The United States and China agreed on Monday (May 12) to pull back from the brink of a massive tariff war that has roiled financial markets and heightened trade tensions. The two sides agreed to reduce tariffs on each other's imports for 90 days starting Wednesday.
The respite came after serious talks in Geneva over the weekend on US President Donald Trump's so-called reciprocal tariffs. The tariffs were intended to ease the US trade imbalance, but they also prompted Beijing to retaliate with similar measures.
Until this Monday, China was the only country that Trump refused to grant a pause in the introduction of tariffs.
What do we know so far?
U.S. Trade Representative Jamieson Greer and Treasury Secretary Scott Besant announced the tariff reductions at a press conference in Geneva on Monday morning.
Greer said the US would reduce tariffs on Chinese goods from as high as 145 percent to 30 percent. In return, China would reduce its tariffs on US imports from 125 percent to XNUMX percent.
The lower tariffs will remain in effect for 90 days to calm tensions and allow for further negotiations.
Two US officials said the talks had led to "significant progress" in resolving the trade dispute.
The White House statement said China and the US were moving forward "in a spirit of mutual trust, continuous communication, cooperation and mutual respect."
China's Ministry of Commerce later said the tariff reduction was "in line with the expectations of manufacturers and consumers in both countries, as well as the interests of the two countries and the common interests of the world."
Beijing called on the US to "take these talks as a basis for continuing cooperation with China and completely correct the wrong practice of unilaterally increasing tariffs..."
How did the financial markets react?
The announcement by the US and China sparked a rally in global financial markets. Asian stock indexes and US futures jumped.
Hong Kong's Hang Seng Index rose 500 percent, while the Shanghai Composite Index gained nearly XNUMX percent. In the US, S&P XNUMX futures rose nearly XNUMX percent early Monday, and the tech-heavy Nasdaq jumped nearly XNUMX percent.
The US dollar strengthened to a monthly high against the euro and yen.
Investors expressed optimism that the agreement would spur trade deals with other US partners facing tariffs ranging from 49 to XNUMX percent.
Besant revealed that talks are underway with 18 key US trading partners, noting that some have proposed "very promising agreements."
Markets are recovering from the initial chaos caused by Trump's broad reciprocal tariffs, which led to a major sell-off in stocks and the US dollar.
High import tariffs have disrupted trade between the world's two largest economies, raising costs for importers and fueling fears of renewed inflation.
What do investors think about the break?
Tai Hui, chief market strategist for Asia-Pacific at investment firm JP Morgan Asset Management, said the tariff reduction was "larger than expected," a sign that both sides believe negotiations are the better option to resolve the trade war. "The 90-day period may not be enough for the two sides to reach a detailed agreement, but it keeps the pressure on the negotiation process," Tai said in a note to clients.
Deutsche Bank went a step further, saying in a note that the cuts were "better than the market expected in March," at a time when Trump was threatening to increase tariffs on the rest of the world.
Dan Ives, managing director and global head of technology research at financial services firm Wedbush Securities, expects tariff cuts to “probably take a recession off the table for now.” Ives predicts new highs for U.S. stocks, especially tech companies.
Stuart Rumble, head of investment management for Asia-Pacific at Fidelity International, said the delay "should help restore confidence" in financial markets, but noted that the tariff cuts are time-limited.
What's happening now?
The 90-day tariff cuts offer a window of opportunity for negotiators under pressure to reach a lasting solution to the trade war.
The White House also announced a mechanism for these talks, which will be led by Chinese Vice President He Lifeng and US representatives Besant and Greer. The talks will be held in the US, China or a neutral, third country.
Besant said the US is seeking a "strategic rebalancing" to reduce its dependence on China, primarily in five or six key industries, including pharmaceuticals and steel. "Neither side wants a separation," he stressed. "We want trade - more balanced trade."
As a result of reduced tariffs, exporters in both countries can now plan with greater confidence and secure orders at lower costs.
Customs have cut the number of container bookings carrying goods from China to the US by up to 60 percent, raising fears that American store shelves could be empty by summer. Shortages of goods such as furniture, clothing and toys are now less likely.
Uncertainty over Trump's tariffs has increased the risk of recession in the US and the world, spikes in inflation, and bankruptcies.
While the pause mitigates this, China's neighbors, including Vietnam, Cambodia and Indonesia, are eager to strike trade deals with Washington, which could potentially undermine future Chinese exports.
Beijing has warned Asian countries not to do anything that runs counter to its interests and could complicate further agreements.
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