Trade conflict between the USA and China eases

The stock markets have now recovered from the price slumps at the beginning of April. Fears of a global trade war were followed by relief that this scenario is unlikely to materialize. The recent agreement between the US and China to significantly reduce tariffs, at least for 90 days, has further supported market sentiment. However, some uncertainties remain.

Tariff increases

On April 2, “Liberation Day”, President Trump imposed substantial tariff increases on all trading partners. The argument was that he was being treated unfairly by his trading partners. After all, a trade deficit is fundamentally a bad thing in his view. This is why “reciprocal” tariffs were imposed.

While other countries were still deliberating, in the case of China the tariff dispute had already turned into a trade war. The originally agreed reciprocal tariff rate of 34% initially became 84% and then 125% because China responded with countermeasures. Together with the existing tariff rate of 20% (due to the alleged Chinese exports of fentanyl), the tariff rate of 145% had reached a prohibitive level. US Treasury Secretary Bessent also said that the high tariff would amount to a trade embargo. In fact, the threat of a global trade war had led to a massive slump in sentiment.

Mitigation

The markets have been recovering since the second week of April, as measures have since been taken to defuse the trade dispute. First, on April 9, reciprocal tariffs on all trading partners except China were paused for 90 days. Last week, an agreement was reached with the United Kingdom. However, the basic tariff of 10% remains in place for most goods.

The markets reacted particularly positively to yesterday’s agreement between the US and China. Firstly, the suspension of the trade war between the world’s two largest economies is a good thing. Secondly, the extent of the tariff reduction has turned out to be significantly higher than expected. As recently as the weekend, President Trump had said that a tariff rate of 80% would be appropriate.

The agreement in detail

The agreement between the USA and China now looks like this in detail: The “reciprocal” import duties, which were raised to an extreme level of 125% in April, were lowered to 10% on May 12. Together with the fentanyl tariff introduced before April 2, a total tariff of 30% now applies to Chinese imports. In return, China is lowering its import duties on US goods from 125% to 10%. In addition, the restrictions on the export of rare earths have been lifted.

This applies for 90 days, during which further talks are to take place. According to Finance Minister Bessent, however, the reciprocal tariffs will be raised from 10% to 34% if the negotiations do not lead to anything. However, there is a loophole here: if the fentanyl duty rate is reduced from 20% to 0% at the same time, the total duty rate will then only rise from the current 30% to 34%, i.e. by a whole 4 percentage points.

The effects

The average tariff rate in the USA will fall from 23% to around 13% as a result of the agreement with China. This level is still significantly higher than the initial level of 3%. This means that the original estimates still apply, but are lower in scale.

• In the USA, the tariff increase has the same effect as a tax increase. Costs rise and, with a time lag, so do prices. This reduces purchasing power and therefore economic growth. However, the risk of the stagflationary effect leading to a recession has fallen.
• For the rest of the world, the US tariff increases have the effect of reducing demand. However, as this is less pronounced, the extent of inflation dampening is also reduced. The scope for key interest rate cuts has therefore shrunk. For example, the key interest rate cuts priced into the market by the European Central Bank fell from 0.62 percentage points to 0.46 percentage points from Friday to Monday.
• The previous estimate for US inflation was an increase from 2.8% year-on-year in March to 3.8% in December 2025. The rise in inflation is now likely to be lower. This makes it easier for the Fed to “see through” the inflation increase, i.e. to credibly assess it as temporary. The risk of key interest rate hikes has therefore decreased and the scope for key interest rate cuts in the event of a weakening on the labor market has increased.
• The potential for major disruptions in the supply chains is now lower. Problems will nevertheless be observed. This is because Chinese exports to the US slumped by 21% year-on-year in April.

Conclusion: Uncertainty remains

The Trump administration has partially extinguished the fire it started. The 30% tariff on Chinese imports is still high and painful for both sides. But at least it is low enough for trade to take place. So the news is positive.

Finally, a cautionary note: the question is whether there would not have been a more efficient way to reach the current situation. The erratic policy (tariff increases followed by tariff reductions) and the fact that reciprocal tariffs have only been paused (for 90 days) are keeping uncertainty for the markets and companies at an uncomfortably high level.

 

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