Financial markets have been in a positive mood this week in the aftermath of a surprisingly encouraging outcome from the talks between the US and China in Geneva. As a result, US equities have not only reversed all the drawdown seen in the aftermath of the Liberation Day announcement but are now back in positive territory for the year, with the S&P500 index just 4% off a record high.
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. Both sides agreed to reduce duties on each other by 115 percentage points, meaning the US tariff on Chinese imports will drop from 145% to 30%, while the Chinese tariff on US imports falls from 125% to 10%. The levels of pragmatism shown in the talks, and the joint statement that “neither side wants a decoupling” highlights how intertwined the two global economic superpowers remain.
With concerns that the punitive tariffs that have been in place since early last month were starting to impact on economic data, it had already been acknowledged by US Treasury Secretary Scott Bessent that the situation was unsustainable, describing it as the “equivalent of an embargo”, which neither country wanted. The Financial Times reported that Bessent had met with his Chinese counterpart, Lan Fo’an in secret three weeks ago during the IMF meetings in Washington, laying the foundations for the talks last weekend. President Trump was reported to have been warned last week in a meeting with the CEOs of supermarket chains Wal-Mart and Target that they had genuine concerns over empty shelves in the near future. Hence there was a clear recognition on the US side that the situation could no longer continue and the US is now opting for “strategic decoupling” only in specific sectors. China, meanwhile, appeared willing to play the long game, and has made no publicly known concessions to bring about the reduction in tariffs. China has ended up with the lowest tariff currently offered by the US – the 10% baseline tariff – for the next 90 days. In addition, the pre-existing 20% tariff related to the production of the fentanyl drug stays in place. It seems China will not, for now at least, face any long-term consequences for being the only country to push back on US tariffs with their own retaliation. Indeed, China appears to have moved close to the top of the queue as a result of the punitive tariffs level that were reached. Meanwhile, many other allies of the US remain in the queue to negotiate their own ‘deals’ over the coming weeks.
Of course, the story of this trade war still has several chapters to be written. The end of the 90-day window before reciprocal tariffs are theoretically reinstated is just over seven weeks away. Before July, we should also have news on tariffs for specific sectors, such as semiconductors and pharmaceuticals, mirroring what we have already seen for the auto industry. But financial markets are very much taking the ‘glass half full’ view that we will see continued easing of tariffs from the initial levels that caused such distress in early April.
The news from the UK last week and China this week points to tariffs remaining in place, but at a level that will enable President Trump to argue he has taken action to address the US deficit and encourage the onshoring of manufacturing but equally a level that does not significantly impact on the economic trajectory of any country that is willing to engage with the US and come up with a framework to reduce tariffs. While detailed trade agreements will not happen given the time periods involved, the UK and Chinese experiences suggest that once a framework for de-escalation is in place and both sides continue to show goodwill, the expectation is that the 90-day window will continue to be extended. So, the sentiment around the trade war has moved further in a positive direction.
The landing zone for tariffs under the template set by the UK and China may feel like a good outcome, but we are still in a far worse position than before President Trump was inaugurated. The upper and lower bound for tariffs is now coming clearer, and it would appear the baseline 10% tariff is ‘as good as it gets’. We should be mindful that with baseline 10% and other tariffs set to stay in place, the overall US tariff regime is now estimated to be around 14-17% – way higher than anything we’ve seen since the 1930s and still a huge leap from 2.5% last year. While the trade war may well be on a de-escalating path already, there will be some impact for some countries and companies. The strong recovery in markets despite continued elevated uncertainty is tempering our asset allocation views and we are not minded to add additional risk to our already slightly positive views on equities, and mild biases to the US and Europe. The strong rally in equity markets suggests ‘Liberation Day’ was just a bad dream, but the heightened tariff regime, and persistent uncertainty will still have a negative impact on the economic outlook, albeit ‘less bad’ than was feared a few weeks ago.
Thankfully, given the extremely high levels of tariffs between the US and China have been in place for a limited time, the economic damage should only be relatively superficial. The front running of trade before the tariffs kicked in and the drop off in shipments from China to the US in the past few weeks still has the scope to cause plenty of confusion in the economic data before it settles down. The key point to ensure that the economic fallout remains limited is to ensure we have certainty sooner rather than later; there is still much to be done in this respect.
Source: Columbia Threadneedle Investments as at 16 May 2025
