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The trade standoff between China and the US has come to an unexpected and welcome pause. The two countries have agreed to substantially reduce reciprocal tariffs for now and continue their discussions, steering away from the worst case scenario and resetting the overall tone of dialogue between the world’s largest economies.

Risk remains that levies could rise again to current levels, so we advise against drawing premature conclusions on the US-China trade talks or putting too much emphasis on the short-term relief rallies. Nevertheless, we are optimistic about the new direction and this new path forward.

Under the new agreement, China and the US will suspend most of the escalatory tariffs and lower reciprocal tariffs to 10% for 90 days to allow time for continued trade talks. In total, the newly lowered US tariff level on Chinese goods averages roughly 50%, trade weighted.¹ This reduction takes into account various industry-specific levies from the first Trump administration, such as those on steel, aluminum and automobiles, as well as tariffs related to the Fentanyl issue.

What is encouraging is the establishment of a framework and declaration of commitment from both sides to continue discussions about economic and trade relations. The 90-day suspension halts the multiple rounds of retaliation and exchanged barbs, hopefully paving the way for material conversations on how to make the China-US trading relationship work. While two days in Switzerland have yielded significant progress, future negotiations are likely to be lengthy. Discussions may center around stabilizing tariffs at current levels, but investors should be prepared for multiple rounds of incremental progress and setbacks. We remain optimistic about the two countries eventually reaching a mutually beneficial trade deal.

The tariff rollback comes just as the initial economic impact is becoming evident. Trade between the U.S. and China has nearly ground to a halt, increasing inflationary pressure in the U.S. and threatening China’s export-related growth. Businesses in both countries have struggled amid rapidly changing trade policy, leading to disruptions in business plans and supply chains, and causing corporate profits to suffer.

Although it will take time to assess the full economic consequences, this truce might have helped avert the worst outcomes. At the current tariff levels, the drag on China’s GDP is estimated at around 1.4%, whilst is still high, is much more manageable than previous levels.² Exports could see a significant boost in the coming months, when more goods (particularly consumer products such as toys, clothing, etc) could resume flowing between the two countries.

Overall, we hold a cautiously optimistic outlook. We anticipate continued volatility in Chinese equities but remained disciplined and committed to our investment process. We believe that high quality companies with solid business models will be able to navigate the challenging situation.

This latest agreement serves as a timely reminder for investors to focus on actions rather than rhetoric. Staying calm to separate the signal from the noise will always be key to successful investing.

Source:
¹ Peterson Institute for International Economics (PIIE), as of 12 May 2025.
² PIIE, Jefferies, as of 12 May 2025.