Analysis: U.S. Tariff Deal Lifts China’s Short-Term Outlook

In a significant move to de-escalate trade tensions, senior officials from China and the United States jointly announced that most of the additional tariffs both countries had imposed on each other would either be suspended for 90 days or removed. This truce, reached after two days of high-level talks in Geneva, allows time for further negotiations to resolve ongoing economic and trade issues. The agreement outlines that the U.S. will lower its extra tariffs on Chinese goods from 145% to 30%, and China will cut its retaliatory tariffs from 125% to 10%. These tariff reductions, some temporary, are set to take effect by Wednesday. [para. 1][para. 2]

As part of the agreement, both countries will create a mechanism to continue discussions, potentially at the working level, to address outstanding economic and trade issues. [para. 3]

Global financial markets reacted positively to the news. In China, the CSI 300 Index rose by 1.2%, the Hang Seng Index in Hong Kong increased by about 3% by the close, and the Hang Seng Tech Index surged 5.2%. Similarly, U.S. markets experienced significant rallies: the S&P 500 climbed 3.26%, the Nasdaq Composite jumped 4.35%, and the Dow Jones Industrial Average gained 2.81%. Other major Asian indices also saw gains, reflecting the market’s relief at the truce. [para. 4][para. 5]

Analysts broadly viewed the trade agreement as more favorable than had been anticipated, predicting it would relieve economic pressure on China in the near term. However, they cautioned that a long-term resolution remains challenging due to the complex relationship between the two powers. Morgan Stanley analysts noted the “faster and deeper” de-escalation, but pointed out that lasting settlement is hard to achieve. Lu Ting, chief economist at Nomura, labeled the result as a “big surprise” for both economies, but warned that further conflict is likely in the future. He suggested that markets should consider the ongoing risks, with the U.S. maintaining a largely offensive posture, potentially prompting China to better prepare for future disputes. [para. 6][para. 7][para. 8][para. 9]

The current agreement marks a retreat from the previous aggressive U.S. trade stance, though the U.S. still imposes higher tariffs on China than on other nations and continues to seek international support for trade restrictions on China. Mark Williams of Capital Economics cautioned that the temporary truce may not necessarily lead to a permanent resolution, especially if the U.S. does not make further concessions. [para. 10][para. 11]

The trade de-escalation is forecasted to benefit China’s exports and economic growth in the short run. According to Morgan Stanley, the effective trade-weighted U.S. tariff on Chinese goods has dropped to around 40% from 107%, surpassing their previous expectations. This reduction may lead to increased shipments and thus boost GDP in the coming quarters, noting current estimates of second-quarter GDP could exceed the tracking figure of about 4.5%, and third-quarter GDP could stabilize above 4%. UBS economists revised their forecast for China’s annual GDP to 3.7%-4%, up from 3.4%, with the drag from tariffs reduced to 1-1.5 percentage points, instead of over 2 points previously expected. [para. 13][para. 14][para. 15][para. 16]

As a result, analysts believe that China is unlikely to launch significant new fiscal stimulus in the near term, given the improved outlook. The truce represents a success for China, which secured lower tariffs without major concessions, brightening growth prospects for both China and the U.S. [para. 17][para. 18]