Markets are celebrating the news that the United States and China have agreed on Monday to sharply reduce import duties for 90 days. Whether they’re right to do so is another matter.
In a surprise breakthrough over the weekend, both countries announced a temporary truce in their escalating tariff war. The US will reduce tariffs on Chinese goods from 145 percent to 30 percent, while China will lower its own from 125 percent to 10 percent. The cuts apply for a 90-day period and follow two days of talks between senior officials in Geneva.
Recovery
US stocks jumped more than 3 percent on Monday, as did Chinese equities. The Stoxx Europe 600 closed 1,2 percent higher.
“While there was an expectation that we would see some movement on tariffs, the substantial reduction, albeit for an initial 90 days, in tariffs between the two countries has surprised to the upside,” said Anthony Willis, senior economist at Columbia Threadneedle Investments.
Given that the tariffs have been in place for a limited time, the economic damage should only be superficial, he said. “We anticipate a further recovery in risk appetite as market participants assess the potential for further ‘trade deals’ for other countries over the coming weeks.”
Others warn that structural distortions triggered by the trade war are already baked in. “The geopolitical storm unleashed by Trump has set changes in motion. That genie is out of the lamp, and one trade deal does not change that,” said Jordy Hermanns, multi-asset portfolio manager at Aegon Asset Management.
“This short-term reprieve is an encouraging signal for markets and should help restore some confidence. However, while the headline tariff cuts are sharp, they are also time-limited,” said Stuart Rumble, head of investment directing, Asia Pacific at Fidelity International.
According to him, the 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. The decline in direct US-China trade has driven increased rerouting through Southeast Asia and other so-called third countries, he said.
Data
Still, the biggest disruptions have yet to show up in the numbers. Consumers are still spending, layoffs haven’t increased, and companies continue to invest in machinery and restock supplies. For now, investors are relying more on soft data and anecdotes than on hard evidence of an actual slowdown.
Corporate earnings in the US also remain strong, with Big Tech leading the way. As of last Friday, nearly 90 percent of S&P 500 companies had reported first-quarter results, and according to FactSet, earnings are on track to rise more than 13 percent from a year earlier.
For European investors, Hermanns says this is about more than just sentiment. The truce shows that a negotiated outcome with the US is still possible, and it lowers the immediate risk of a global recession.
Hermanns even expects the deal to reinforce disinflationary pressure across the eurozone. Slower wage growth, a fading impact from trade rerouting, and downward pressure on commodity prices and currency effects could all contribute to lower inflation in the coming quarters, he explains.
Still, he remains cautious. “Risk premia are back at the levels from just before ‘Liberation Day’. Valuations on US equities are high, and credit spreads have returned to cycle lows. Neither reflects the current macroeconomic uncertainty.”
Diplomacy or detour?
For now, a full-scale trade rupture appears to have been avoided in Geneva, where US and Chinese officials described the weekend talks as productive.
“I’m happy to report that we made substantial progress between the United States and China in the very important trade talks,” said US Treasury Secretary Scott Bessent.
US Trade Representative Jamieson Greer added: “It’s important to understand how quickly we were able to come to agreement, which reflects that perhaps the differences were not so large as maybe thought.”
From Beijing, Vice Premier He Lifeng called the meeting “candid, in-depth and constructive” and said both sides had “achieved substantial progress and reached important consensus.” Li Chenggang, China’s chief trade negotiator, described the result as “good news for the world”.
Both sides appear willing to use domestic tools to cushion their economies. The US administration is likely to continue supporting demand through extended tax relief and other fiscal measures aimed at supporting household spending.
China, having spent years preparing for renewed trade tensions by reducing reliance on US exports, also retains the capacity to expand domestic stimulus.
Speaking Monday on CNBC, Bessent confirmed that further talks are in the pipeline. “I would imagine in the next few weeks we will be meeting again to get rolling on a more fulsome agreement,” he said. The two countries have now established a “mechanism” for ongoing negotiations, he added.
Still, the underlying dynamic, where tariffs are tools of leverage in a fragile geopolitical standoff, is still in place, Hermanns argues. “The underlying policy direction from Washington is still negative, and we remain careful in our positioning because of that,” Hermanns said. “This kind of noise is disruptive for companies. But at least the biggest risk has been postponed, for now.”
The image of this article is AI generated.