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The US and China reached a significant agreement to de-escalate trade tensions in the coming months. The US will lower tariffs on Chinese goods from 145% to 30% while China reduces its tariffs on US goods to 10% from 125% by May 14. The world’s two largest economies committed to a 90-day pause to facilitate further negotiations to resolve their differences over their trade imbalances.
The proactive diplomacy between the world’s two largest economies brought significant relief to global markets. Markets rewarded both currencies. The USD Index (DXY) gained 1.4% to 101.8, while the CNY rose 0.4% to 7.2053 per USD. Receding US recession fears boosted the S&P 500 Index by 3.3% to 5844, above the 5671 level of the Liberation Day tariff announcement. The futures market pulled back bets for Fed cuts this year, heeding the Fed’s patient stance in lowering rates. Short-term inflation expectations in the US lifted the 10Y Treasury yield by 10.9 bps to 4.38%. US President Donald Trump will closely monitor how his tariffs impacted today’s CPI inflation in April.
The recent agreements with China and the UK confirmed that the 10% baseline tariffs on most goods entering the US are a permanent feature in US trade policy. The reciprocal tariffs and the sector-specific tariffs (like steel and aluminium and autos) are adjustable tactical tools for the Trump administration to get trading partners to address trade imbalances by reducing their tariffs and non-tariff barriers, increasing market access for US goods and companies, addressing unfair industrial policies, and reshoring strategic supply chains.
America’s first trade deal with the UK eliminated the 25% tariff on British steel and aluminium and reduced the tariff on British cars to 10% from 27.5%, subject to a quota of 100,000 vehicles. In exchange, the UK will eliminate its 19% tariff on US ethanol imports and increase quotas for US beef exports. Bessent indicated that US tariffs on Chinese goods would fall between a floor of 30% and a ceiling of 145% after the pause expires in August, depending on the outcome of talks. With the US asking trading partners to “earn” tariff reductions, other countries should abandon hopes of entirely removing US tariffs.
The “Trump Put” has not returned to push the USD higher with US bond yields. The “escalate to de-escalate” experiences with Trump’s tariffs this year mirrored, at first glance, the Fed’s “jumbo” 75 bps of rate hikes in 2022 to rein in high inflation and its subsequent pullback to a normal pace of rate rises. The Fed was focused on restoring institutional credibility by anchoring inflation expectations through a clearly communicated rule-based policy path.
Don’t confuse the trade relief as a catalyst for a USD comeback. Trump’s policies have been marked by unpredictability and volatility, wielding tariffs to get concessions and pursuing significant tax cuts and industrial subsidies without a meaningful fiscal offset. Warning that the Treasury could exhaust its borrowing capacity as early as August, Bessent urged lawmakers to raise or suspend the federal debt ceiling by mid-July to prevent a potential default during Congress’ August recess. Bessent’s preferred goal is to pass Trump’s comprehensive tax reform package by Independence Day, July 4.
Quote of the Day
“A wise man gets more use from his enemies than a fool from his friends.”
Balthasar Gracian
May 13 in history
The first US airmail stamps (24 cents) were issued in 1918.
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