The United States has a significant trade deficit with China. However, some recent comments indicate that trade relations between the two countries are currently stable. Negotiations to manage trade terms are ongoing, and officials are generally content with how things stand right now.

Trade Deficit Concerns

We believe the remarks from a former Treasury official do not reflect the reality of the situation. The U.S. goods trade deficit with China reached a staggering $279.4 billion in 2023, according to the U.S. Census Bureau. Such a large gap is not a sign of stability; it creates ongoing economic and political tension that could escalate at any time. This overly optimistic perspective stands in stark contrast to the current administration’s statements. Officials, including Janet Yellen, have recently traveled to China to discuss concerns about the economic risks of China’s excessive industrial capacity. Additionally, the White House is considering implementing new tariffs on Chinese electric vehicles and solar products. These actions indicate that conflict is brewing rather than calm, which could lead to unexpected market shifts.

Preparing for Volatility

This situation signals it’s time to prepare for increased market volatility. We should consider buying long-dated call options on the VIX or straddles on broad market ETFs like the SPY. This approach allows us to benefit from significant market changes, regardless of whether the news drives prices up or down. History shows that markets often respond sharply to unexpected trade developments. During the height of the 2018-2019 trade war, sudden tariff announcements caused the VIX to rise above 20 multiple times, impacting traders who were caught off guard. Ignoring hard facts in favor of reassuring statements is a mistake we must avoid. A more direct strategy is to hedge against the most vulnerable sectors. We should consider purchasing protective put options on semiconductor ETFs and major industrial companies that rely heavily on Chinese supply chains. These will likely be the most affected if official statements turn out to be empty and new trade barriers are put in place. Create your live VT Markets account and start trading now.

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