Representatives from China and the United States announced a near breakthrough in their ongoing trade dispute this Monday, where both countries agreed to substantially reduce tariffs for a 90-day period. This was as a result of intensive talks and negotiations in Geneva, where both economic powerhouses consented and agreed to slash their respective tariff rates, with the U.S. lowering its imposition from 145% to 30%, and China reducing its rates from 125% to 10%.
Inasmuch as this truce doesn’t necessarily mean to resolve the fundamental issues that ignited the trade hostilities, the agreement between the two countries makes an effort to establish a framework for continued dialogue during this short period. As such, analysts and investors remain cautious about the prospects of achieving a comprehensive and lasting trade agreement.
The pathway to the current trade war began with a rapid escalation of tariffs imposition in early 2025. In April, U.S. President Trump initiated what he called “Liberation Day,” where he imposed a 34% reciprocal tariff on Chinese imports under the International Emergency Economic Powers Act (IEEPA). It was this event that set off a series of tit-for-tat measures, where China was forced to immediately retaliate, thereby threatening to destabilize the global supply chain and economy.
Then as tensions continued to mount, Trump increased the tariffs placed on Chinese imports to a staggering 145%, also forcing the hands of Beijing to quickly implement a comparable levy of 125% on American goods. These extreme numbers, according to Reuters, immediately and effectively halted the over $500 billion bilateral trade relationship between the world’s two largest economies, causing severe disruptions to global supply chains and raising fears of an impending economic collapse.
It then got worse as China’s response to Trump 145% tariffs went beyond conventional duty increases (its 125%). The Asian country imposed export restrictions on critical rare earth material that are essential components for many high-tech products, as well as added numerous U.S. defense and technology firms to the country’s Export Control List and Unreliable Entity List.
As a result of these harrowing measures, the economies of both countries began to suffer measurable damage. The U.S. experienced its first quarterly decline in gross domestic product since early 2022, as importers scrambled to bring products ahead of the implementation of the tariff rates. Simultaneously, China’s exports to the U.S. dropped dramatically, where it adversely affected the country’s giant manufacturing sector, thus, allowing for intense levels of pressure to be mounted on Beijing to implement new economic measures that’d turn everything around.
These pressures on both economies forced the hands of their governments to initiate negotiations that’d de-escalate the hostilities before it exploded. As such, U.S. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer engaged in talks in Geneva with a Chinese delegation led by Vice Premier He Lifeng.
The adjustments agreed upon by both countries – U.S.’s tariff drop from 145% to 30% and China’s drop from 125% to 10% – are scheduled to take effect by May 14, 2025, and will remain in place for the 90-day period through August 12, 2025. It is worth noting that part of U.S’s 30% current tariff is the 20% tariffs on fentanyl-related products from China that was implemented by the Trump administration, and it will remain in place despite the big reduction in levies.
The speed at which the agreement was reached surprised many observers, including some of the negotiators themselves. “It’s crucial to recognize how swiftly we reached an agreement, which suggests that perhaps the disparities were not as significant as previously believed,” Greer said.
Also, this breakthrough, albeit a temporary one, triggered an immediate and positive response across global financial markets. For example, the dollar experienced its largest increase (1%) in almost a month against a range of major currencies, while traditionally safe-haven assets such as the yen, Swiss franc, gold, and government bonds fell as risk appetite improved.
Futures for the S&P 500 also surged nearly 3%, indicating expectations of a substantial rally when markets opened.
However, despite the positive initial reaction, investors and analysts still maintain a cautious outlook regarding the prospects for a comprehensive resolution to the trade war, as there are still concerns about the temporary nature of the agreement as well as the challenges that lie ahead in negotiating a more permanent solution. But it can be said that the countries agreeing to
reduce reciprocal tariffs created a window of opportunity to pursue more constructive engagement on the issue.
The next 90 days will be critical in determining whether the U.S.-China economic relationship can be stabilized or whether the world’s two largest economies will resume their war-like confrontations.
