US-China trade relations are back on track after both countries announced a 90-day reduction in the steep tariffs that had threatened to derail the global economy.
Fears of a US-China trade war had been brewing ever since US president Donald Trump announced sweeping tariffs on 2 April, which he dubbed “Liberation Day”.
China was hit by a 34% levy on all its exports to the US. That alone would have been a major impediment to US-China trade, but unlike many of the other countries hit by so-called “reciprocal” tariffs, Beijing took a firm stance and retaliated by raising tariffs on its own imports from the US.
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This tit-for-tat exchange quickly ratcheted up to the point where US imports from China were subject to a 145% tariff, with 125% tariffs applied to goods moving the other way. This effectively ended US-China trade at any scale.
It is a relief, then, that the two countries issued a joint statement this morning (12 May) saying that tariffs will be reduced by 115% for 90 days. That leaves tariffs on Chinese imports to the US at 30%, while goods imported from the US into China will be taxed at 10%.
“This short-term reprieve is an encouraging signal for markets and should help restore some confidence,” says Stuart Rumble, head of investment directing, Asia Pacific, at Fidelity International.
The agreement doesn’t constitute a full US-China trade deal, but it is still a significant improvement in relations between the two countries, and ought to reassure markets that global trade isn’t on the verge of collapse.
US-China trade agreement lifts markets
The US and China are the world’s two largest economies, by some distance. According to the World Bank, the two countries accounted for around 43% of global GDP between them in 2023, the most recent year for which data is available.
Country | 2023 GDP ($ trillion) |
|---|---|
USA | 27.72 |
China | 17.79 |
Germany | 4.53 |
Japan | 4.20 |
India | 3.57 |
UK | 3.38 |
Source: World Bank
Nearly half the world’s goods are produced in either country. China’s share of global manufacturing output is 28.9% and the US’ 17.2%, according to United Nations Statistics Division data.
With the two countries playing such a pivotal role in the global economy, the danger was that the US-China trade war could lead to a global recession. It is no surprise that the announcement of the temporary pause lifted investors’ spirits.
“The high US-China tariff regime has already caused major disruption, reducing bilateral trade between the world’s two largest economies and increasing the risk of a broader global slowdown,” says Rumble. “Although the reductions are temporary, they represent a notable shift in the overall effective tariff burden.”
Markets gained on 12 May, with the Hang Seng Index gaining around 3% and S&P Futures up 2.8% as of 10.50am in London.
Is this a full US-China trade deal?
In short, no.
It’s a welcome step back from the trade-ending barriers that had been erected, but US-China trade is still in a worse place now than it was at the start of April.
“Follow-through matters more than headlines,” says Lale Akoner, global market analyst at eToro. “The deal is still short on detail, and it’s unclear what an “acceptable” outcome looks like for either side. China wants full rollback; the US is still chasing trade balance and enforcement tools.”
She also cautions that “the 90-day cool-off echoes 2018’s ceasefire which ultimately collapsed into deeper conflict.”
It does, however, pave the way for a more comprehensive US-China trade deal.
All the same, the Liberation Day tariffs could have done lasting damage to US-China trade.
“Much of the shift in global trade flows has already begun,” says Rumble. “The decline in direct US-China trade has driven increased rerouting through Southeast Asia and other so-called third countries.”
Which other countries could follow the US-China trade agreement?
The US-China trade announcement followed hot on the heels that a UK-US trade deal had been negotiated. With two major trade agreements reached over the weekend, the US appears to be rowing back from its protectionist stance.
Japan could be one of the next countries to improve its trade relationship with the US. Reuters reported on 22 April that the basics of a trade deal with the US were taking shape, and Japan’s prime minister Shigeru Ishiba told Fuji Television on Sunday (11 May) that “discussions have gradually come together”.
“While Japan was one of the first to begin tariff negotiations, the US has so far said it won’t budge on the 10% levy that applies to all countries or the tariffs on cars and steel products,” says Kate Marshall, lead investment analyst at Hargreaves Lansdown.
Another question mark surrounds the potential for a trade deal between the US and the EU. Negotiations here are seemingly in early stages: European Commission president Ursula von der Leyen told a press conference on Friday that she would not visit Trump in the White House until there is a “concrete” trade package that can be discussed.
What does the US-China trade agreement mean for your investments?
Investors concerned about the impact of US-China trade tariffs can breathe a small sigh of relief – for now. However, there is still plenty of uncertainty ahead.
Investors with exposure to Asian markets will want to look into how the potential rerouting of supply chains could impact them, says Rumble. Those with a longer-term outlook might also want to consider the larger trend away from globalisation: “this development perhaps should be seen by investors as an easing of tensions within a broader, long-term shift in the US-China relationship towards greater self-sufficiency,” he adds.
“If this truce holds, it’s a real tailwind for global risk assets, especially exporters, cyclicals, and supply chain-sensitive sectors,” says Akoner.
What went up during the crisis has come down during the resolution. Gold prices fell around 2% this morning, reaching lows not seen for nearly a month.
“However, the precious metal is still 25% higher since the start of the year, indicating that nervousness remains about the global outlook,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.
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