China’s Commerce Ministry urged the US to remove unilateral tariffs on trading partners. It said China will defend its interests and is assessing the implications of a ruling.
The ministry said US measures, including reciprocal tariffs and fentanyl tariffs, break international trade rules and US domestic law. At the time of writing, AUD/USD was 0.14% lower at 0.7075.
How Tariffs Work
Tariffs are customs duties on imported goods or product categories. They aim to support local producers by making imported goods relatively more expensive, and are used alongside trade barriers and import quotas.
Tariffs and taxes both raise government revenue for public services, but they work differently. Tariffs are paid by importers at the port of entry, while taxes are paid at purchase by individuals and firms.
In the run-up to the November 2024 US presidential election, Donald Trump said he would use tariffs to support the US economy and domestic producers. In 2024, Mexico, China and Canada made up 42% of total US imports, and Mexico exported $466.6 billion to the US, according to the US Census Bureau.
We are treating the recent warnings from China’s Commerce Ministry with high seriousness, as they confirm the escalating trade friction we have anticipated since the new administration took office in 2025. This is not just rhetoric; it signals a new phase of potential retaliation which will directly impact market volatility. The current environment is a direct result of the tariff policies promised during the 2024 election campaign.
Positioning For Volatility
Derivative traders should anticipate sharp, sudden movements in the coming weeks, driven by policy announcements rather than economic fundamentals. We saw the VIX, a key measure of market fear, spike above 25 on three separate occasions in 2025, each time following new tariff announcements. Buying volatility through options on major indices like the S&P 500 could be a prudent way to position for the expected turbulence.
The currency markets, especially commodity-linked currencies, will be on the front line of this trade dispute. The AUD/USD is a key barometer for Chinese trade, and we have seen it fall from highs around 0.72 in early 2025 to test support below 0.68 this month. Traders should consider using options to position for further weakness, as any direct action from China will likely weigh heavily on the Australian dollar.
We must also watch key commodity markets, which are often the first targets for tit-for-tat tariffs. We should remember how Chinese retaliatory duties on agricultural products in mid-2025 caused soybean futures to drop 15% in a single quarter. Hedging exposure in agricultural and industrial metal commodities is now critical for any trader with positions in these sectors.
These trade measures are also fueling domestic inflation, complicating the Federal Reserve’s policy path. Recent Consumer Price Index (CPI) figures for January 2026 showed core inflation stubbornly holding at 3.2%, with rising import costs cited as a key factor. This sustained price pressure creates uncertainty for interest rate derivatives and bond futures.
The administration’s focus on tariffs to rebalance trade has shown mixed results, creating an environment of persistent uncertainty. U.S. Census Bureau data from late 2025 showed the trade deficit with China narrowed by 8%, but the overall U.S. trade deficit actually increased by 3% as imports were re-routed. This suggests the administration is more likely to double down on its strategy than reverse course.
