapore government bonds, etc., as those financial hubs might serve as refuges.

Commodities: In a hot war scenario, commodities could see violent moves. Oil prices might skyrocket if conflict threatens shipping lanes in the South China Sea or if the U.S. and China start scrambling for energy (China might face an embargo, the U.S. might ensure supply for allies). We could see oil well above any previous highs in a full confrontation – thus, holding long-dated oil call options or energy ETFs could be a lottery-ticket payoff. Agricultural commodities could be critical – China is a huge importer of soy, corn; if it’s cut off, those U.S. farmers lose a market but global prices might not fall because China will try to buy elsewhere (driving up prices outside U.S.). It’s complex, but likely food prices jump globally due to war disruptions. Grain futures might merit a long position after an initial U.S. oversupply shock. Industrial metals might initially crash (global recession) but then certain ones spike if they become strategic (like copper for rebuilding infrastructure after conflict). An investor might create a barbell: long energy and precious metals for the conflict phase, and once the dust settles, rotate into base metals for the rebuilding phase.

FX: Currency dynamics would be unprecedented. Initially, the U.S. dollar might surge as global investors seek safety in the world’s reserve currency and U.S. allies coordinate around the dollar. However, if the war is protracted and truly decoupling, the dollar’s long-term hegemony could be at risk – the rest of the world (particularly neutral nations) might seek to diversify away from both the dollar and yuan blocs. It’s conceivable that alternative currency blocs or even a global digital currency get momentum if trust in the dollar system is shaken by U.S. financial sanctions (as seen in the Russia case). But such shifts are slow. In the actionable horizon, we would go long USD against most emerging currencies at first. The Chinese yuan would likely plummet (possibly becoming non-convertible and black-market if sanctions hit). Eventually, the euro and yen might also gain as secondary safe havens. One might hold long USD and JPY positions through the acute phase. If one truly feared a U.S. default risk (in a nightmare scenario of China dumping debt and war expenses), then holding some gold and maybe Swiss francs is insurance. In summary, FX positioning is long the currencies of the U.S. and its close allies, short the rest. After the conflict, if the U.S. emerges with allies intact, the dollar might remain king – but if global confidence erodes, hard assets trump currencies.

In a catastrophic scenario, flexibility is key. The environment would be highly fluid, with government interventions at every turn (market closures, capital controls, nationalizations). Generating alpha would require swift moves and likely contrarian courage to buy when others are panicking – but also the wisdom to hedge against further tail risk (for instance, always maintaining some gold/vol hedges until stability clearly returns). This scenario is low-probability, but its impact is so severe that incorporating hedges for it (like out-of-the-money put options, gold, etc.) into the portfolio is prudent even in more benign base cases. As WTO officials have warned, tit-for-tat trade wars (let alone shooting wars) would have “catastrophic consequences for global growth”​

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– thus, part of the family office’s strategy is ensuring survival through the worst case, while tactically positioning to seize opportunities that such turmoil would create (e.g. buying depressed assets that will be essential in the new post-conflict economy).

Scenario Outcomes vs. Optimal Positioning – Summary Table

To synthesize the above analysis, the table below compares the key features of each scenario (short-term and long-term) along with suggested financial positioning strategies to generate alpha or protect capital. This provides a high-level roadmap for shifting investments based on which scenario (or mix of scenarios) seems to be unfolding, and highlights how different asset classes and themes become attractive under each outcome.

Scenario (Horizon) Outcome & Key Features Alpha-Generating Positioning (Trades & Exposures)

Short-Term Truce (6-month) – De-escalation Partial easing of trade war: No new tariffs; possible rollback of some duties.

Improved sentiment; minor boost to US & China growth.

Geopolitical calm, continued dialogue. Equities: Overweight China & EM equities; go long multinationals with China exposure (tech, consumer).

Fixed Income: Underweight safe havens – e.g. lighten USTs as yields may rise with risk-on.

Commodities: Short gold, long industrial metals (anticipating higher demand).

FX: Long EM FX & CNY vs USD (risk-on flows to EM).

Status Quo Stalemate (6-month) – Baseline Tensions frozen: Tariffs and restrictions unchanged.

Continued gradual supply-chain shifts; moderate drag on growth and slight inflation.

No major shocks in near-term. Equities: Favor domestic-oriented stocks (healthcare, utilities); underweight firms reliant on China trade (retail, hardware).

Fixed Income: Neutral duration; monitor corporate spreads (tariff-exposed sectors at risk).

Commodities: Little change; stay long rare earths as a hedge (China risk)​

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FX: Range-bound – maintain slight long USD vs Asian FX bias.

Renewed Escalation (6-month) – Trade War 2.0 Significant escalation: New tariffs or export bans from US, retaliations from China.

Higher US inflation + slower growth (stagflation risk); China GDP hit −1 to −2%.

Markets volatile, risk-off mood. Equities: Short global cyclicals (esp. Chinese and EU exporters); long defensive sectors and defense stocks. Pair trade: long US healthcare vs short semiconductor index​

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Fixed Income: Long long-term Treasuries (flight to quality); add TIPS (inflation hedge). Avoid high-yield/EM credit.

Commodities: Long gold (safe haven) and strategic metals (e.g. rare earth plays) on supply risk; potentially short oil (growth worries).

FX: Long USD and JPY (safe havens); short CNY, KRW, AUD (trade-sensitive currencies).

Strategic Détente (Long-term) – Coexistence Managed competition: Tariffs gradually reduced; cooperation on some global issues.

Trade volumes stabilize or even rise by 2030 (still high interdependence).

Geopolitical risks ease somewhat. Equities: Overweight EM and global equities; long Chinese consumer and US firms re-accessing China market (industrial, luxury).

Fixed Income: Compressing risk premia – long EM bonds, corporate credit (improved outlook).

Commodities: Underweight gold (diminished fear); overweight cyclical commodities (copper, energy) on stronger global growth.

FX: Long EM Asia FX (CNY, KRW) vs short USD; also short CHF/JPY (less demand for safety).

Prolonged Cold War (Long-term) – Partial Decoupling Persistent rivalry: High tariffs/export controls become permanent; US & China form rival blocs.

Supply chains bifurcate over years – efficiency loss weighs on global growth (~1% GDP drag)​

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Tech and capital markets separated by bloc. Equities: Tilt toward “decoupling winners” – long India/Mexico/SEA equity (manufacturing shifts), defense and infrastructure stocks; short China tech and any companies stuck between blocs.

Fixed Income: Prefer bonds within U.S./ally bloc (strong legal systems); avoid Chinese securities. Long U.S. infrastructure project bonds.

Commodities: Long critical minerals (lithium, rare earths) as each bloc stockpiles; hold core gold (hedge for geopolitical risk).

FX: Long USD and ally currencies; selectively long INR, MXN (beneficiaries of rerouted trade); short CNY (gradual weakening as foreign access shrinks) and other China-dependent FX.

Catastrophic Breakdown (Long-term) – Full Decoupling or War Severed ties / Conflict: All trade halted (e.g. Taiwan war).

Severe U.S. recession (supply shock + demand collapse); inflation soars on shortages.

Global depression; financial crisis and real economy chaos. Equities: Max short equities initially; then cherry-pick survivors – long domestic essential industries (steel, basic goods) at distressed prices; long defense/aerospace.

Fixed Income: Long volatility & cash; hold non-US safe bonds (Swiss, etc.). Later, buy distressed bonds of strategic firms (anticipating gov’t support).

Commodities: Long gold aggressively​

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; long oil (war disruption); long agricultural staples (food security).

FX: Initial long USD (global panic into dollar); long safe-haven FX (JPY, CHF). Be ready to shift if dollar leadership erodes – ultimately hard assets > any fiat.

Sources: Key assumptions and impacts are informed by reputable analyses, including IMF and Oxford Economics modeling of tariff scenarios​

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, statements by officials like U.S. Treasury Secretary Yellen warning against full decoupling​

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, and war-game economic impact studies (e.g. Stimson Center on a Taiwan conflict’s catastrophic costs​

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). These guide the probability and severity assigned to each scenario, and the positioning is tailored to exploit the market mispricings or hedging needs each outcome would create.