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TL;DR:

  • Markets predict tense negotiations, but potential US-China trade agreement by November 10th
  • Markets anticipate tariff rates between 30-40%, far lower than Trump's 100% threat
  • Traders are confident no immediate economic downturn despite trade tensions
  • Xi Jinping's political power appears unshaken by current trade disputes
  • Tesla and US Companies face potential supply chain disruptions and tapered growth in Chinese market
  • The trade war is likely to advance global economic uncertainty and reshape geopolitical dynamics over the long-term

Market Snapshots

US - China Trade

Recession

US Trade Deficit

Xi Jinping

Taiwan

Tesla

Event Breakdown

Tariffs, Tensions, and Predictions: Inside the US-China Economic Standoff: US-China trade relations are once again heating up. What does it mean for the world?

On October 9th China introduced export controls on rare-earth materials. The move appeared to be a way for China to increase its leverage going into trade negotiations with the US later this month. Further, China applied “special port fees” on ships built or operated by the US. The move echoed a similar move imposed by Washington back in April.

The following day, Trump responded with a threat to introduce an additional 100% tariff on Chinese goods, starting November 1st. 

Markets reacted violently to the downside, particularly the (altcoin) crypto market where liquidations reached a record $19B. 

Following Trump’s threat over the weekend, both JD Vance and Trump fired off messages on social media which helped de-escalate. Markets rebounded quickly

So, what’s next?

First, let’s drill into US-China trade-related prediction markets and explore what’s around the corner for the two superpowers. Then, we’ll dig into the potential implications including the likelihood of a recession, Xi Jinping’s future, Taiwan, and Tesla production.

US - China Trade War

In spite of last week’s spat and a corresponding dip in optimism, traders remain confident that the US and China will have a tariff agreement in place by November 10th.

There’s even an increase in confidence that a tariff agreement could be reached before the end of the month.

The optimism goes even further when you dig into tariff rates. Markets are anticipating a tariff rate between 30% and 40%, much lower than Trump's threat of 100%.

Traders see an easing in tensions despite the rhetoric and threats. 

However, it is becoming increasingly unlikely that China will lift the rare-earth exports ban by the end of the year. This in spite of a surge in optimism following Trump’s 100% tariff threat Friday afternoon.

Communication between Trump and Xi will be paramount to a deal getting down. We’re consequently seeing an increase in the likelihood of Trump and Xi meeting before the end of the month.

It’s interesting to see the rapid and reflexive bounce to the upside following Trump and JD Vance’s social media posts over the weekend. They were effective at calming fears, for now.

Regardless, it certainly seems as though a free trade agreement between the US and China before 2029 is unlikely.

Trade wars can have serious economic implications, especially when between two global superpowers. We’ve seen trade wars linked to recessions in the past, however the relationship is nuanced and complicated. 

That said, trade wars unequivocally shake confidence in markets, disrupt supply chains, and reduce investment. 

They introduce the catalysts necessary to fuel a recession.

Will There Be a Recession?

Recessions are difficult to forecast. Economic indicator data lags, psychology and confidence can shift rapidly, complex systems can result in unexpected effects, and policy decisions are inherently unpredictable.

Nevertheless, recession-related markets associated with China, the US, and the potential for a global recession have all been muted.

We did however see a bit of a bump in the likelihood of a US recession by the end of 2026 following Trump’s threats last Friday. It quickly reverted back the following day, though.

Similarly, markets concerning the timing of the next US recession were also flat.

Could these recession markets be suppressed as a consequence of Trump’s efforts to reduce the US’s trade deficit? 

US Trade Deficit

The Trump administration has made clear its goal to reduce the US trade deficit. Doing so can help boost domestic manufacturing, create more jobs, and provide economic resilience. It’s a key driver behind the tariffs.

Shortly before Trump’s comments Friday, Kalshi’s Will Trump halve the trade deficit before Feb 28, 2029? saw a 10-12% dip. It has since recovered 5-6%.

Did Trump’s threats help reverse the downward trend? Do traders see his negotiating tactics ultimately working in the long run when it comes to halving the US’s trade deficit before the end of his term?

It’s too early to tell, but it’s interesting to see how Trump's pressure helped reverse the downward trend.

If the US were to ultimately halve its trade deficit by 2029, what would this mean for the general secretary of the Chinese Communist Party, Xi Jinping?

Xi Jinping

Unlike Trump, Xi himself has been more subdued when it comes to public rhetoric and threats. In contrast, top Chinese trade official Li Chenggang has been very aggressive. US Treasury Secretary Scott Bessent referred to him as “unhinged”, “disrespectful” and a “wolf warrior”.

The implications for Xi in the midst of this trade war are material. They introduce economic pressure while at the same time require him to project political strength and self-reliance.

That said, Xi’s grasp on power is unmatched. Yes, this trade war introduces challenges for him, but his strong domestic position means he can likely withstand the pressure. Polymarket’s “Xi Jinping out in 2025 or 2026” markets reflect this.

If Xi’s power were to come into question from an economic downturn fueled by the trade war, the political calculus becomes more interesting. He’d be required to project more strength and potentially divert domestic political attention.

This brings us to Taiwan.

Taiwan

Xi has made clear, reunifying China with Taiwan is a long-standing goal of the CCP. If China’s economic situation were to deteriorate from the trade war and resulting deflation, Xi may feel threatened and forced to project strength by invading Taiwan as a last resort. This would of course be incredibly risky. 

However, Polymarket’s “Will China invade Taiwan in 2025 or 2026” markets closely mirror “Xi Jinping out in 2025 or 2026?” markets. Thus reflecting the trade war and the recent contentious rhetoric is having little impact on Xi’s power and the potential for a hot military conflict with Taiwan.

It’s interesting to reflect upon the implications the trade war may or may not have on China’s domestic and geopolitical situation. Now let’s circle back to what this means for US industry, in particular Tesla.

Tesla

Tesla relies heavily on China in several key areas. First, they have their Shanghai Gigafactory which is crucial to Tesla’s global operations. It’s both a production site as well as an export hub. Next, China is Tesla’s second-largest market after the United States, and critical to the company’s growth. From a supply chain standpoint, Tesla relies heavily on Chinese suppliers for key components and battery production.

If Trump’s threats of 100% tariffs are to go into effect, Tesla would likely face significant challenges including increased production costs, supply chain disruption, and reduced competitiveness in China and global markets.

In the short-term, prediction markets reacted quickly to Trump’s threats on Friday concerning Q4 Tesla delivery numbers. Interestingly, there was a rapid dip in 430,000 or more deliveries and an increase in the likelihood of  450,000 or more. It seems markets aren’t buying into Trump’s threats at least in the short-term.

On the production front for Q4 markets hardly reacted to Trump’s threats.

What if we look at the dynamics further out?

In recent days, Kalshi’s “How much will Tesla deliveries grow before 2027?” market and its above 500,000 strike nearly doubled while the above 750,000 strike remained unchanged.

As the trade war has heated up over the last few days, markets anticipate a more tapered increase in deliveries over the next 1.5 years. This is likely the result of pricing pressure and increased competition in the EV market.

The trade war has far reaching implications on multiple fronts. Let’s tie it all together.

What’s next?

The world is responding as the US-China trade war has reached its most contentious point, yet. In spite of the tension, markets still anticipate a tariff agreement will be in place by November 10th and that it will be well below 100%.

Despite that, markets still think it is unlikely that China will lift its rare-earths export ban by the end of the year. It’s hard to see a tariff agreement being reached by November 10th without some Chinese flexibility on that front. 

That said, it’s very likely Trump and Xi will meet before the end of the month. The November 10th market seems to be optimistic about this meeting and that ultimately a deal will get done.

Recession risk has been stable in the face of the threats and rhetoric. Markets are confident a US recession will not take place over the next few quarters. 

Trump’s threats may actually be working when it comes to the administration’s goal to halve the trade deficit.

If the US were to halve its trade deficit by the end of Trump’s second term, it would negatively impact China’s economy. That said, there’s little evidence it will impact Xi’s political power. If Xi’s power were to be threatened, we could see a potential hot conflict between China and Taiwan. At the moment that however seems unlikely.

Lastly, the trade war is unequivocally having an impact on US companies that rely on China’s manufacturing base. Tesla for instance is likely to have tapered growth over the next 1.5 years.

We still have a long way to go in this story. What is clear however is that this trade war between the world's two largest superpowers will have far reaching consequences for the global economy and further advance geopolitical uncertainty.

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