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Senior US and Chinese trade delegations are meeting in London today for another round of high-stakes talks, following an all-day session on Monday. This latest round of in-person negotiations comes after a “lengthy” phone call between President Xi Jinping and President Donald Trump last week, aimed at reviving stalled trade discussions. While both sides had agreed in Geneva last month to suspend the worst of their retaliatory tariffs, building tensions over technology curbs, critical minerals, and student visas have since undercut progress.

Export controls and trade restrictions, both key risks for global supply chains, are said to be at the center of the London agenda. The US is pressing for an immediate resumption of Chinese rare earth and advanced magnet exports. China in turn is seeking the removal of US export restrictions on jet engines and various technology exports, according to a Wall Street Journal (WSJ) report.

While an agreement has yet to emerge and any consensus could again prove fragile, we see several reasons for optimism:

London talks could revive momentum for de-escalation. Since the Geneva meeting, both sides have accused each other of breaching the consensus and have escalated non-tariff measures. While Chinese officials have not commented publicly, Trump told reporters he had received “good reports” from his negotiating team in London, despite acknowledging that “China is not easy.” More broadly, the US has in recent weeks made clear it is seeking to accelerate dealmaking. For investors, renewed efforts to stabilize the US-China relationship and avoid an escalating spiral on non-tariff issues are a clear positive.

The White House is signaling it can compromise on tech controls. According to the WSJ, Trump has given negotiators “room to lift export controls,” marking a potential shift in US trade strategy. By contrast, prior controls targeting China were never reduced or negotiated down under Trump’s predecessor. National Economic Council Director Kevin Hassett told CNBC that “immediately after the handshake, any export controls from the US will be eased, and the rare earths will be released in volume,” though he clarified that “very high end” AI chips from NVIDIA would likely remain under control. The WSJ report revealed that, alongside new export curbs on chip design software and ethane, the US had also restricted exports of jet engines and related parts to China. We think all could potentially feature in concessions.

China’s resumption of rare earth permits confirms its own strategic flexibility. Shortly after the Trump-Xi call, Chinese authorities reportedly cleared “export control backlog” issues affecting rare earth exports, and offered licenses to key US firms. Some European firms have also reportedly been granted exports, after EU lobbying. This suggests China is willing to use its dominance in critical minerals strategically, applying and easing pressure as needed. However, China also faces a balancing act in not overly encouraging its trade partners to accelerate alternative rare earth supply chains. US efforts to diversify rare earth supply will continue, but building capacity outside China will take years and remains both expensive and difficult.

So, as talks continue, we welcome the prospect of more stability for the US-China relationship and for global supply chains. We anticipate some announcements from the London round on US export controls, particularly around chip design software, and there could be some conciliatory moves around the US Entity List. US restrictions on lower-end AI chips and other semiconductors could be relaxed, though we anticipate cutting edge chips and advanced manufacturing gear will remain under more stringent control. We expect China to dial back its recent rare earth curbs, but the new centralized system to control and track supplies is likely to expand, and could be periodically tightened to reassert leverage as needed.

Headline risk on trade is likely to persist, in our view, but markets are also growing increasingly accustomed to high-stakes negotiations. We expect US tariffs to finish the year near 15%, up from 2.5% at the start of 2025, and that the effective US tariff on China could level off around 30-40%, up from 10% at end-2024. Sector-specific levies may also increase after recent legal setbacks for the US administration. We continue to recommend that investors use near-term trade-related volatility to phase into equity markets or balanced portfolios. Beyond US equities, we see opportunities in Europe via our “Six ways to invest” theme and EMU small and mid-caps. In Asia, we prefer Taiwanese and Indian equities, as well as mainland Chinese tech stocks. In a scenario where mainland China maintains strict rare earth exports, domestic electric-vehicle makers and their supply chains could benefit from increased foreign demand for finished goods reliant on these metals. We also favor select ex-China resource companies with rare earth exposure.