US-China Trade Talks: A fragile rapprochement

On 12 May, the United States (US) and China established a temporary ‘trade consultation mechanism’, reducing tariffs by 115% for 90 days. While this may ease tensions, high tariffs are still expected to exert upside pressure on US prices, and trade volatility could drag on economic growth in China.

Although a worst-case scenario seems to have been avoided, we need to monitor the progress made towards achieving an elusive trade deal over the coming 90 days. Policy easing in China will help to alleviate these downside pressures, while activity has remained resilient.

On 12 May, US and Chinese delegations met in Geneva and established a ‘trade consultation mechanism’ to progress bilateral trade discussions. Although it constitutes a step in the right direction, this functions more as a truce than a comprehensive trade agreement. Both nations agreed to lower ‘reciprocal tariffs’ temporarily, with the US reducing its rates from 145% to 30% and China its rates from 125% to 10% for a 90-day period. Existing measures, announced prior to the US’s 7 March tariffs, remain unchanged. According to US Trade Representative Jamieson Greer, who participated in the talks alongside Treasury Secretary Scott Bessent, Trump’s ‘Phase Two’ tariffs on Chinese goods are now approximately 30%, including those targeting Fentanyl exports and sector-specific measures.

Evolution of US tariffs on China

Market reactions have been positive due to the easing of tensions, yet tariff levels remain significantly high. Recent estimates from the Yale Budget Lab indicate that US consumers are facing an average effective tariff rate of 17.8% – the highest since the 1930s. Although the worst-case scenario has been averted, elevated tariffs are expected to exert upward pressure on domestic prices in the US, with impacts likely visible around Q3 2025 due to the typical 30-day shipping time from China. High-frequency data reveals a sharp decline in container shipments from China to the US in late April, a trend that likely continued into May despite the temporary tariff cessation. Even with this 90-day pause, trade data is expected to remain volatile, influenced by a significant front-loading of shipments in Q1 2025.

China’s economic activity showed resilience in April, with authorities proactively cutting interest rates shortly afterwards in early May. However, a concrete trade deal is needed for a more optimistic outlook. Bessent emphasised that ‘neither side is interested in a decoupling,’ yet he could not specify clear objectives for the next 90 days, suggesting US trade policy remains largely reactive and without a detailed action plan. A hopeful interpretation might indicate a shift in US priorities, as Bessent highlighted the need to remove ‘non- tariff trade barriers’ and to broaden negotiations to include reforms that China may resist, such as increasing market access for US goods and further loosening the exchange rate.

In contrast, the official Chinese response was more measured. Chinese Vice-Premier He Lifeng, who will lead trade talks with the US over the next 90 days, reiterated China’s desire to avoid a trade war while stating they are prepared to ‘fight to the end’ if necessary. An emphasis was placed on the mutually beneficial nature of the China-US economic relationship and the need to manage frictions through dialogue and win-win cooperation; in other words, China will only consider a trade deal with the US if it is mutually beneficial.

Key activity remained robust in April

The Chinese market offers substantial opportunities for US firms. On a market-cap-weighted basis, approximately 15% of total revenues for S&P 500 companies come from China, with even higher percentages in sectors such as technology and autos. This amounts to around USD 212 billion annually, exceeding US exports to China, which reached USD 143.54 billion in 2024. US companies generate more revenue by operating within China than by exporting to it, making market access a likely key focus in bilateral discussions. US companies have substantial opportunities to expand their presence in China, particularly in the services sector. For the US, this could offer a faster way to rebalance the overall current account balance, given lower market shares in this sector. This opportunity is particularly promising if Beijing shifts towards stronger domestic consumption. Additionally, China may be more open to allowing US companies to be involved in its domestic economy, as it could offer protection against future trade disruption.

US companies generate more revenue by operating within China than by exporting to it, making market access a likely key focus in bilateral discussions.

Encouragingly, there appears to be a shift in US rhetoric, reminiscent of the focus during the ‘Phase One’ trade deal. Looking ahead, the US administration could place more emphasis on addressing non-tariff barriers to improve market access for US companies, rather than attempting to bring back low-value manufacturing to the US. That could entail additional purchases of US goods and services, and potentially even the transfer of intellectual property rights if China agrees to sell some key technology firms. This approach could also be beneficial for other Asian exporters like India and Vietnam, provided these countries can reach reciprocal agreements with the US.

For the US, this announcement reduces inflationary risks and averts the worst-case scenario of a tariff- induced global recession. However, it ushers in a 90-day period of uncertainty, requiring close monitoring of developments. There is scepticism regarding the potential for significant progress in such a short timeframe, as trade agreements typically take years to finalise and involve complex issues; for instance, the European Union and China have faced an impasse over market access for years. Therefore, we must be prepared for the possibility of renewed geopolitical tensions by August, as reaching any deal may take longer than expected. The ideal scenario would see both parties moving positively without escalating tensions as the deadline approaches, reflecting a broader understanding that talks are progressing constructively and possibly further extending the 90-day pause if necessary.

Against this backdrop, we believe that it may be too soon to revise up our 2025 GDP growth forecast for China of 4.1%. The People’s Bank of China (PBC) implemented a comprehensive package of measures in May, including a 10-bp rate cut and a 50-bp reserve requirement ratio (RRR) cut, unleashing CNY 1 trillion in liquidity (0.7% of GDP); however, this was insufficient. China probably needs at least an additional 15-bp cut to the 7-day reverse repo rate and another 50-bp RRR cut to stabilise expectations. Beyond monetary support, the government needs to deliver on the fiscal front. We expect that the announced bond issuance (around 7% of GDP) will land in Q2 2025 and may be expanded to CNY 10 trillion (around 12% of GDP) after the July Politburo meeting. Together with a potential agreement with the US, that could exert upside risk on our growth forecast.