The United States and China have agreed to temporarily reduce tariffs on each other’s goods for 90 days. This marked a significant de-escalation in the trade war, which affected markets for nearly six weeks. The S&P 500 gained 3.3 percent on Monday, its best day since April 9.
This surge was driven by President Trump’s decision to pause his “reciprocal” tariffs on all countries except China. The tech-heavy Nasdaq climbed even higher, rising more than 4 percent. The apparent thaw in relations, even if temporary, is the latest concession the Trump administration offers.
Last month, the announcement of unexpectedly high tariffs on dozens of countries led to a substantial stock drop. The S&P 500 dropped steeply after Mr. Trump announced sweeping tariffs in early April.
However, it has since rebounded, recovering all of those losses as various exemptions and tariff pauses were announced. In a joint statement released on Monday after weekend talks in Geneva, the United States and China announced their agreement to reduce their respective tariffs for 90 days while trade negotiations continue. The rally in the stock market reflects a cautious optimism among investors.
However, future uncertainty regarding US-China trade relations persists.
Temporary tariff truce boosts markets
The 90-day reprieve completes the Trump administration’s rollback of its reciprocal tariff policy.
However, it raises questions about the long-term impact on U.S. trade credibility. The dollar has weakened against major currencies like the euro and yen, reducing the purchasing power of U.S. households and discouraging foreign investments in U.S. financial markets.
This scenario could result in increased volatility in U.S. bond and stock markets. Chinese officials have described the Geneva talks as an important step towards resolving differences through equal dialogue and consultation. Despite not explicitly claiming victory, Beijing appears to view itself as having the upper hand in this round of trade negotiations.
The thirty-nine-day mutual trade embargo revealed the vulnerabilities of U.S. retailers’ and manufacturers’ just-in-time inventory management systems, especially in the face of potential trade disruptions. For China, the key takeaway is that the Trump administration is sensitive to domestic pressure from American businesses whose supply chains still rely heavily on Chinese imports. This understanding will likely influence China’s future negotiation strategies and economic policies.
Looking ahead, Washington and Beijing have a 90-day window to outline their demands and concessions. A natural starting point for further negotiations could be the 2020 Phase One Trade Agreement, which was amicable to both sides. However, unforeseen geopolitical events could still disrupt the path to a comprehensive trade agreement, potentially triggering another round of tariff escalations.
