Markets are up sharply—but the move appears justified.
The key risk to the economic outlook was a potential policy outcome that would have been highly disruptive to international trade and therefore economic growth.
We can only speculate if the administration has lost interest in a high tariff scenario, or if it was always just using the threat of high tariffs as a high stakes negotiating ploy to bring counterparts to the table.
Or maybe something in between.
But what we do know now—and with a relatively high degree of confidence—is that the high tariff scenario will not prevail.
A comprehensive deal with China paves the way for investor attention to shift away from downside risk scenarios and back towards the more constructive themes that propelled stocks toward all-time highs in mid-February.
These include tech innovation, deregulation, energy expansion, tax cuts and moderating inflation.
With a more stable outlook, investors can focus once again on company-specific opportunities, rather than handicapping downside scenarios.
Recoupling
A potential fracturing of the U.S./China economic relationship was perhaps the key factor that drove market volatility immediately after Liberation Day.
Trump had announced tariff rates at the time that were so high that they would practically end trade between the two countries.
As we flagged on April 23 (A Kinder, Gentler, Market-Friendlier Trump), markets were already starting to anticipate positive movement in relations with China. Today’s dramatic reaction underscores just how important the China dynamic is.
On a combined basis, the two economies represent more than 40 percent of global Gross Domestic Product (GDP) and nearly 50 percent of global manufacturing output.
China represents over 13% of all U.S. imports, trailing only Mexico. China is the third-largest export market for the U.S., after Canada and Mexico, totaling close to $200 billion in 2024.
The U.S. trade deficit with China is close to $300 billion as of last year. This is actually the lowest since 2009, but it represents the largest bilateral trade deficit that the U.S. has.
Further complicating the situation, China, behind Japan, is the second largest foreign holder of U.S. Treasuries. This fed into post-Liberation Day concerns of a bond market collapse.
The deep integration of American supply chains with Chinese manufactured goods, especially in high tech areas, also made a potential U.S./China decoupling particularly perilous.
The geopolitical implications of a fractured U.S./China economic relationship are also serious.
To the extent the U.S and China separate commercially, this potentially increases the risk of Chinese belligerence in Taiwan or elsewhere, which naturally unsettles markets.
What was announced
President Trump described the agreement with China as a “total reset” in the U.S./China trade relationship. Here are the key points:
Major Tariff Rollback: The U.S. will reduce tariffs on Chinese imports from 145% to 30%, and China will lower tariffs on U.S. goods from 125% to 10%, both for an initial 90-day period.
90-Day Negotiation Period: Most tariffs imposed by both sides are suspended for 90 days to allow time for further negotiations.
Existing Tariffs Remain: Tariffs and trade restrictions imposed prior to April 2, including those on cars, steel, aluminum, and certain pharmaceuticals, will remain in effect.
Fentanyl-Related Tariffs Remain: The U.S. will maintain a 20% tariff on fentanyl-related imports from China.
Non-Tariff Barriers: China agreed to suspend or remove non-tariff barriers and other retaliatory measures, including anti-dumping investigations.
Market Access: China pledged to open its markets further to American businesses, allowing greater access for U.S. firms.
Framework for Further Discussion: Both sides established a mechanism for continued negotiations.
Retaliatory Measures Lifted: China will lift countermeasures enacted after April 2, such as blacklisting U.S. companies and restricting rare earth exports.
No Plans to Return to High Tariffs: President Trump stated that if no final deal is reached after 90 days, tariffs could rise again, but not to the previous peak of 145%.
