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The United States and China have agreed to suspend steep tariffs on both nations’ goods, which leads to a de-escalation in trade war tensions between the 2 largest economies. The agreement led to a 90-day pause which was announced on Monday May 5 in Geneva, has ignited optimism in financial markets and raised hopes for more negotiations in the future.
Reason Behind The Deal
The deal indicated a shift in tone with both the US and China stated that they both need to avoid economic challenges, which was stated by US Treasury Secretary Scott Bessent, indicating also a stable trade relationship. The terms of the deal are that China will reduce tariffs on US imports from 125% to 10%, while the US has to lower its tariffs on Chinese imports from 145% to 30% with 20% duties on Chinese imports relating to fentanyl will remain in place for 90 days starting May 14. ⁽¹⁾
The breakthrough follows intensive bilateral talks held over the weekend in Lake Geneva, which Bessent described as “productive and constructive.” Both sides reached an “important consensus” and agreed to establish a new economic ties to continue discussions. “We had very productive talks, and I believe that the venue, here in Lake Geneva, added great equanimity to what was a very positive process,” Bessent said at a press conference. ⁽²⁾
An Ongoing Truce With Challenges Ahead
With the tariff deal seen as a positive step, it might not resolve the US-China trade war. The 90-day agreement will be monitored for more negotiations and changes by the markets. Both countries have agreed to become committed to more discussions with other nations. Bessent stated that as long as efforts, engagements and good dialogue continue, negotiations will continue. ⁽³⁾
The agreement also touches on broader issues, such as supply chain issues that happened during the COVID-19 pandemic. Bessent highlighted the US’s focus on “strategic rebalancing” in critical industries like semiconductors, steel, and pharmaceuticals, aiming for greater independence or reliable supplies from allies. Additionally, an unexpected positive outcome was China’s willingness to address the fentanyl crisis, with Bessent noting that Chinese officials demonstrated a new understanding of its impact in the US. ⁽⁴⁾
Market Reactions: A Surge of Optimism
The announcement triggered a swift and robust response in financial markets. US stocks soared, with the S&P 500 rising 3.6% and Nasdaq 100 surging 4.35%, and Dow Jones rising over 1,000 points, reflecting investor confidence in the potential stabilization of global trade.
The US dollar index (DXY) strengthened, rising 1.5% to a one-month high of around 101.800. However, not all sectors benefited equally. Shares of pharmaceutical companies declined following President Donald Trump’s announcement of plans to lower US prescription drug prices 80% through an executive order, as stated in a post on Truth Social. ⁽⁵⁾
Looking forward
The temporary tariff reductions signal a shared interest in fostering a “sustainable, long-term, and mutually beneficial economic and trade relationship,” as stated in a joint US-China statement. Both sides acknowledged the importance of their bilateral trade ties to the global economy. Bessent emphasized the need for “more balanced trade,” urging China to open its markets further to US goods and addressing trade imbalances he attributed to the previous Biden administration.
Despite the optimism, challenges remain. The US continues to impose fentanyl-related tariffs on China, though talks on this issue have been positive, according to US Trade Representative Jamieson Greer. The success of the 90-day pause will depend on the ability of both nations to sustain constructive dialogue and translate temporary measures into lasting agreements.
