Containers are stacked at a port in Nanjing, in eastern China's Jiangsu province on May 12.STR/AFP/Getty Images
An agreement between the United States and China to de-escalate their trade war sent stock markets sharply higher on Monday, reflecting expectations that the world‘s two largest economies are moving past the most acute phase of their conflict, though analysts warn the truce could be fragile.
Washington and Beijing agreed to a 90-day pause on the most severe tariffs each country had imposed on the other in recent months, and said they would continue negotiating a broader trade deal. The agreement temporarily reduces U.S. tariffs on Chinese goods to 30 per cent from 145 per cent, and lowers Chinese levies on U.S. products to 10 per cent from 125 per cent.
The sudden breakthrough, announced after talks over the weekend in Geneva, follows months of tit-for-tat escalation between the two countries. It marks a significant about-face in U.S. President Donald Trump‘s global trade war, which had culminated in towering tariffs between the U.S. and China that risked shutting down bilateral commerce, pushing both economies into recession and sending shockwaves through the rest of the global economy that would have washed over Canada.
After Monday’s announced deal, financial markets, which had low expectations for the talks between U.S. Treasury Secretary Scott Bessent and Chinese Vice-Premier He Lifeng, responded with euphoria.
The S&P 500 rose 3.26 per cent, and the Nasdaq Composite jumped 4.35 per cent – fully reversing the sell-off that began in early April when Mr. Trump announced tariffs on almost all trading partners.
The U.S. dollar strengthened, yields on U.S. Treasuries rose and global oil prices jumped, as investors dialled back bets that the U.S. is careering toward an economic downturn.
Economists say the thaw with China – which follows days after Mr. Trump announced a trade deal with Britain – appears to mark the end of the most perilous phase of Mr. Trump’s global trade war.
However, they cautioned that the deal could easily collapse and warned that Mr. Trump‘s protectionist agenda will continue to weigh on economic activity and push up consumer prices, even if the worst-case scenario has been avoided.
“We’ve stepped back from the really dramatic tariffs we were looking at a bit more than a month ago. But it does look like we’re locking in a baseline [U.S.] tariff of about 10 per cent, and then a bit higher on some goods and some countries,” Douglas Porter, chief economist at Bank of Montreal, said in an interview.
“I’m not sure I characterize that as great news. It‘s certainly better than where we were six weeks ago. But it‘s still not a great environment for global trade.”
Mr. Trump, speaking at the White House, heralded the agreement as “a total reset with China” and said he was confident Beijing would also reduce non-tariff trade barriers, leading to an “opening up” of the country.
“I think it‘s going to be fantastic for China. I think it‘s going to be fantastic for us. And I think it‘s going to be great for unification and peace,” he said.
If the two sides don’t strike a deal in 90 days, Mr. Trump said, he will reimpose “substantially higher” tariffs but will not return to the previously high level because, “at 145, you’re really decoupling, because nobody is going to buy.”
The reversal from Washington followed increasing pressure on the White House over looming shortages of consumer goods. Much of the country’s supply of children’s toys, for instance, comes from China, and as existing inventories sold off, companies warned there would be empty shelves by Christmas.
There were also widespread warnings from economists that companies would pass the cost of tariffs along by raising prices, which risked reigniting inflation and preventing the U.S. Federal Reserve from lowering interest rates.
In China, the hefty U.S. tariffs posed a major risk to the country’s export-led growth model, at a time when the domestic economy is struggling in the wake of a property market crash. Exports to the U.S. had already contracted, as seen in the sharp fall-off in container ships crossing the Pacific over the past month.
Matthew Martin, senior U.S. economist at Oxford Economics, said that the agreement announced Monday is a significant step in the right direction. But he said that trade between the two countries will still suffer with U.S. tariffs at 30 per cent – much higher than before Mr. Trump returned to office in January.
Low-margin Chinese exports – including toys, sports equipment and apparel – likely won’t be profitable with U.S. tariffs at this level, and will need to be rerouted to other countries, Mr. Martin said in an interview. Higher-margin goods, such as appliances and electronics, may still be competitive in the U.S. market.
“Maybe there‘s a little bit more margin to play with there. But I still think at a 30-per-cent level, we’re still going to see a pretty large reduction in overall imports from China,” he said.
For other governments and companies trying to navigate Mr. Trump‘s erratic tariff agenda, Monday’s announcement conveyed a positive message, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.
“Trump has figured out that the financial market makes a difference to consumer confidence and business confidence, and those were both suffering quite a bit,” Mr. Hufbauer said in an interview.
The fact that Mr. Trump was eager to strike a deal with China suggests that he’s paying attention to markets and listening to his more market-oriented advisers such as Mr. Bessent, Mr. Hufbauer said.
“This effort is driven by his hope to quell recession talk, build up consumer confidence and, of course, keep the stock market at a nice robust level. I don’t think it takes recession talks off the table, but it puts it off the front page.”
The question for Canada is whether Mr. Trump‘s recent deals with Britain and China point to a willingness to negotiate further tariff concessions. Canada wasn’t hit with the 10-per-cent baseline duty the U.S. imposed on other countries in April, but still faces tariffs on steel, aluminum and automobiles, as well as on goods that don’t comply with the continental trade agreement‘s rules of origin.
“At the margin, it helps Canada,” Mr. Porter of BMO said of the U.S.-China agreement.
“Anything that‘s better for the global economy will be better for Canada. And I think, more broadly, it suggests there‘s plenty of leeway for the U.S. to negotiate away some of their toughest positions on tariffs.”
Mr. Porter said he’s becoming more optimistic about the outlook for the Canadian economy in the coming quarters, given the declining odds of a U.S. recession, higher oil prices and the possibility of further tariff concessions.
That said, Canadian households and businesses remain nervous, which could weigh on spending and investment, he said.
“Confidence was really shaken, both at the consumer and business level, and I would still be concerned about that.”
With reports from James Griffiths and Adrian Morrow