A wobbly tariff fence?

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Giorgio Curti

Research Senior Associate

10 July 2025

As GK Chesterton observed, you shouldn’t tear down a fence unless you know why it was put up in the first place. There could be a bull lurking in that field. Conversely, if you’re building a wall, you should make sure it’s secure. You don’t want that bull escaping.

International trade has hit the headlines this year, as Donald Trump’s inauguration was followed by announcements of sweeping tariffs on friends and foes alike. The issue became even thornier when ‘reciprocal’ tariffs were announced on the rest of the world, starting from a minimum 10% rate. After China retaliated with its own tariff on the US, Trump raised the rate on its exports to 135%. Although the tensions have eased since, the US tariff rate on Chinese exports still stands at 51%.

But how effective is this tariff fence proving? Between March and May, Chinese monthly exports to the US fell by a third – to just under $30 billion – and are now running nearly 40% below where they would have been had they continued their 2024 trend. However, more than 90% of the decrease in exports to the US was offset by a rise in exports to the rest of the world. So total exports from China stayed roughly in line with last year’s trend.

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There are two possible explanations for this outcome: China may have successfully diversified its export market; or goods may simply have been rerouted to the US via lower-tariff countries.

There is some evidence of rerouting, especially through Southeast Asia and Taiwan. As this month’s chart shows, whilst Chinese exports to the US were $15.7 billion lower in May than in January, those to ASEAN countries were around $6.9 billion higher. If we dig deeper into the data, an interesting picture emerges: bilateral trade flows suggest a significant share of the increase in Chinese exports to ASEAN countries and Taiwan may have made its way into the US.

If goods are being rerouted, the effective tariff rate on US imports (customs revenues divided by the total value of US imports) may turn out to be lower than anticipated. That should lead to a more limited increase in production costs for US importers, translating into a smaller hit to corporate margins and less of an increase in consumer prices. Yet it would also result in disappointing revenues, worsening the US fiscal outlook just as the Big Beautiful Bill looks set to add to the government deficit.

Despite compelling evidence of some rerouting, this is unlikely to be the full story. In fact, US goods imports fell by $72 billion between March and May. Largely, this was payback for the surge in imports at the start of the year, as importers rushed to get ahead of tariffs. However, total imports are now running around 5% below their 2024 trend. So at least some of the rise in Chinese exports to the rest of the world seems to be thanks to genuine diversification of its export market.

Downbeat expectations for China’s economy have been weighing on investor sentiment, contributing to the attractiveness of Chinese equity valuations. Yet, whether thanks to market diversification or through rerouting, China’s exports so far have taken much less of a hit from US tariffs than was feared after the Liberation Day announcements. This raises the prospect of an upside surprise in economic activity – a scenario which our position in Chinese equities is well positioned to benefit from.

Giorgio Curti

Research Senior Associate

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Piers Wheeler

Director – Institutional

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Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

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Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

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