On May 12, a significant breakthrough in U.S.-China trade talks ignited a relief rally across global stock markets and propelled the U.S. dollar higher. Despite this positive movement, investors remain cautious, fearing that further negotiations could be arduous as the specter of a global economic slowdown looms large.
Following two days of discussions with Chinese officials in Geneva, U.S. Treasury Secretary Scott Bessent announced that both nations have agreed to a 90-day pause on additional trade measures. Notably, tariffs are set to decrease by over 100 percentage points, with U.S. tariffs on Chinese goods remaining at 30% from May 14 until August 12, while Chinese duties on U.S. imports are established at 10%.
This outcome surpassed the expectations of many investors ahead of the talks, leading to a notable increase in the dollar, which surged over 1% against a basket of major currencies. In contrast, safe-haven assets such as the yen, Swiss franc, gold, and government bonds experienced declines as investors embraced riskier assets.
John Praveen, managing director at Paleo Leon in Princeton, New Jersey, remarked, "This is a relief rally indicating that the worst-case scenario regarding tariffs, which could exceed 100%, is unlikely to materialize." He emphasized that while zero tariffs might not be achieved, the situation has improved significantly.
However, the excitement surrounding the temporary agreement is tempered by the reality that a more permanent trade deal is essential. Charles Wang, chairman of Shenzhen Dragon Pacific Capital Management Co., noted, "It's long-term positive, but we face 90 days of uncertainty." Michael Metcalfe, head of macro strategy at State Street Global Markets in London, estimated that the recent U.S.-China agreement suggests an average effective tariff rate of approximately 15%, indicating a net positive outcome.
Previously, U.S. President Donald Trump implemented tariffs of 145% on imports of Chinese goods, prompting China to retaliate with tariffs of 125% on U.S. goods and restrictions on essential rare earth minerals. These drastic measures had halted nearly $600 billion in two-way trade, disrupting global supply chains and heightening fears of a potential economic downturn.
Trump's announcement on April 2, dubbed Liberation Day, which included sweeping tariffs, resulted in a sharp sell-off of U.S. assets, including the dollar and Treasuries, crucial components of the global financial system. This heightened uncertainty surrounding U.S. trade policy has adversely affected both business and consumer confidence, creating a challenging environment for decision-making.
Recent economic indicators suggest that Trump may be reconsidering his trade strategy in light of weakened economic performance and warnings from central bankers about slowing growth and rising inflation. A recent trade deal with Britain, along with positive signals from Japan, Vietnam, and South Korea, has contributed to a renewed sense of confidence, as geopolitical tensions ease.
However, Zhiwei Zhang, chief economist at Pinpoint Asset Management in Hong Kong, cautioned that the 90-day reduction in tariffs is merely a preliminary step in a lengthy negotiation process. "The two sides will likely spend months working toward a resolution or final trade deal, but this is a promising starting point," he stated.
Jane Foley, head of FX strategy at Rabobank, expressed optimism that the tariffs may not be as detrimental as initially feared. Nonetheless, she emphasized that this does not imply a return to the pre-Trump trade status quo. "We still face significant uncertainty regarding the future tariff landscape and its implications for global growth and central bank policies," she said.
As the situation evolves, concerns among investors may shift from trade issues to other pressing matters. For example, uncertainties surrounding Trump's proposed tax cuts and their potential impact on U.S. debt levels are becoming prominent, especially as tariff revenues decline. Metcalfe noted, "The U.S.-China trade deal does not eliminate policy uncertainty; it merely shifts the focus to new areas of concern."
In conclusion, while the recent U.S.-China trade agreement has sparked a wave of optimism in the markets, the path ahead remains fraught with challenges and uncertainties that will require careful navigation by policymakers and businesses alike.
