China’s Rare Earth Controls and the U.S. 100% Tariffs: Will Trump’s TACO Emerge?

The current escalation in the U.S.–China tariff conflict is not a random shock. Its roots go back to April, when Washington imposed port fees on Chinese vessels and export restrictions on AI-related technology items. The Trump administration had directly targeted China’s strategic core.

At that time, however, these measures were given a six-month grace period. Both sides projected a façade of easing tensions, and markets temporarily felt reassured. But the expiry of that grace period on October 17 reignited the issue. Because of the U.S. government shutdown, automatic extensions were not possible, and China was forced to shoulder the cost directly. In turn, Beijing retaliated with its own countermeasures, marking the beginning of a renewed tit-for-tat escalation.

Market Shock and Bond Yield Reactions

Markets immediately priced in the political tension. While equities fluctuated, the more critical signal came from long-term Treasury yields.

• Right after the tariff shock, the 10-year yield fell, signaling risk-off sentiment as investors rushed into safe assets.

• In April’s earlier episode, yields also fell initially, reflecting heightened risk aversion. Later, as Trump temporarily pulled back, yields rebounded.

This suggests that bond yields are not just a reflection of market mechanics but serve as a barometer of Trump’s next policy step. More than equity indices, the yield curve can provide an early signal for a potential policy pivot—what we call TACO (Trump Announced Concession/Offense).

Why Rising Yields Matter

Why is a rebound in yields so important? Because it represents not just growth expectations but fears of tariff-driven inflation feeding into bond markets.

Tariffs directly raise import prices. For U.S. industries heavily reliant on Chinese raw materials and intermediates, both production costs and consumer prices move higher. Bond investors demand higher nominal yields as compensation. Rising yields therefore embody a collective market signal: inflation risk is back on the table.

At this juncture, politics enters the picture. Higher prices translate into greater fiscal burdens for the U.S. government. With the shutdown already leading to administrative paralysis, government employee layoffs, and weakened consumption, any further upward pressure on yields amplifies political stress. This is precisely the point where Trump’s TACO becomes more likely.

Trump’s Pattern and the Logic of TACO

Trump’s negotiation style follows a clear sequence:

1. Push hard initially.

2. Endure market turbulence without retreat.

3. But once yields climb past a certain threshold and costs for the government and corporations become visible, he suddenly offers conciliatory gestures.

This pattern has played out repeatedly, and the current situation is unlikely to diverge. Rising yields are thus the trigger condition for a new TACO. Conversely, if yields continue to fall, risk-off sentiment will dominate, and equity markets will likely face further corrections.

Today’s Multi-Layered Risk Structure

The current turmoil cannot be explained by tariffs alone. The U.S. today faces a complex overlay of risks:

• Government shutdown → administrative paralysis, public sector layoffs, and weakened household spending

• Tariff escalation → heightened inflationary risk

• Global safe-haven flows → distortions in the bond market

These interlinked pressures magnify uncertainty. While stable yields allow the market to cope, a reversal into rising yields could unleash far greater political and economic repercussions.

Forward Scenarios

K3-Lab considers three potential scenarios from here:

1. Risk-Off Continuation

   • Falling yields → stronger safe-haven preference → deeper equity correction

   • Weaker consumption and labor market → Fed faces pressure for faster rate cuts

   • In this environment, risk assets such as small caps and cryptocurrencies are most vulnerable.

2. Conciliatory Gesture Scenario

   • Trump–Xi meeting at APEC produces partial compromise or temporary suspension → yields rebound

   • Equity indices recover on a technical bounce → TACO reemerges

   • If bond yields rise first, it would almost certainly signal a new TACO from Trump.

3. Rising Yield Scenario

   • Market fully prices in tariff-driven inflation → yields move higher

   • U.S. government’s cost burden intensifies → Trump is pushed toward a conciliatory response

Conclusion

The essence of the current standoff is this: the April measures—port fees and AI export restrictions—were the spark. With their grace period expiring in October, confrontation has reignited. Markets reacted, but the key signal to watch is the 10-year yield.

• Falling yields = risk-off, equity correction.

• Rising yields = inflation fears, government burden, higher likelihood of TACO.

Against the backdrop of a government shutdown and weakening consumption, any rise in yields would magnify both political and economic pressure. The bond market, not equities, will provide the clearer signal of Trump’s next move.

K3-Lab Positioning

From our perspective, the 10-year yield has already fallen significantly. This makes a quick equity rebound unlikely; instead, a deeper pullback into early next week is probable. However, Washington cannot afford prolonged uncertainty. We therefore expect yields to rise again, setting the stage for a TACO.

Our view: buy into the correction. The scale and duration of the pullback will be judged through the bond market, but attention should remain focused through the APEC summit. We continue to believe we are in a broader bull market. Thus, this correction should be seen not with fear but as a strategic opportunity.