China-US 90-day trade war pause surprises markets

On Monday (May 12), the United States and China announced they had reached agreement on a mutual reduction in tariffs for the next 90 days. Both countries lowered their tariffs to pre-Liberation Day rates plus the 10 % baseline “reciprocal” rate. The US will also keep in place its 20 % punitive fentanyl tariff imposed earlier this year. Soon after the pause announcement, the US administration said it was also reducing the tariff on small packages of goods valued at less than $800 from 120 % to 54 %. Before February, such small goods packages enjoyed duty-free status, a boon for online sellers. With the latest reciprocal tariffs by the Trump administration included, financial analysis provider Capital Economics estimates that the total effective bilateral tariff amounts to roughly 40 % on US imports from China and about 25 % on China’s imports from the US.

The sudden rapprochement caught global markets by surprise. On Monday, the American S&P 500 index rose by 3.3 % and the Nasdaq by 4.3 %. Both indices have returned to levels close to all-time highs. The US treasury yields are indicating that global recession worries have begun to fade. The markets appear to have interpreted the de-escalation as a sign the Trump administration no longer has the stomach to continue its full-on trade war.

The situation remains fluid despite the temporary pull-back. No specifics have yet been agreed beyond a commitment to let lower tariffs prevail for the next 90 days. President Donald Trump has also hinted at “significantly higher" tariffs if there is no progress in trade negotiations. Despite the concessions, the Trump administration’s erratic behaviour continues to raise suspicions at the grassroots level. Chinese export firms openly admit they are trying to shift their export focus away from the US to other countries due to trade policy uncertainty. Many US importers say the uncertainty created by the trade war is more problematic than the magnitude of 145 % tariffs per se.

The harsh tariff levels imposed in April are visible in China’s foreign trade figures for April. Exports of Chinese goods to the US fell by 21 % y-o-y, while imports from the US were down by 14 %. At the same time, China’s exports to ASEAN countries grew by 21 % y-o-y and imports by 23 %. The share of Chinese exports going to the US fell from 14 % in April 2024 to 11 % this April. Chinese exports overall rose by 8 % y-o-y. The moving on-year 3-month and 6-month averages indicate that the overall goods exports growth remains robust.

China’s goods exports to the US collapsed in April.

Sources: China Customs, Macrobond and BOFIT.